Tuesday, August 9, 2011

monday's crash

Had a crash on Monday. We saw a huge point loss on huge volume, but breadth was really remarkable. The NYSE only had 50 stocks in positive territory at the end of the day, while there were 3,111 in the red. The last time breadth was this bad was over 70 years ago in 1940 when Germany invaded France.

In the last nine days of trading, the DJIA is down 1676 points or 13.4%. The small-cap indices have done even worse: They are down nearly 21% during the same time period. It's a good example of the old saying that stocks go down much faster than they go up.

When things are down this far, this fast, you have to wonder if the market is close to some sort of massive snap-back rally. It is certainly hitting some extremes and we are seeing some real capitulation, as folks want out of stocks regardless of the size of their losses. They just can't take the pain and want to exit no matter what the cost at this point.

Due to its downgrade of U.S. sovereign debt, Standard & Poor's is receiving the blame for the action today, but one could certainly argue that this really didn't change anything. The rating agency simply pointed out that the U.S. has some issues with the size of the national debt and everyone knew that anyway.

The problem today was that once the selling started, the market just couldn't break the cycle of negative sentiment. The more the indices dropped, the more negative the mood became and that caused more selling and more despair. It is momentum in reverse, and it is can be even more powerful than upside momentum once it takes hold.

Tomorrow we get the Fed's interest rate decision. The bulls are going to be looking for some sort of hint about another round of quantitative easing, although there are plenty of doubts about whether that can really help the market much at this point. I suspect we'll see some sort of vague reassurance from the Fed that they are "prepared to act" even though there really isn't much left in their bag of tricks at this point.