October 9th, 2008

Next to Last Line in the Sand

I think the train has finally arrived at the station. The S&P 500 just hit 92 with about 15 minutes left in the trading day and the Dow is down 640. Needless to say, the long anticipated Bear Market Crash I’ve been writing about since February has finally arrived, in full force. I must confess, I hoped it wouldn’t happen and even today can’t believe it actually has.

Go back just a couple of days and take a look at the S&P chart with the support lines. It’s amazing that the market cut through all higher support levels so easily. The Dow closed at 8657; it was at 11,000, or only 11 trading days ago. The S&P 500 was 1237.08 14 days ago; today it closed at 910.67, or 26% decline. The last time declines were so swift was during the 1987 crash but then it happened in a single day. Since my target was hit, I had to be true to my strategy and decided to sell the doubleshorts. Mistake? Don’t think so in the short run but may have to buy them back sooner than I expect.

The 1987 crash happened because of mutual funds and their computers dumping automatically. Today, it’s the hedge funds and the mutual funds needing to sell because of redemptions they need to fund. I wish you had sold anytime since February (or even as far back as December), I can’t tell you whether you should join the selling now. My guess is that it’s too late; you should now lick your wounds and stay put. Rather than sell and you need some comfort, buy some insurance in the form of put options on the SPY.

Let me show you an update of the S&P 500 with those “support” or, more correctly, “non- support” trendlines:

Note the following:

  • the index hit the final support trendline I drew on previous similar charts.
  • there was a knife-type bounce back in 2001 off this trendline. That was a 25% bounce after almost a precipitous decline during the summer of 2001 into year-end.
  • but after that 2001 bounce, the market resumed its decline by April into the ultimate bottom by Fall, 2002. Perhaps we’ll get a break and see a 10-20% bounce (up to 1150?) at this point too
  • I hope we won’t see it but I inserted a new final support trendline off the bottom in 2002 leading to a bottom this time of 780-800, or another 12% lower from today’s close making it a 50% decline from the top.

Even after hitting the low in Summer, 2002, it took another 9 months before there was an all-clear green light that it was relatively safe to invest again. I’ve continually cautioned you to be in cash and not get suckered in during during the bear market corrections. That’s especially true now. We’re soon going to start hearing more and more stocks touted as “precious gems on sale at a discount mall”.

The steeper the decline the more repair needed and repair takes time. The steepness of this decline means we could leave the first 10-15% on the table for the scavengers to pick up. There will be plenty of time to get back on and you don’t need to be the first.

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