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The Stock Market Is In Forced Liquidation at Trader’s Narrative

What a wild day. Everyone knew coming in this morning from the markets which opened in Asia that this would be one for the books. The intense and indiscriminate selling that we saw today can only be characterized as forced liquidation.

People are not selling just because they are fearful, or because they think the market is going lower. They are selling because they have to. We’re seeing massive deleveraging. Here are some more highlights:

  • the volatility index (VIX) goes to 52.05
  • even “safe”, boring stuff that held up until now is getting liquidated
  • brokers put in stricter margin rules
  • down volume was overwhelming - do the specifics really matter anymore?
  • NYSE new lows goes to half securities traded, matching Black Monday 1987
  • surprise! the bailout plan doesn’t live up to its name
  • less than 6% of S&P components are above their 50 day moving average
  • S&P 500 is about 20% below its own 200 day moving average (see below for graph)

Here is the chart of the S&P 500 index (SPX) compared to how stretched it has become from its long term moving average. For more details about this indicator, check out: How the Stock Market Resembles a Dog on a Leash.

spx relative to 200 moving average Oct 2008

Ultimate Fade?

“Whatever money you may need for the next five years, please take it out of the stock market right now, this week…I don’t want people to get hurt in the market.”

Remember, this is the “Paris Hilton” of the investment world speaking. Someone who froths at the mouth almost daily, dresses up in diapers to recommend Kimberly-Clark (KMB)…. uses a ridiculous sound board to accentuate his manic “advice”… and now he is as somber as a funeral parlor. Watch:

I don’t want to be mean and kick Cramer when he’s down. I’m just pointing out something that he himself has said. When he gets overly emotional, either way, he is wrong and a great fade. At his old hedge fund he had his wife (who he calls the “Trading Godess”) who would force them to take the other side when this happened. Most famously, she did this before the 1987 crash and not only saved their hides but made them very wealthy. Unfortunately, she is otherwise engaged these days and can’t pop in front of the camera and save regular folks who may be contemplating taking her husband’s advice.

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3 Responses to “The Stock Market Is In Forced Liquidation”  

  1. 1 Tom

    This bear will take your head off. Bottom picking is not the thing to do until we are at a bottom . For various reasons I have projected the Dow to go to 7948 after bounce and the S&P 500 to go to 896. Both are about 50% retracement from 1987 bottom. But there are targets below that. Be humble and careful.

  2. 2 options trading

    People will be surprised where the bottom is. Markets have a funny way of shaking out all the short interest before dropping hard and fast.

  1. 1 » Blog Archive » Light at the End of the Tunnel

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