This Is A Bear's EKG

- Beautiful chart by Doug Short of dshort.com and found on the Calculated Risk blog, calculatedrisk.blogspot.com

This should put things into perspective for those staring into the abyss. What is truly striking is the remarkably tight range of these great bear market declines (47.9 to 49.1). The entire decline of the Great Depression was almost 90%, however, there were strong bull runs of over 20% between the overall high and low.

One could postulate that the chart illustrates the temperature (velocity of decline) of this crisis in scale. In its current posture, it makes the technology bubble look like a walk in the park; it is more severe than the recession(s) of the 70's; but not as severe as the Great Depression. I believe the next few months in the equity markets will telegraph strong clues as to whether we are in for another depression or if it is truly "different this time".

It's Always Darkest Before The Dawn

My contrarian heart strings have begun pulling me back into this market. There is a complete absence of any news remotely positive. At this rate, the Dow will be at zero come Obama's inauguration! Looks like Bush will have one last laugh. Much like a spoiled older sibling having to turn over the stolen toy, they break it at the last moment, "Here, have fun playing with that!".

All joking aside, If anything Obama would like to see as much speculation and pessimism wrung out of the market before he gets a chance to drive it. I believe that is why his initial press conference after the election was so anticlimactic and void of any real news. Many market pundits were expecting him to reveal his Treasury Secretary or at the very least give a glimpse into his approach of this crisis. By moving the starting line of his administration further into the future the market uncertainty gives the crisis another chance at exhausting itself before he gets the reigns.

In the short term I believe there are two possible scenarios:

1) Bottoming around 770 to 795 (795 was hit on the S&P futures overnight) or

2) Moving much much lower, possibly below 700 in a final capitulation crash.

If I was to handicap things (that's all a good trader is), I would put the chances of a sub 700 S&P in the near term much less than a healthy bounce from here.

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9:47 follow up

So this is what the edge of western civilization looks like? Scary stuff. Would you like a value meal, or one share of Citigroup (5.45!). Line in the sand for today is 7750 on the Dow. Let's pray it holds.

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1:04 follow up

So far so good, but three hours is an eternity in this market. 7750 held for now. All it will take for things to stabilize is one gram of good news. The automobile industry loan may just be that catalyst. I like what I am seeing with the gold/silver ratio, it looks like it's about to rollover. This market needs the return of risk like a heroin addict needs methadone. 2:30 press conference with Senators may be the moment of truth. Let's hope they don't grandstand like they did with the bailout. I'm not holding my breath.

Anatomy of the Boom & Bust

Here's a little mock up of the varying boom and bust cycles starting in 1994 or so. One interpretation may be that we are currently going through the second and more destructive deflationary wave. Although it was only marginally higher intraday, you could interpret the recent October 2007 high as the head of a giant head and shoulder formation. You get a cleaner fit using the DJIA. In any case, this decline should take us down to the 600's at some point on the S&P. From there you could speculate the current fiscal stimulus will morph into the next bubble, possibly TIPS and precious metals markets.

Bank Index

There is so much quantitative data on the market right now that it so overextended that it is almost useless to interpret it. Basically, most of it is saying the market is so oversold that we should rally, and should rally hard. But I have been following a few indexes and ratios as guideposts. Since this is arguably the greatest financial crisis ever, the banking index (BKX) is an excellent forward looking vehicle to guide us where we are heading. Big surprise, it doesn't look good. Today we took out the Philadelphia Banking Index's lows from early October and last July. I think this is a pretty big deal and pulls 800 into the crosshairs pretty quickly, maybe by the end of this week or at least the end of November.

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Dig a little deeper and you can see an interesting relative performance chart for the BKX and the S&P 500. In both instances, the BKX led the turn in the overall market by several months. Back in July of this year, the ratio bounced HARD off of the bottom established in the 1998-2003 bear market.

Assuming logic and geometry prevails (if you have any question about this market's geometry look no further than the 2 beautiful tops that the market carved out in 2000 and 2007 on the S&P - as much as the market feels random and volatile, there is a rhyme and rhythm to this beast):

The fact that we took ourselves back down to the last bear market lows in this ratio puts the very real possibility that the 768 intraday low on the S&P in October of 2002 will be revisited in this waves decline. Slightly scarier, is the ratio's decline during this bear took out the intraday low from the previous by a substantial margin. Obviously, if those lows are taken out on a closing basis (especially on the weekly or monthly charts) this market will gain new and uncharted territory potential towards the downside.

Could This All Be Part of The Plan? - Part I

I remember the exact moment Henry Paulson, or Hammerin Hank as they like to call him, was named to be Treasury Secretary. It was the morning of May 30th 2006. I had been predominantly trading on the short side of the market for a few weeks. The stock market had been sliding since early May after catapulting higher out of the gates in January. It was the top of the housing bubble. Bob Toll, of Toll Brothers, was selling billions of his own company's stock every few months and buying everything from Atlantic City real estate to Philadelphia newspapers. The price of gold had screamed from $400/oz. a year earlier to over $700/oz. by the end of April. Every gold bug from Geneva to Vancouver were plastering their hyperbolic forecast calling for $2000 gold by the end of the year.

Looking back, you can clearly see they were the initial tremors, the friction points of this current crisis. For me as a trader, the appointment of Henry Paulson as Treasury Secretary was a game-changer. There was so much information to be interpreted by his appointment. This was a man who's very entrance into the Treasury said, "Houston, we have a problem". By Paulson's own admission, he does not walk from a problem or even to a problem, he runs towards the problem. to be continued.