Tuesday, October 07, 2008

Don't fire 'til you see the fear in their eyes

It was about 1500 Dow points and 10 trading days ago that Guambat was lamenting the detached observations of the market's malaise. Said he, "If market bottoms are born of window-jumping fear and anguish, we're not going to put one in as long as we trivialize and alienate the actor from the antagonism."

In market terms, we're pretty close to the fear levels that tend to correlate roughly well with substantial bottoms. But even if that eventuates, the economic pain will be a while with us. The market tends to lead the way out of economic misery by placing bets on that far horizon. Guambat hastens to add that sentiment indicators are merely corroborative trading hints, not trading signals.

And Guambat warns he is well known to foul out to left field by swinging too soon regardless of market direction.

With the Vix at fairly rare fear levels, DJIA Bollinger lower band broken, the DJIA Average True Range at multi-year highs and the DJIA now off over 30% from its highest, though, now is the time to bite down hard on that bullet while the doctor saws your leg off.

You'll be better in no time.

All you have to do is survive.

And we've seen worse. This is only a Greatish Depression, after all.


(The Great Depression took almost 90% off the Dow, and it lost almost 50% in 2000 and 1974 according to the data from Calculated Risk noted below.)

PS:

CHICAGO, Oct 6 (Reuters) - An index regarded as Wall Street's fear gauge surged to a record high on Monday in a sign investors expect more stock market turmoil as they scramble for options to insure their stock portfolios.

The Chicago Board Options Exchange Volatility Index , or VIX, jumped almost 25 percent to a record high of 56.32, before slightly paring gains to trade at 53.24.

"This is absolutely amazing. The elevated VIX is reflecting that people are unsure about every financial relationship they have ever known not only in the U.S. but worldwide," said Joe Kinahan, chief derivatives strategist at thinkorswim Group.


LOOKING BACK to the future:

Guambat wrote back in January this year:
Guambat is not sanquine that this is, though, a "mere" bear market. It has the makings of something longer and stronger because of the huge amount of ignorance in the financial world (in both senses of the term) about the "value" of all that credit alphabet soup of souped up financially/genetically engineered magicians' tricks that exists ... who knows where?

In US market perspectives, Calculated Risk has produced some charts (click the link and study them) which show the degree to which past bear market plunges have gone, which indicates that a 20% drop is "garden variety". Looking at the Dow Index chart at Calculated Risk, Guambat's not insubstantial gut and intuition is that a 30% drop would not be atypical and a "reasonable" expectation.

With that in mind, Guambat hopes to stay out of the stores until the 30% off sale signs go up.

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