Monday, October 10, 2005

Clear and Present Danger.

Jack Ryan aside, it's probably not the time to be a hero.

John Hussman: Wednesday's Breakdowns.


Seriously, although CNBC inexplicably blamed last week's decline on the hawkish comments of a fairly obscure Fed governor, my impression is that investors were expressing a distinct loss of confidence on a variety of fronts. Wednesday was particularly decisive – to an extent that I closed the bulk of our remaining exposure to market fluctuations in the Strategic Growth Fund about mid-afternoon. There has to be a lot wrong with market action to provoke me to increase hedges when the market is down rather than up. There was a lot wrong on Wednesday – it was singularly the worst technical showing I can recall in years.

Other veteran market-watchers had similar comments. The Dow was down 123 points, which wasn't in itself so unusual, but the internal action was terrible. Richard Russell commented after the close that the action was “a really mean mark today, with my PTI close to a bear signal, and Lowry's also close to a major sell signal. I still get the feeling that complacency rules. Today was what I call a semi-crash day.” On the subject of complacency, Investors Intelligence reports that the majority of investment advisors have been bullish now for 154 weeks, which is the longest bullish stretch in the 42 years the figures have been tracked. Joe Granville described Wednesday as having “the most bearish reversal patterns that I have ever seen in one day,” which is an interesting statement even for a perennial bear.

In short, there was a lot of information in market action indicating that investors have fairly abruptly adopted a skittish view of risk taking.

If you look at how the Russell 2000 has behaved, the speed of the shift is also of concern. Market declines that start with sharp, seemingly relentless vertical declines often turn investors into bag-holders all the way down. Those initial declines often tempt investors to say “the market is already down so much, I can't sell now. How much lower can it go? No, really, how much lower can it go? Sweet Mother of Joseph! How much lower can it go?!??”

At this point, a poor continuation would involve a spike in the CBOE volatility index (VIX) and breakdown in the Dow Transportation index below its August-September lows, which would occur slightly below 3600 on that index.

That said, what I've just described is a combination of what I view as unfavorable and informative market action. It still does not ensure that the market will decline, however. It only suggests that given the current evidence, we don't have sufficient reason to accept broad market risk. Both valuations and market action are unfavorable here.

(Hat tip: US Market Blog)

Alan Abelson of Barrons via the Big Picture:


"Where does that leave the market? Probably right where it was -- namely, shaky. But since that has been our diagnosis for it seems like an eternity, we thought it might be worthwhile getting a second opinion. So we did, from an old pal who has been keeping tabs on the market ever since he was a pup (and that was quite a few years ago). Not the least of his virtues is that he shuns publicity, which means that only his clients (a select, savvy and rich bunch) and the occasional accidental kibitzer (like us) are privy to what he thinks.

OK, OK -- we hear you -- what does he think?

We should note, incidentally, that he's the last of the great contrarians (while just about everyone else was beating the drums for a burst upward, he cautioned that September would see a weak rally -- and so it did). Our friend is one of those strange people with the capacity to read the entrails of the market -- new highs, 200-day moving averages, that sort of arcana -- and what he sees is a mean shakeout this month, followed by a rally that might carry into next year.