Let’s see, did anything happen on Tuesday that we need to report. In fact, yes, there is much to include this evening so buckle yourselves in and let’s get started.
Days like this, one that we have been waiting for so long, are the kind of days that give us two kinds of feelings: One, relief that all of our hard work has not gone in vain, and, two, satisfaction that the market does have some sense once in a while. You may disagree with our assessment but you have to understand that we have been short for a while.
Market action, get going…As the market opened on Tuesday morning, the overnight futures were negative and several reasons were given. First, the Chinese market had dropped about 9% overnight and that was weighing on the US. Second, VeeP Cheney was considered a target in a Taliban suicide bombing attempt. Third, just before the market opened, the durable goods orders were reported much weaker than was expected. The one thing that wasn’t mentioned was the sub-prime mortgage malaise we have been in for the past few weeks, so we thought we would mention it.
To us, the “reason” is mostly irrelevant because the market has been ready to go down for about three months and any reason is good enough, just pick one. The stock valuations had gotten way ahead of themselves and were due for at least a correction.
One of the biggest surprises for us as we surveyed the day was the big break in the Dow right around an hour before the close. We were stunned to see the Dow trade from down about 295 to down about 505 in the space of minutes, literally less than five minutes. Bigcharts.com reports a five minute period when the Dow traded at 12,335 and then at 12,089 or about 250 points.
This drop was a mystery to us until this evening when we saw the front page article scheduled for the WSJ on Wednesday. Apparently, trading got too heavy for the system to follow properly and the quotes on the Dow were being delayed. Right at the top of the hour someone made a decision to go to a backup system which immediately indicated the correct price on the Dow.
The article says that the other indexes were falling faster than the Dow (particularly noteworthy was the SP 500) so someone decided to see why. You may want to read the article but at least we are less mystified by a five minute 200+ point drop in the Dow in the middle of the day. The article has graphs of the major indexes.
It looked as if the market sensed a buying opportunity with that whoosh down and from there the market staged a comeback rally attempt. Well, the market was in a deep hole so this attempt did not hold and the market traded down into the close. Prices were off the lows of the day but, especially in the NASDAQ, not that far off the lows.
We are surprised by the fact that the electronic system “failed” with trading volume not even as high as it has been in recent memory. Maybe the volume was especially heavy right after lunch but we still are scratching our heads on this one.
As for some other items, we wanted to mention bonds, gold, and VIX. In the bond market, the Treasuries enjoyed a nice day as evidenced by the TLT fund below. The TLT traded near the high for the year during the day before settling up about 1.3%. Gold didn’t have a bad session until after it closed for the day. Yes, that doesn’t make sense but the big move did happen after gold closed its regular session. From the close of its trading until the close of the stock market, gold dropped about $25 an ounce, making for a very poor day for the HUI, our gold mining index.
We thought we would spend a little time on the VIX just because it deserves some attention this evening; after all it was up 64% today, closing at 18.31 up 7.16. For some reason, traders seemed to think it was a good day to be buying puts, which is what pushes up the VIX. What we are really questioning is the options trading that was reported in the VIX options. For an index that closed at 18.31, a 15 call option should be worth at least 3.31 and we see it being reported at less than 2, we are skeptical and didn’t report that number this evening.
Oh yes, there is more but we want to keep this section as “short” as possible. Actually, that’s not true, there is more.
Let us first say that the top is in and any rally attempts should be used to capitalize on the downside. We do expect some violent upside moves over the next several months but we don’t expect they can get back to Monday’s price levels. We remind you of the price levels of our primary indexes (we apologize for the spacing):
Monday morning’s high:
SP 500 1,457
SP 500 1,399
Year end 2006:
SP 500 1,418
The analysis that will be done by most market watchers will be the same tired old rhetoric we have heard for 20 years (since the 1987 “crash”) that this is a buying opportunity and you shouldn’t get panicked by a sudden move like this.
We have been watching and waiting for this Day for a long time and we think that this is the First day of a long painful sell off. Markets need more than one day to make up for four years of rally. This day will be followed by many more points to the downside this year.
We had a pretty good day as noted below.
Comments would be most appreciated by us and other readers.
Dow Industrials: 12,216.24 -416.02 (not at a new record high)
VIX: 18.31 (up 64%)
VIXEC.X: ??? (we’re not sure what’s going on here)
HUI: 334.72 (down 27.10)
QQQQ: 43.19 (down 1.85)
RYVNX: 17.37 (up 8.22%--own)
RYCWX: 37.14 (up 6.69%--own)