Market Monitor shows good buying pressure

Wednesday was Fed interest rate decision day. The overseas market on Wednesday built on their Tuesday gains, however US futures were subdued early morning and in early trading stocks opened lower from the massive gains from earlier day. The market came off low by 10.30 and went sideways till Fed rate decision.

Fed cut rate by half a point. This news was priced in to the market. The rally on Tuesday was in anticipation of this cut. Initial reaction was negative. Then the market attempted a rally. It seemed like we will close positive and then things just went crazy. In 10-12 minutes the Index dropped 400 points.

Market Monitor 4% breakout ratio for the day is 758/235. Which indicates very good buying pressure. Unlike last bounce, this bounce has much better breadth. That is a encouraging sign. At this stage market is focused on beaten down stocks. Stocks from bottom twenty sector with more than 50% drop from six month high had some of the best moves today. The casino sector stocks like MGM,LVS, PNK , PENN, etc had very big one day moves.

Stocks moving on above average volume on Wednesday:
Apollo Group Inc Cl A,APOL (Google Yahoo Earnings Chart)
Aerovironment Inc,AVAV (Google Yahoo Earnings Chart)
Avalon Pharmaceuticals Inc,AVRX (Google Yahoo Earnings Chart)
Black Box Corp,BBOX (Google Yahoo Earnings Chart)
Chimera Investment,CIM (Google Yahoo Earnings Chart)
Carmike Cinemas,CKEC (Google Yahoo Earnings Chart)
Clearwire Corp Cl A,CLWR (Google Yahoo Earnings Chart)
Capital Trust Inc Md,CT (Google Yahoo Earnings Chart)
ProShares Ultra Oil & Gas ETF,DIG (Google Yahoo Earnings Chart)
Empire Resources,ERS (Google Yahoo Earnings Chart)
Fmc Corp,FMC (Google Yahoo Earnings Chart)
Homex Development Corp,HXM (Google Yahoo Earnings Chart)
Icon Plc Ads,ICLR (Google Yahoo Earnings Chart)
Idt Corp,IDT.C (Google Yahoo Earnings Chart)
Kendle Internat Inc,KNDL (Google Yahoo Earnings Chart)
Las Vegas Sands,LVS (Google Yahoo Earnings Chart)
Midway Gold Corp,MDW (Google Yahoo Earnings Chart)
MGM MIRAGE Inc,MGM (Google Yahoo Earnings Chart)
Mgic Investments Corp,MTG (Google Yahoo Earnings Chart)
Meritage Homes Corp,MTH (Google Yahoo Earnings Chart)
Newtek Business Services Inc,NEWT (Google Yahoo Earnings Chart)
New Gold Inc,NGD (Google Yahoo Earnings Chart)
Northwest Pipe Co,NWPX (Google Yahoo Earnings Chart)
Pmi Group Inc. The,PMI (Google Yahoo Earnings Chart)
Parexel Internat Cp,PRXL (Google Yahoo Earnings Chart)
Power-One Inc,PWER (Google Yahoo Earnings Chart)
Ritchie Bros Auctioneers,RBA (Google Yahoo Earnings Chart)
Royal Dutch Shell plc Class B ADR,RDS.B (Google Yahoo Earnings Chart)
Clamore/Raymond James SB-1 Equity Fund,RYJ (Google Yahoo Earnings Chart)
Spectrum Pharm Inc,SPPI (Google Yahoo Earnings Chart)
Seaspan Corp,SSW (Google Yahoo Earnings Chart)
Savient Pharmaceuticals Inc,SVNT (Google Yahoo Earnings Chart)
Tessera Technologies Inc,TSRA (Google Yahoo Earnings Chart)
Uranerz Energy Corp,URZ (Google Yahoo Earnings Chart)
ProShares Ultra Basic Materials ETF,UYM (Google Yahoo Earnings Chart)
Viacom Inc Class A,VIA (Google Yahoo Earnings Chart)
Wright Medical,WMGI (Google Yahoo Earnings Chart)
Widepoint Corp,WYY (Google Yahoo Earnings Chart)
Dentsply Internat Inc,XRAY (Google Yahoo Earnings Chart)

Fed cuts rate

The Fed statement:

Release Date: October 29, 2008

For immediate release

The Federal Open Market Committee decided today to lower its target for the federal funds rate 50 basis points to 1 percent.

The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures. Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports. Moreover, the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit.

In light of the declines in the prices of energy and other commodities and the weaker prospects for economic activity, the Committee expects inflation to moderate in coming quarters to levels consistent with price stability.

Recent policy actions, including today’s rate reduction, coordinated interest rate cuts by central banks, extraordinary liquidity measures, and official steps to strengthen financial systems, should help over time to improve credit conditions and promote a return to moderate economic growth. Nevertheless, downside risks to growth remain. The Committee will monitor economic and financial developments carefully and will act as needed to promote sustainable economic growth and price stability.

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; Timothy F. Geithner, Vice Chairman; Elizabeth A. Duke; Richard W. Fisher; Donald L. Kohn; Randall S. Kroszner; Sandra Pianalto; Charles I. Plosser; Gary H. Stern; and Kevin M. Warsh.

In a related action, the Board of Governors unanimously approved a 50-basis-point decrease in the discount rate to 1-1/4 percent. In taking this action, the Board approved the requests submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Cleveland, and San Francisco.

2008 Monetary Policy Releases

A big bounce.....

• It had breadth and Market Monitor numbers show 2000 plus breakouts. However volume was not as massive as the point or % move. We have only 48 EP and only 7 of them were on 10 times volume.
• Overnight markets were very strong yesterday. Many of these markets had several days of selloff before that.
• US futures were strong and a gap up was indicated, setting us up for a big up day.
• Market opened strong, but gave up the gains after the consumer sentiment data came out. However it never looked in trouble.
• Slowly it started rebounding from the lows and steadily built a up move. The move accelerated post 2 pm.
• At this stage we do not know whether this is bottom. My expectation was only for a big 1-2 days up move of 10%. That has happened and most of the gains also happened yesterday.
• What the move tells us is a possible double bottom is in the process.

A buy day

• What started as a good day ended badly yesterday.
• There was major weakness in overseas market prior to our market opening. However buyers were active and we were not affected by the weakness.
• Initial bout of buying looked to set up the market for a good day. Fear of missing out on a rally had traders buying the midday strength.
• However the strength proved illusive and sellers resurfaced in last few hours and the close was ugly.
• While the action continues to be negative , the Market Monitor readings have not reached extreme. The reversal in MM readings seen on 9th October still holds.
• The world markets coming in to open are today in reversal mode and we are likely to see some buying interest at open.
• For us Indians today is a must buy day. It is Diwali day. Traditionally Indians buy stocks, gold, or land on Diwali day. So I am a buyer today. At least a token buy is must today in the spirit of Diwali for us.
  

Another triple-digit loss on Friday is no longer news

Friday, Asian and European markets plunged. Early morning on Friday it looked ugly for our market. How ugly , futures were limit down and electronic future market was closed. Sentiments were so negative that , to calm investors, the New York Stock Exchange had to confirm in the morning that it would open as usual. There were lot of rumors of 1000 point plus drop in the morning session, triggering circuit breakers, closing the market for some time and so on.

At the opening, the market plunged by around 550 points. What everyone anticipated did not materialize. So the market spent rest of the day going sideways and in final hours putting together a small rally to end down around 300 point. For some reason, people did not panic, and the Dow bounced off its early-morning lows. Another triple-digit loss on Friday is no longer news in these volatile times.

In the United States, where the crisis began, investors were less alarmed than elsewhere. A rout in Asian and European stock markets sent the Dow Jones industrial average swooning by more than 500 points in early trading in New York, but trading recovered enough ground through the day to leave the Dow down 312.30 points, or 3.6 percent.

Just a year ago, a drop of that size would have been considered a black day in the markets, but in these days of routine triple-digit declines, it offered a modicum of relief to traumatized investors.

Today again we are looking at a ugly action in overseas market. Let us see what happens after the open.

Market panics and bounces

Bottom 20 ETF

Some of the most spectacular bounces happen when market panics. So if you want to look at playing one of those bounces, look at the ETFs most likely to revert.

And always remember the quote from a classic Wall Street book .....

Henry Clews wrote in Twenty-Eight Years in Wall Street (1887):
But few gain sufficient experience in Wall Street to command success until they reach that period of life in which they have one foot in the grave. When this time comes, these old veterans of the Street usually spend long intervals of repose at their comfortable homes, and in times of panic, which recur sometimes oftener than once a year, these old fellows will be seen in Wall Street, hobbling down on their canes to their brokers’ offices.

Then they always buy good stocks to the extent of their bank balances, which they have been permitted to accumulate for just such an emergency. The panic usually rages until enough of these cash purchases of stock is made to afford a big “rake in.” When the panic has spent its force, these old fellows, who have been resting judiciously on their oars in expectation of the inevitable event, which usually returns with the regularity of the seasons, quickly realize, deposit their profits with their bankers, or the overplus thereof, after purchasing more real estate that is on the up grade, for permanent investment, and retire for another season to the quietude of their splendid homes and the bosoms of their happy families.

The definitive look at Wall Street in the 19th Century

Perhaps the 19th century's best book on Wall Street, Fifty Years in Wall Street provides a fascinating look at the financial markets during a period of rapid economic expansion. Henry Clews was a giant figure in finance at that time, and his firsthand account brings this colorful era to life like never before. He reveals shocking stories of political and economic manipulation and how he helped bring down the mighty Boss Tweed. He writes eloquently about the madness of the markets and how the era's greatest speculators amassed their fortunes. This book provides an expansive view of Wall Street in an era of little regulation, rampant political corruption, and rapid financial change.

Henry Clews was born in England in 1836 and emigrated to the United States in 1850. In 1859, he cofounded what became the second largest marketer of federal bonds during the Civil War. Later, he organized the "Committee of 70," which deposed the corrupt Tweed Ring in New York City, and served as an economic consultant to President Ulysses Grant.

From the Back Cover

Author Henry Clews was a giant figure in finance during the late nineteenth century, and his firsthand account brings this colorful era to life like never before. This abridged version of an investment classic touches on a wide range of important financial issues, including:

• The causes and consequences of Wall Street panics
• The influence of Wall Street on national politics
• How individuals like Jay Gould, Daniel Drew, and Commodore Vanderbilt made their fortunes
• The characteristics of winning and losing speculators
• How operators attempted to corner the markets for individual stocks

Everyone is staring at their screens in disbelief

We are headed for a bad opening going by the futures. As of 6 AM all three indexes are showing 6% plus down move. We are now in really unknown territory. Just hold on to your nerves and wallet.

LONDON (MarketWatch) - U.S. stock futures pointed to another monumental beating on Friday, as a plunge in Asia reignited concerns about the health of the global economy.

S&P 500 futures dropped 60 points to 855.20 and Nasdaq 100 futures fell 81.5 points to 1,172.00. Dow industrial futures fell 538 points.

The drop on the S&P 500 contract was so much that it triggered a halt in electronic trading.

Thursday's session for U.S. stocks was erratic but generally positive, with the Dow Jones Industrial Average closing 172 points higher and the S&P 500 rising 11 points, though the Nasdaq Composite slipped 11 points.

But that wasn't the case in Asia, where the Nikkei 225 tumbled 9.6% in Tokyo as Japanese traders got their first chance to react to Sony's profit warning, and the Kospi plunged 10.6% in South Korea. Europe stocks also were crushed, with the Dow Jones Stoxx 600 losing 6.6%.

"Everyone is staring at their screens in disbelief," said Tom Hougaard, a strategist at City Index in London.

It depends on your style

After a major reversal few week ago, market went up some 14% in few hours on low volume, since then it has been tough going for the market. In 9 days since then it had 3 up days and 6 down days on Market Monitor. At this stage it is still a more retest of that low 9 days ago.
How you look at this market is a function of what is your style of investing or trading. Market consists of various players with various motivation and holding period. The contrarians like to play opposite of prevalent pubic opinion. Value investors look for bargains. That is why Buffett was excited about this market. Technical traders look for levels, trend lines, patterns and so on. Quants would look for mean reversion in this market. Growth investors look for rapidly growing companies and they may not find much in these environment. The momentum traders look for established trend or momentum before committing.
At this stage barring few sectors and stocks, there is no momentum on long side. As a result you would not find many opportunities if you are primarily momentum trader.

Low volume

Volume have been very low recently. For a 4% plus move in Index, it was really low volume. So essentially we are going sideways at this stage. A high volume breakout from such sideways move will be better for swing trade.

Momentum yet to build on long side

The market has been volatile as of now. Which has been the story for sometime. If you are using a momentum strategy, what you are essentially doing is betting on a winning horse once race is halfway through and you can with reasonable confidence figure out laggards and likely winners. Currently we are in a market where momentum was on negative side, for it to turn positive, it will take some time.
Lot of the breakouts showing up in scans are from the laggard kind of stocks which are oversold. Such stocks have low probability of making big moves over a longer time horizon. They are good just for a few days bounce play.

If you watch the beginning of a Marathon, you would see many amateurs burst out in first few minutes with great speed while the real pros pace themselves. Similar things are happening currently. Low quality is bouncing , but they have low probability of making enduring rallies.

Constructive day

It was a constructive day. First 1000 plus breakout day since the MM turned bullish. However it is just one step towards tradable bottom formation. In the first phase of this turn the focus is on beaten down stocks and sectors. A typical mean reversion kind of play is happening. Stocks which had sharp down moves in last 2 months are attempting to reverse.

It is likely that we will see more attempts at testing the low of last Friday. It will take some time for the next set of leaders to emerge.

At this stage stocks are reversing from low.This list is full of such stocks for those looking to play reversals:

Apple Inc,AAPL (Google Yahoo Earnings Chart)
Ak Steel Holding Corp,AKS (Google Yahoo Earnings Chart)
American Tower Corp,AMT (Google Yahoo Earnings Chart)
Avalonbay Communities,AVB (Google Yahoo Earnings Chart)
Baker Hughes Inc,BHI (Google Yahoo Earnings Chart)
Peabody Energy,BTU (Google Yahoo Earnings Chart)
Boston Properties Inc,BXP (Google Yahoo Earnings Chart)
C.H. Robinson Worldwide,CHRW (Google Yahoo Earnings Chart)
Clorox Co,CLX (Google Yahoo Earnings Chart)
Cms Energy Corp,CMS (Google Yahoo Earnings Chart)
Centerpoint Energy Inc,CNP (Google Yahoo Earnings Chart)
Chevron Corp,CVX (Google Yahoo Earnings Chart)
Dominion Resources Inc,D (Google Yahoo Earnings Chart)
E. I. du Pont de Nemours and Company,DD (Google Yahoo Earnings Chart)
Danaher Corp,DHR (Google Yahoo Earnings Chart)
Dow Chemical Co,DOW (Google Yahoo Earnings Chart)
Ecolab Inc,ECL (Google Yahoo Earnings Chart)
Equity Residential,EQR (Google Yahoo Earnings Chart)
Fluor Corp (New),FLR (Google Yahoo Earnings Chart)
Google,GOOG (Google Yahoo Earnings Chart)
Genuine Parts Co,GPC (Google Yahoo Earnings Chart)
Harley-Davidson Inc,HOG (Google Yahoo Earnings Chart)
International Flavors & Fragrances Inc. ,IFF (Google Yahoo Earnings Chart)
Intuitive Surgical Inc,ISRG (Google Yahoo Earnings Chart)
Johnson & Johnson,JNJ (Google Yahoo Earnings Chart)
Kimberly Clark Corp,KMB (Google Yahoo Earnings Chart)
Liz Claiborne Inc,LIZ (Google Yahoo Earnings Chart)
Macy's Inc,M (Google Yahoo Earnings Chart)
Altria Group Inc,MO (Google Yahoo Earnings Chart)
Microsoft Corp,MSFT (Google Yahoo Earnings Chart)
Noble Corp,NE (Google Yahoo Earnings Chart)
Nisource Inc,NI (Google Yahoo Earnings Chart)
Nucor Corp,NUE (Google Yahoo Earnings Chart)
Ppg Industries Inc,PPG (Google Yahoo Earnings Chart)
Sherwin-Williams Co,SHW (Google Yahoo Earnings Chart)
Slm Corp,SLM (Google Yahoo Earnings Chart)
Simon Property Group,SPG (Google Yahoo Earnings Chart)
Steel Dynamics Inc,STLD (Google Yahoo Earnings Chart)
Questar Corp,STR (Google Yahoo Earnings Chart)
Teradata Corporation,TDC (Google Yahoo Earnings Chart)
Thermo Fisher Scientific Inc,TMO (Google Yahoo Earnings Chart)
United Technologies Corp,UTX (Google Yahoo Earnings Chart)
Vf Corp,VFC (Google Yahoo Earnings Chart)
Vornado Realty Trust,VNO (Google Yahoo Earnings Chart)
Walgreen Co,WAG (Google Yahoo Earnings Chart)
Wal-Mart Stores Inc,WMT (Google Yahoo Earnings Chart)
US Steel Corp,X (Google Yahoo Earnings Chart)
Exxon Mobil Corporation,XOM (Google Yahoo Earnings Chart)
Xerox Corp,XRX (Google Yahoo Earnings Chart)
Yahoo! Inc,YHOO (Google Yahoo Earnings Chart)

Volume.........

93% of 4 breakouts yesterday were on bearish side. There were only 26 bullish breakout once you take out the bearish ETF's. But again volume remained weaker than last week low day volume. This week is expiration week so that will make it even more volatile.

Sellers were in complete control throughout the day. This looks like a liquidation of positions. In such circumstances the buyers just step aside and we have these one sided moves. One of the problem with the bounce on Monday was the extremely small number of breakouts for a big move. As a result I had concerns about it. At the current rate of selling we will be back to 200 numbers by end of the week on Market Monitor. Which again will be bullish.

Earnings will be in focus

When the market gapped up in the morning yesterday, it was up around 13% in just matter of few days. That kind of move was invitation for profit taking. Market gave up part of the gain. Market will likely take some time to build on its reversal.

This is a big week for earnings and number of large caps are scheduled to announce their earnings this week. Investors would be closely looking at the earnings and earnings projections for clues. Earnings season tend to be volatile. Lot of bad news has already been priced in to the market and so bad earnings or bad guidance will not come as a surprise in many cases.

More upside likely

Market responded to policy intervention. Till today previous policy interventions have failed to turn the market around. However yesterday with govt around the world promising unlimited money spigot, the market responded well.

Only 547 breakouts on Market Monitor, while the market made one of the biggest move in history tells you something. Volume was lacking. Which puts a little bit of question mark on this move. For this kind of move the numbers should have been upwards of 2000 on 4% breakout. Something does not make sense.

But I will still maintain my stance that we are likely to see rally that will last for 2-3 month. So better days for swing trading will start from now onwards.

How to play the bounce

Yesterday was highest volume day in many Indexes and finally market ended positive. So There is a probability of a bounce here. We don't know whether this is bottom, but we do know probability of counter trend bounce is very high. Such bounces tend to be on Indexes or stocks or sectors which have had most oversold levels. This will be primarily a mean reversion kind of bounce.

The bottom 10 ETF in this list is what I am interested in for the bounce trade. ETF which are the farthest from their 40 day moving average are prime candidates for bounce.

What next

There is panic in the air and people are scared. At this stage one should look at things logically and with cool head.
If you were following Market Monitor kind of market timing model, you were anyway out of market during the drop. So you have now luxury to play it cool. Think through your options and the opportunity ahead.
What does MM going green on primary indicator tell you:

When the number of stocks up 25% or more goes below 200, it indicates an extreme oversold level and is a bullish signal. Rallies that start from such extreme levels tend to be very powerful.

So we are currently at a stage which you will seldom see every year. It is extremely rare phenomenon. It tells you there is extremely high probability of a rally and any such rally will be very powerful.

My interpretation of that signal is :

We have high probability of a 20% or more rally starting in October lasting up to January in USA market and a rally of 30 to 40% in the emerging markets.

Does it mean it will start today, no. But we are in a zone from where a rally will start in next couple of days or weeks.

Timing Model Bullish

Market Monitor: Bullish

With the ban on short selling gone, the market tumbled again. This has finally pushed the Market Monitor market timing model in to bullish zone.

When market panics

Useful to keep a quote from a classic Wall Street book handy.....

Henry Clews wrote in Twenty-Eight Years in Wall Street (1887):
But few gain sufficient experience in Wall Street to command success until they reach that period of life in which they have one foot in the grave. When this time comes, these old veterans of the Street usually spend long intervals of repose at their comfortable homes, and in times of panic, which recur sometimes oftener than once a year, these old fellows will be seen in Wall Street, hobbling down on their canes to their brokers’ offices.

Then they always buy good stocks to the extent of their bank balances, which they have been permitted to accumulate for just such an emergency. The panic usually rages until enough of these cash purchases of stock is made to afford a big “rake in.” When the panic has spent its force, these old fellows, who have been resting judiciously on their oars in expectation of the inevitable event, which usually returns with the regularity of the seasons, quickly realize, deposit their profits with their bankers, or the overplus thereof, after purchasing more real estate that is on the up grade, for permanent investment, and retire for another season to the quietude of their splendid homes and the bosoms of their happy families.

The definitive look at Wall Street in the 19th Century

Perhaps the 19th century's best book on Wall Street, Fifty Years in Wall Street provides a fascinating look at the financial markets during a period of rapid economic expansion. Henry Clews was a giant figure in finance at that time, and his firsthand account brings this colorful era to life like never before. He reveals shocking stories of political and economic manipulation and how he helped bring down the mighty Boss Tweed. He writes eloquently about the madness of the markets and how the era's greatest speculators amassed their fortunes. This book provides an expansive view of Wall Street in an era of little regulation, rampant political corruption, and rapid financial change.

Henry Clews was born in England in 1836 and emigrated to the United States in 1850. In 1859, he cofounded what became the second largest marketer of federal bonds during the Civil War. Later, he organized the "Committee of 70," which deposed the corrupt Tweed Ring in New York City, and served as an economic consultant to President Ulysses Grant.

From the Back Cover

Author Henry Clews was a giant figure in finance during the late nineteenth century, and his firsthand account brings this colorful era to life like never before. This abridged version of an investment classic touches on a wide range of important financial issues, including:

• The causes and consequences of Wall Street panics
• The influence of Wall Street on national politics
• How individuals like Jay Gould, Daniel Drew, and Commodore Vanderbilt made their fortunes
• The characteristics of winning and losing speculators
• How operators attempted to corner the markets for individual stocks

US debt clock runs out of digits

The National Debt Clock near Times Square, NYC, yesterday. The '1' can be seen squashed in to the same space as the dollar sign

The financial crisis that has rocked the world over the last few weeks will go down in the history books as changing the face of global capitalism forever.

And in New York City the signs of change have already hit Times Square.

The U.S. national debt has spiraled so high that the National Debt Clock near Times Square has actually run out of digits to record it.

Oversold

Market Monitor: Bearish (If you take out the short ETF and funds we are approaching bullish zone). All secondary indicators are bullish.

• If you look at Market Monitor first row, you will see in last 5 days we had days where the readings ranged from 723 to 2253. That is extremely high level of selling. It has now persisted for 13 days with just 2 days where there was some relief. Such extreme periods have very high probability of precipitating in reflex bounces.
• Similarly if you see the primary indicator of # of stocks up or down 25% in a quarter, you will notice it is now approaching extreme readings. One of the reason it has not reached extreme so far is because market structure has changed in last 11/2 years with proliferation of short ETF. So if we account for that the new extreme reading will be 300 instead of 200. We are now almost reaching that stage.
• The secondary indicators are all in bullish zone. In fact if you look at number of stocks down 50% in a month you will see it is in extreme territory for 9consecutive days. Those kind of things have never happened before.
• Similarly the number of stocks up 100% from 52 week low is at extreme level. Here again if you take out the short ETF it is at lowest readings I have seen in several years.
• So everything indicates a extreme oversold level. Under normal market circumstances by now we should have seen a big counter trend move, but we are in a once in a lifetime kind of event currently.

Rate Cuts

WASHINGTON, Oct 8 (Reuters) - The U.S. Federal Reserve led a coordinated round of global official rate cuts on Wednesday, easing by a half-point, as did the European Central Bank, Bank of England and Swiss, Canadian and Swedish banks. In an attempt to stem unprecedented global market turmoil, the Fed cut its key federal funds lending rate by half a percentage point to 1.5 percent and also lowered its discount rate by the same amount to 1.75 percent.

The ECB also cut by a half-point to 3.75 percent as did the Bank of England, taking its rate to 4.5 percent.

Crammer Panics

Market Monitor: Bearish Secondary indicators bullish. Indicating possibility of reflex bounce.
Worden T2108 = 4.06

• There was real panic yesterday after a long time. Till now most sell-off have been followed by eager dip buyers. Gap downs have been bought, yesterday was one of those days where there was no hint of buyers as market opened weak. Rumors of worldwide coordinated rate cuts had the market recovering in last hour. But overall it was panicky move. James Crammer who has been extolling people to buy was yesterday telling them to panic. Such panicky sell-off are good as they will ultimately lead to capitulation.
• As there has been lot of selling in last few days, all the secondary indicators on Market Monitor are now in extreme territory. Such extreme readings have high probability of producing a counter trend moves in shorter time frames. Such bounces are for the nimble few. The primary indicator on Market Monitor is not yet in extreme territory but it is getting there.

Sellers at work globally

Market Monitor :Bearish

• 11 month old bear market continues.
• Secondary indicators are becoming bullish. That indicates a probability of a bounce in shorter time frames. The primary indicator in Market Monitor is yet to reach extreme levels where sustainable rallies develop.
  
• The spread of fear worldwide is leading to panic. Panicky markets historically tend to resolve in bounces in the short run. Slow and planned selling dominated bear markets tend to last longer. This market has been slow and not very panicky.
  
• The IBD 85/85 list had only 36 stocks this week.
• Bear markets are good for the long term health of market and once they get over, they offer very good buy opportunities.
  

Time Cover

Another bearish cover...

A bearish bubble is developing

Alcoa is first large company traditionally to announce its earnings. Its earnings will be out on 7 th October. That will be the official start to the earnings season. Once the earning season starts the market will be focused on it.

In spite of the overall bearishness there will be companies which will do exceedingly well and market would still focus on them. Also investors would be keen on hearing about future earnings expectations of management. Typically market looks 2-3 quarters ahead and as a result the bad things are already priced in at this level.

One of the temptation currently for most investor is to start believing in all the bearish propaganda. I will take a bet that 80% of the worst thing being predicted by the bears will not come true. You can go back and see history, you will always see that during panics and crisis , mass media and few pundits compete to create scary scenarios. Most of them never come true.

By becoming excessively pessimistic you will have cognitive dissonance when market starts rallying. The biggest problem to watch for in analyst or in investors is what psychologist call Cognitive Dissonance. Cognitive Dissonance is a phenomenon in which an individual or a group of individual with an established opinion refuse to accept another point of view, in spite of new irrefutable evidence suggesting quiet another conclusion.

Cognitive dissonance, refers to our desire to avoid believing two conflicting things. Whereby the brain attempts to find support for the belief that carries the greater attachment or emotional involvement by finding a way to ignore or discount the conflicting belief.

In the classic study of this characteristic, researchers found that once a person had purchased a particular automobile, they would avoid advertisements for competing models and seek out those for the model purchased, so as to avoid the pain of regret that was bound to follow if they were to realize they had made the wrong decision. One way to avoid regretting the purchase decision is to (irrationally) filter the information received (or believed) after the decision has been made. Similarly, people tend to minimize the importance of subsequent information that might call their original decision into question.

The upshot is that we resort to various subconscious mechanisms to defend our existing beliefs, even where the desire to maintain these beliefs has a less-than-rational basis.

Knowing this, how do investors adjust their behaviour to compensate for the tendency to avoid or deny new, conflicting information? The answer is to seek out contrary opinions; to realize that research doesn't stop once a decision is made; to strive to identify mistakes as early as possible and take pride in the ability to do so.

Historically periods of panics and bearishness have been brief. Government, regulators, entrepreneurs, investors, consumers all react to panic and make several adjustment to their behavior and choices. That does not get reflected in most current extreme bearish scenario.

Economist Cover

36 Hours of Alarm and Action as Crisis Spiraled

This NYT article gives a very good behind the scene look at what happened in past few weeks.

Panic was spreading on two of the scariest days ever in financial markets, and the biggest investors — not small investors — were panicking the most. Nobody was sure how much damage it would cause before it ended.

This is what a credit crisis looks like. It’s not like a stock market crisis, where the scary plunge of stocks is obvious to all. The credit crisis has played out in places most people can’t see. It’s banks refusing to lend to other banks — even though that is one of the most essential functions of the banking system. It’s a loss of confidence in seemingly healthy institutions like Morgan Stanley and Goldman — both of which reported profits even as the pressure was mounting. It is panicked hedge funds pulling out cash. It is frightened investors protecting themselves by buying credit-default swaps — a financial insurance policy against potential bankruptcy — at prices 30 times what they normally would pay.

It was this 36-hour period two weeks ago — from the morning of Wednesday, Sept. 17, to the afternoon of Thursday, Sept. 18 — that spooked policy makers by opening fissures in the worldwide financial system.

In their rush to do something, and do it fast, the Federal Reserve chairman, Ben S. Bernanke, and Treasury Secretary Henry M. Paulson Jr. concluded the time had come to use the “break the glass” rescue plan they had been developing. But in their urgency, they bypassed a crucial step in Washington and fashioned their $700 billion bailout without political spadework, which led to a resounding rejection this past Monday in the House of Representatives.

That Thursday evening, however, time was of the essence. In a hastily convened meeting in the conference room of the House speaker, Nancy Pelosi, the two men presented, in the starkest terms imaginable, the outline of the $700 billion plan to Congressional leaders. “If we don’t do this,” Mr. Bernanke said, according to several participants, “we may not have an economy on Monday.”

Breadth Indicators

One of the usual tool to look at change in overall market direction is breadth indicator. There are number of breadth indicator in the market and to get a comprehensive idea about them you should read The Complete Guide to Market Breadth Indicators by Gregory Morris.
Some of the popular breadth indicators are:

• Advancing - Declining Issues
• Advance/Decline Line
• Advance/Decline Ratio
• Breadth Thrust
• McClellan Oscillator
• The McClellan Summation Index
• New Highs-Lows Cumulative
• New Higs-Lows Ratio
• New High/Lows

If you are Telechart user , you will notice it contains 28 different kinds of breadth indicators. one of the most useful out of that is T2108. Itis currently at 14. Levels below 20 on this indicator tend to lead to bounces.

Once you understand breadth indicators, one can develop a market timing model based on such indicators. Such market timing models indicate zones where turns can appear in market and can identify safer periods for using long or short strategies. I developed Market Monitor after studying the breadth indicators commonly used. Market Monitor is a breadth indicator. The key difference between Market monitor and other breadth indicator is that MM uses significant moves to look at breadth.

The Novice Bear has adopted the Market Monitor concept in Blocks and put together a video on how to use it on his site. It is a good video explaining the basic idea.