Thursday, August 11, 2011

Wednesday Reality

Hello? Helllllooooooooooooo? Is there anybody out there?

Where did everybody go who just one day ago was telling you that the market rallied 600 points in an hour on Tuesday afternoon because the Fed pledged long-term support for the market? Boy, that long-term pledge of support sure disappeared in a hurry, didn't it?

Where did everybody go who denied that Tuesday's Fed statement made the FOMC sound overly negative, and overly powerless?

Where did all the talking heads, analysts, and current and former fund managers go who advised you to buy on the dip all day on Monday? Anyone? Anyone? Bueller?

Right back under their rocks is where they went, that's right. Only to re-appear in a month or two and tell you they've predicted this whole move downward all along. But then, that's the shtick that makes any public market analyst survive nowadays, isn't it.

The markets plunged again on Wednesday, erasing all of Tuesday's massive 4% gains in the U.S. and then moving more than a full percent lower than that, bringing the Dow's total five-session tumble to a stunning 1176.50 points, representing a decline in just one week of 9.9% of the full accumulated value over the entire lifetime of the Dow Jones Industrials Average, and I can say from the perspective of a very involved market observer, it has truly been a thing of awe to behold. Even more ominous than the fact that Wednesday saw the markets give back significantly more than all of Tuesday's gains, is the fact that the market sold off hard all throughout the final 90 minutes of trading, and finished Wednesday's abysmal session literally right at the lows of the day.

Make no mistake -- what we're witnessing right now is one of the most impressive momentum struggles between the bulls and the bears that we've had on Wall Street in our lifetimes. Of course the absolute peak of the 2008 financial crisis was even a little worse than what we've endured over the past several trading sessions, but after Wednesday's huge slide, I think it's fair to say that we've officially moved into "historic" territory with this incredible fiasco over the past week in the stock market. It's not quite to "apocalyptic" yet -- in fact, amazingly it's nowhere near "apocalyptic" yet by a longshot -- but in truth, a 10% decline in exactly one week is close to as bad as the whole market at large ever gets. With the situation in Europe seeming to deteriorate almost daily, and with the GDP numbers for the first half of this year finally making clear to Americans for the first time the farce that has been manufactured by the current administration through growing use of government-printed money over the past two years, combined with what I have been telling you was a Fed statement on Tuesday that somehow managed to make the FOMC sound simultaneously as scared and as powerless as I have ever seen them sound, this is far and away the market bears' best opportunity to garner the support they need to force huge downward spikes in the market since the financial crisis finally bottomed out in March of 2009.

It's been two and a half long years for the bears, it really has. Even by bear market standards. The move from Dow 6,600 in March 2009 to Dow 12,810 on April 29, 2011 was one of the single most ferocious bull cycles in the history of the DJIA. Think about that -- the world's leading market index surged a full 94% over the span of just over two years. It was basically impossible to make money shorting stocks, or doing anything other than sitting squarely on the long side in equities, for over 25 months in the U.S. In truth, mostly every bear out there has been pulling his or her hair out for over two years as equities have inexorably risen, seemingly without any valid justification to support such strength, a sentiment expressed by many financial bloggers and other talking heads in the industry repeatedly ever since the market started recovering from the financial crisis.

And now, finally, the confluence of negative events I mentioned above have given the bears their first chance to flex their muscles since March of 2009. And given what the past 25 months have been like on Wall Street, the muscle of the bears can be great indeed, as we saw well back in 2008 and as we're seeing again now in a big way. The bottom line is that these negative guys, and the momentum guys, and the logarithmic trading guys, they all come out of the woodwork in times like this, and they do so in incredible numbers and with incredible strength in their push. We see it every few years like this, even though most market participants seem to be surprised all over again each time the cycle repeats itself. The bulls put up a strong effort around midday on Wednesday after a large opening drop following Tuesday's short-lived rally, bumping up the Dow more than 200 points off the morning lows, but the bears circled the wagons for another sick push in the afternoon, and the final 90 minutes of trading on Wednesday was about as bad as you ever see the markets get. And once it was clear that this selling momentum had started kicking in and that traders were setting their sights on a run at the day's lows, it was like a tidal wave of sell orders flushing over Wall Street.

Given what things look like at this exact moment, the bears' insatiable thirst for blood in the market has clearly not yet been quenched.

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