10/12

Champagne Glitches And Caviar Screams

Beluga Wail?...Ouch!  Don'tcha just hate it when this happens?  Well, you wouldn't know there is much pain by looking at public reaction.  Quiet desperation or intestinal fortitude?  Either way, the public isn't flinching - yet.  Ed Hyman's recent poll of institutional investors also measured one of the highest bullish readings ever.  (Maybe that's because institutions are fully invested.  They better be bullish.)  When will the market bottom?  Strategist after strategist is trying to sooth some frazzled nerves.  A few brave souls are even making a stab at timing the turn.  Good luck.  Here's what we are watching for signs of emotional capitulation:

The VIX:

Our old buddy the VIX (OEX volatility index) is heading toward fear and panic, but hasn't quite gotten to the finish line just yet.  When it does, you'll know by all the screaming.

The TRIN:

As you may know, the TRIN usually spikes on fear.  No spike yet.  No fear yet?

(Chart courtesy of StockCharts.com)

Just look at where the TRIN went last April/May during the "denial correction" of the NAZ.

Sentiment Readings:

Investors Intelligence for last week measured a drop in bearish sentiment relative to three weeks ago.  That's right, a drop.  Concensus, Inc. sentiment for Bulls was literally unchanged from three weeks ago.  Lastly, AAII showed an increase in bears, but barely a budge in bullish numbers from three weeks ago.  Clearly the public has been conditioned to believe that all dips are benign.  At least they hope they are.

Ratio of Declining Volume to Advancing Volume:

The numbers at the moment are nowhere near the extremes seen in the May NASDAQ decline.  To be honest, we are a bit surprised.  This sell off seems a bit closer to the heart of the average American because so many of the big cap darlings of the bull market are being carried off the field.

As we suggested on Tuesday, watch the mutual fund inflow numbers.  We feel they will be extremely important ahead.  Also, watch what happens in the last ½ hour of trading each day and watch last half hour market characteristics (volume, advance decline, etc.) for clues as to public reaction.  The mutual funds tend to execute daily redemption orders in the last half hour or so.  For what it is worth (and we'll probably live to regret this), the mania stage of the 1990's-2000 bull market is over.  It's dead.  It's not coming back anytime soon.  Now it's about survival.  The champagne is rapidly going flat with each bubble pop.  The caviar is starting to smell far too fishy to continue gorging upon.  Is the public still dreaming or is the waking state overtaking them?  At the moment, it's more like they are caught in the pre-waking REM state.  With all the red on the screen these days, our eyes are moving rapidly also.

"We're Close To A Bottom"...Oh really?  Anything can happen over the course of hours, days or weeks, but what happens over the remainder of the year and into 2001?  If you have been following the work closely in the past, you already know that Tim's chart work has been a godsend in terms of perspective.  So, what seems like a realistic bottom?  Well, just have a look:

There is simply no way that the public or mutual fund managers are ready for something like this.  From a technical standpoint, the target ranges are realistic and clearly achievable.  We take this chart extremely seriously.  As contrarians, there is no time to revel in bearish success of the moment.  Preparing for tomorrow's battle is always the daily routine.  As Tim has suggested, by the time CNBC is primarily featuring bearish strategists and commentary, it will be time to load up on long side bets.

Died And Gone To Heaven...It's simply amazing how money can be lost so quickly in the stock market.  Especially in today's world.  What may have taken years to accumulate can be wiped away in months.  The ultimate irony of greed.  We're always asked the question, "Where is the money going to go if it leaves stocks?".  Quite humbly, the correct question should be "Where is the money that is left going to go if it leaves stocks?"  In today's rapid fire world, traders are not given the opportunity to exit stage left in a reasonable fashion.  The exiting is violent.  Stocks down 20-30%, or more, for missing earnings of the moment.  Much paper wealth has just evaporated over the recent past.  Especially after gap-down events.  Although the following table does not display complete evaporation, there is a good chunk of this former paper wealth that has simply gone to "NDX heaven". 

The almost $1.2 trillion paper loss is staggering.  As we said, some of this money was clearly converted into cash or reinvested elsewhere, nonetheless the number is a bit numbing.  Now do you know why HD, JCP, WMT, etc are hitting the wall?  If the market continues to lose ground, you haven't seen anything yet in terms of retail sales declines.  Oh yeah, residential real estate won't be far behind either.

The On Deck Circle...It's always a bit disappointing to be standing in the "on deck" circle when the game is called because of rain.  The Street was a bit worried about MSDW's junk bond operation and junk debt book last week.  Although MSDW has categorically denied that there is a problem, the sinking market clearly raises other questions about the future of earnings and cash flow for the entire brokerage industry.  The following table shows the theoretical value of equity deals in registration for the "big boys" as of bloody September's month end (these numbers include IPO's, Secondaries, ADR's and Convert deals - Source: Equidesk):

MSDW was clearly the "big hitter" in the group with over $14 billion in paper ready to hit the Street.  Is it any wonder why the brokerage stocks have been getting clocked lately?  Of course, this comes right on the heels of another round of big acquisition deals for the likes of Paine Webber and DLJ.  Timing is everything, isn't it?

You Live, You Learn. You Love, You Learn. You Lose, you Learn. You Bleed, You Learn. You scream, You Learn...On Tuesday, we prepared a graph of annual margin debt looking back over the course of the better part of this decade. Let's take a closer look at human decision making in the near term, shall we?

If we didn't know better, we'd swear it looks a heck of a lot like the following chart:

Don't you think?  Given the action in the NASDAQ over the past few months, we'll give you one guess as to what will happen to the margin debt chart when September and October numbers are reported.  That's right.  Margin debt "heaven".  The margin calls in May were clearly not a lesson learned.  We wonder if the lesson will be learned this time.  That of course depends on how big a lesson it will be, now doesn't it.  It's getting bigger by the day, at least so far.

Bear Markets In The New Era...You bet it's different this time.  Bear markets, especially in individual securities, are happening in virtual "e-time".  Whatever happened to the good old gentlemen's bear market?  You know, like the following chart of Gillette.

In what took years to happen to Gillette is now happening in a month or a few weeks to stocks like Intel, Home Depot, etc.  

We are moving at digital speed.  How much of the new digital bear market do you think the public can take before they logon to the fact that things are different this time?  Much different.  Digital wealth is being lost at the speed of light.