From a report issued October 10, 2008
As I stood on the train platform this morning, I noticed an inordinate number of fellow commuters looking up toward the heavens, with long, blank, ashen stares. Were they searching for an answer to the downward spiral of the global equity markets, or perhaps seeking (hoping) for some divine intervention? With the Federal Reserve and governments around the world seemingly shooting blanks at the credit crises, perhaps hope only lies from beyond?
With that said, it is always bleakest at a major market bottom, but this is not to suggest that the black hole has finally disappeared. Just as there was an extreme feeling of helplessness this morning as global markets around the world got pummeled, U.S. stock futures were again sharply lower. I was a rookie at S&P during the 1987 crash, but this feels much worse. The decline in 1987 was dramatically quick and dirty. This time, however, it is like slow torture that doesn’t let up.
The historic precedents we are witnessing leave us no shortage of things to write about. The problem is determining just how bad they can get. There is a limit to how bad many of our technical indicators can get because they are oscillators with a range of 0 to 100. I suppose the stock market has a downside limit as well, unfortunately it is zero. The number of new 52-week lows, I guess, could reach the number of issues traded. While we think that isn't going to happen, we will attempt to illustrate just how severe things have become.
On Wednesday, 52-week lows on the NYSE as a percentage of issues traded spiked to an incredible 67.3%, an all-time record. This just shows that there have been few places to hide during this selling deluge. That equates to 2,223 issues on the NYSE. On the Nasdaq, about 33% of issues traded on Wednesday hit a 52-week low, or a total of 1,029 issues, and also a record. Another interesting statistic comes from S&P’s Chief Investment Strategist, Sam Stovall. The percentage of S&P 500 subindustries on Wednesday with negative 6-month returns had soared to 98%, the highest amount since September 27, 2002. We think this is pretty close to as bad as it can get.
Another interesting statistic comes from www.stockcharts.com and concerns the Bullish Percent Index or BPI. The BPI is a popular market breadth indicator that is calculated by dividing the number of stocks in a given group (an exchange, an industry, etc.) that are currently trading with point and figure (P&F) buy signals, by the total number of stocks in that group. As of Thursday, the percentage of stocks in
the S&P 500 that were trading with P&F buy signals was an abysmal 3.6%. For the NYSE, it was 4.5%, and for the Nasdaq, it was 9.1%. Looking at the S&P Sectors, the range was a high of 24% buy signals for consumer staples and a low of 1.2% for the financial sector.
As far as price rate-of-change (ROC) data on the major indices, the numbers are mind-numbing. The nine-day ROC for the S&P 500 as of Thursday’s close was a negative 25%, almost equaling the -29.6% during the crash in 1987. For the DJIA, the nine-day return was -23%, the worst since the -31.8% drubbing in October 1987. The nine-day return during the 1929 crash was -31%, so things are almost as bad as they have ever been. With today’s meltdown, they may well be.
The CBOE total put/call (p/c) ratio hit 2.1 at 10:00 EST Friday, which is basically in the stratosphere. It would be nice to see a closing reading well above 1.5, in our view, to illustrate a level of fear that the options market has rarely seen. The 10-day CBOE p/c ratio stood at 1.22 as of Thursday’s close, near the all-time high posted on March 14, 2007 of 1.31. The 30-day p/c ratio is at 1.13, closing in on the all-time high of 1.18. The higher these ratios go, the more pessimistic the options market is, and, in our view, the bigger the upside reversal will be, once one finally comes.
To no surprise, the volatility indexes spiked again this week, as option premiums went ever higher. Traders are expecting more fireworks, as an almost certainty, with the VIX soaring to almost 77% today. Since about the middle of September, the VIX has gone basically straight up. The slope of the increase has basically gone asymptotic, as stock indices have seen their price velocity accelerate to the downside. The VXO, based on the options of the S&P 100, exploded to almost 103% on Friday, the highest since it rocketed to 173% on October 20, 1987.
Predicting a price low in this type of market is next to impossible, but we will provide a wide range of long-term supports. The S&P 500 has dropped into what could be a very good area of chart support defined by the 2002 – 2003 market base and reversal formation. That zone of support runs from 770 up to 965. If we’re going to get a counter trend rally, it should come from this area. For the DJIA, the 2002/2003 base sits between 7177 and just above 9000.