By John Galt
August 8, 2011 23:30 ET
There is this strange, suicidal, insane belief by the Bubblevisionistas and their talking heads that there “has” to be a dead cat bounce or counter-trend rally because the XYZ index is way, way oversold. From a basic, non-extraordinary, within the standard deviation move of any market, that is a perfectly logical conclusion. Technically speaking every major US equity market is over sold, however, NOT every stock within those averages are in the same condition. In major bear markets, which this past decade plus has been the perfect picture of a secular bear market by the way, markets can continue in downtrends for sustained periods of time until the sellers are exhausted, defeating the traders and bulls attempting to find entry points into the markets.
On a local (Tampa) radio station, there is a program on at 6 p.m. ET every night called Investors Edge with Gary Kaltbaum, a regular guest on the Fox network’s various business programs where he raised an interesting problem which I had forgotten about regarding market veracity to the downside. There are those, not Mr. Kaltbaum, who believe that after prolonged periods of trading and action under the 200 Day Moving Average (DMA) it is inevitable that one of those “rip your face off rallies” will occur. Logically that is correct based on trading history and chart patterns.
This time could truly be different however. The rumors of massive hedge fund redemptions impacting both domestic and now tonight, overseas markets, is creating an almost identical liquidity squeeze on Wall Street which appears to be spreading to every aspect of the financial system around the Western world. To analyze this idea, let’s check out the spread between the 200 DMA in the past and look where we are today.
If you look at the chart of the market action from August 1, 2008 to April 20, 2009 the arrows in the chart of the Dow Jones Industrial Average below indicate a massive gap between 200 DMA and the closing price of the markets at any given time for many, many months:
(Click to Enlarge/Reduce Chart)
As you can see from the chart, the spread blew out from approximately 2000 Dow points to over 3500 during the final capitulation in March of 2009 after President. Sunshine started making his policy agenda even clearer for the masses to see and hear. The ONLY thing that saved the markets at that time was the announcement of Quantitative Easing Version 1.0 and the action of the financial stocks validated this move and the facts behind this statement.
Fast forward to the current time frame. As of the market close today, the DJIA is about 1200 points below the 200 DMA, a Death Cross technical pattern is forming for most DJIA components and the index itself, and lastly the severe type of selling we saw in the summer and fall of 2008 is being repeated except in this particular time frame there are no Federal Reserve programs to rescue the financial system or create and inject additional liquidity. Thus why the chart below should be of some alarm and what I have to say afterward giving my readers some serious food for thought:
(Click to Enlarge/Reduce Chart)
Odds are the selling ends tomorrow after 2 p.m. or a nightmare scenario develops which creates the ultimate marker for historians to study at the end of modern American financial insanity. If the Federal Reserve does not come out with a plan or message indicating massive support for the financial system, bagholders of MBS be it commercial or residential, and some sort of program backstopping municipal bonds, another 1000+ equity liquidation is entirely possible if not probably.
Everything depends on the Fed now so if the selling remains intense overnight and the Fed fails to prevent any further carnage from occurring, we might well see a movie with a very sad ending and similar footage to late 2008. Unfortunately I fear the ending will look more like that of The Road.