Wednesday, October 21, 2009

Where the Volatility Came From

Stocks did a complete about-face in a late-day sell-off that had investors scratching their heads for explanation. From a high of 10,119 on the Dow, that index closed near the low of 9945, for a full-day swing of nearly 175 points. It was the most dramatic turnaround to the downside since, well, last October.

At issue is how the actual decline came about. Stocks had been drifting lower since making what would be the highs of the day around 10:45. But, at 3:15, things really got interesting, as the Dow quickly erased a 35 point gain and turned negative, extending those losses into the close with no escape mini-rally.

Some said that a sell recommendation by analyst Dick Bove on Wells Fargo, which had reported before the opening bell, caused it and all of the bank stocks to sell off. Others cited the Obama administration's directive to cut executive pay for financial firms which had accepted TARP funds - Bank of America, Citigroup, Wells Fargo, Morgan Stanley, JP Morgan Chase, others - by as much as 90%, as the culprit. The most succinct explanation came from CNBC's Fast Money contributor Tim Seymour, founder and Managing Partner at Seygem Asset Management, who opined that program trading moved the market in such spectacular fashion. Calling them "the machines," Seymour reiterated his position that the move was technical and that the S&P would be on the rise on the morrow.

While it's plausible that the move was "machine-made," because the move was so sudden and on such high initial volume, it's not easy to accept Seymour's recipe for tomorrow's trade. We'll all know whether he was prescient within 16 hours. In any case, it was an ugly end to a few days of trading that has produced a mid-week loss overall. Today's full-trip stock move produced a double engulfing day, taking out the highs and lows of the previous two sessions, and was close to being a triple or quadruple engulfing move, as it nearly took out the lows of Friday and definitely engulfed all of Thursday's move from last week as well. That is not an encouraging sign for anyone who is long, which is just about everyone. The technicals are screaming sell, as the market also hit a double top today as well on both the Dow and the S&P, when it failed at S&P 1100.

Dow 9,949.36, -92.12 (0.92%)
NASDAQ 2,150.73, -12.74 (0.59%)
S&P 500 1,081.40, -9.66 (0.89%)
NYSE Composite 7,107.21, -51.06 (0.71%)

Simple indicators, all of which were positive most of the day, turned ugly in the final hour. Declining issues battered advancers, 4257-2207, and all sectors (not just the financials), except utilities were down. New highs beat new lows, 608-84, though mostly because of easy comparisons, so these figures have become nearly meaningless, except when taken in the proper context. If new lows expand considerably over the next few sessions, we'll have something then on which to chew. Until then, best ignore the highs-lows.

Volume was considerably higher than most recent sessions, another omen for the downside.

NYSE Volume 6,514,343,500
NASDAQ Volume 2,600,789,500

Another cause give for the decline was the high price of oil, now into the December contract, which gained $2.25, to $81.37 on the day, which many complain may be a price too high. Gold added $5.90, to $1,064.50, and silver gained 27 cents, to $17.83, very close to a 15-month high.

Markets are getting very jittery and investors appear to be losing patience with companies, as earnings reports are being scrutinized and tossed into the trash heap on the way to the sell button. Investors are also not very happy with the government's plans for everything from the general economy, to bank executive's salaries to health care reform. The discontent on Wall Street is nothing compared to the rabble-rousing in the streets, which is reaching fever pitch. Stocks may have to come down if only to appease the working man and woman in the US that Wall Street isn't running ahead of the pack and leaving Americans behind (it is).

Whatever the cause of today's collapse, it should not be taken lightly, if only for the reason that it is a technically-reversing pattern. If stocks suffer mildly tomorrow and Friday, it could be time to head for the exits for at least a few weeks. When the dust settles, stocks will be cheaper.

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