Let’s take a look at a previous plunge and how the market reacted. Here is a chart of the aftermath of September 11, 2001 (click to enlarge):
After the market reopened on the 17th, the S&P 500 plunged for 5 straight days, dropping 148 points. After our current 6-day plunge, we are down 179 points.
Notice that if you got in on the fourth day of the rally off of the bottom (blue arrow) you did just fine.
So, there are three morals to the story:
1) You don’t need to catch the exact bottom.
2) It is possible to have a long-lasting rally during a period where the economic fundamentals are deteriorating.
3) A giant, traumatic plunge and re-bound is not necessarily “the bottom.” Our last bear market didn’t end until over a year after September 11th.
ah good thing i bought DDM i caught it on the 5th day.
Matt – are you suggesting we put on our rally hats over the next month or so – as opposed to trying to short into strength?
@Randall: Matt is giving you a possible scenario and a comparison to the past. The rest is up to you.
@Matt: Thank you for your posting. Very interesting again.
I am still asking myself if we had a sell-off at the end of the last trading session without Hanky boy showing up on tele. At least he couldn’t stop the sell-off. How can he make such an appearance minutes before the close and giving his frigging statement? This guy is so strange it makes me wonder how he could become so rich. I’m still speechless.
Thanks for the perspective, Matt. At first I didn’t like the comparison to 9/11 since our fundamentals are much worse at present, but after a bit more thought, the amount of uncertainty and panic in the general public is probably quite equivalent, albeit for different reasons.
That chart shows what I would use for confirmation of a “rally” – A few days going up (remember when the stock market went up?) after a large plunge. Notice too that the volume, while much lower than the deep down days, is higher on the up days than the down days after the crash. Those two things would tell me we could sustain a rally for a week or two. I just can’t see it lasting much longer since our economic indicators are only going to get worse.
The other alternative is that we get no rally and continue our plunge into the abyss. I don’t feel like flipping a coin to decide, so I will wait a few days to see what unfolds.
Dressguard: I have to agree. That was really strange that Paulson would say that just before the market closed on the same day the FED made a surprise interest rate cut. I think we would have closed in the green if it weren’t for him.
IBM announced early earnings and they were good. now we need google and apple and i’ll be happy with nazdaqqqq. the rest… whatever we should rally so i will hold onto ddm. we’ll see how chevron does tomorrow but it might suck hence diving down i will just read and try not to post tomorrow. I did it with GE and got 10% LOL
Paulson is no salesman, that’s for sure!
Check out the candlestick on SDS daily. Put the hammer down, Nellie. On a calculated gamble, I bought SSO EOD Wednesday. Not because of that candle stick, but because of what Matt said above, “You don’t need to catch the exact bottom.”
With respect to capitulation, there wasn’t one when the bottom was hit in July and October, 2002, merely a simple double bottom.
I did some of this during the 2000 crash. Turned out okay. I hope this time is not different due to the World crashing!
Paul F,
I think the return of the short sellers to the FINS is well anticipated. Some of this plunge may have been part of the bulls selling in advance and preparing for a fight. They have my respect. I covered my shorts for a small gain and have some OTM calls in case Matt is once again on the money.
Matt,
One other difference between now and 2001 is that we are at the beginning of, what in the end will be, an ugly earnings season. IBM preannounced, and given the enviorment others with good news may follow. This makes me think that the earnings could be very unbalanced, mostly good news at first followed by mostly bad news. This scenerio supports a shorter more volitle pump and dump than in 2001. I am looking to go long for a short rally.
George,
Reviewing the DIA daily chart, I see I missed so much of the action. I was fortune that my lunch time in AZ occurred when Hank was being cheerful. Otherwise I would not have caught the short at the top.
I need to focus on longer term trading plans, even if that puts me on the sidelines for a bit.
One last SPAM. FWIW Asia is up over 2.5%, even the battered NIKKEI 225.
Can’t resist, the CNBC website has a item on Hank.
People are trading the “Paulson Effect” — every time U.S. Treasury Secretary Paulson takes the stage and talks about the situation, the markets go down. http://www.cnbc.com/id/15840232?video=882894041&play=1
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