How Low Can We Go, SPY
- Posted by Frank Zorrilla
- on August 7th, 2011
So we got the Standard and Poors credit rating downgrade. Some on my twitter stream are saying that it was leaked. I believe Politico had an article saying that it was going to happen on Friday. If it was leaked, it is possible that a lot of it is already priced in. Our opinion or what we believe about these credit agencies is irrelevant. If you have money in the market what matters is the reaction. In the past we have had many crises in the market that when the actual news came out it put a bottom in the market at least in the short term.
My only concern is; that the old school crash thesis is playing to a tee; you are down big on a Thursday, flattish on Friday, news comes out over the weekend (in this case Friday night after the futures were closed), Monday we have a huge sell off that spills over to Tuesday until about 10-11:00am, then we have turnaround Tuesday and close higher. Joe retail will probably panic, I have friends that have already called me, scared and ready to get outright bearish after a 15% sell off in the Russell 2k in about 11 days. The bigger question is; how will the computers react.
We have gone through many crises in the past, and it is always darkest before dawn. All we can do is look at the past to see if can gives us clues about the future. I do this by looking at previous sell-offs, looking for patterns, duration, breadth indicators, etc… Now, I have been talking about certain breadth indicators over the last week and they have been as useful as tits on a bull. At the end of the day, price is all that matters; hence our 85% cash position since Monday. But, while these indicators have not mattered yet, eventually the rubber band gets stretched so far that they have no choice but to snap back even if its only for a few days.
Here is a chart of stocks above their 40 day moving average since 1987. When you look at the chart, look at the level we are at, look at how low it is relative to previous years, think about all the crises we have had since 1987; the 87 crash, the Iraq war, the Asian contagion, LTCM blow up, the aftermath of the internet bubble, the housing bubble, the bank problems etc..
Telechart’s T2106 index-McClellan Oscillator closed at -380, there has been only 1 reading since 87 lower than Friday’s reading on a closing basis.
Here is the chart of stocks above their 20 day moving average since 2002. Only 6% of stocks are trading above their 20day average, we have not been this low since 2008 when the banks were going to take us into a depression, I’m not so sure a credit rating change nor Europe will take us there.
Like I said earlier, I have been harping about these indicators for a week now and they have meant nothing, zilch, nada. But, these extreme readings put a little perspective in today’s situation.
The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.
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Frank Zorrilla is the founder and chief investment officer of Zor Capital LLC.He began his Wall Street career 10 days after his 20th birthday when he became a Series 7 licensed stock broker. More »
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