If the financials sector were to continue getting slaughtered in the short term, then I believe closing this position could have me feeling Blue for a while . . .

Hey Big Mack,

Nice to see you branching out with the blog. I was wondering if there is any chance you are related to a childhood friend. I spent a few months in Lowell, MA when I was young and knew a kid name of Dennis McGrath. His dad was an air force colonel. Any connection? I assume not, but you never know.

On the stock market business...some are preaching a big bounce, nay, a major move in the offing. At this point, I don't see it. As far as I can see, there is nothing in upcoming earnings that will precipitate such a move. If Europe does a TARP of sorts, then such a move seems plausible. Short of that, things look less than bullish.

What concerns me is the weekly moving averages. If we don't see a move upward soon, the 20 sma appears ready to bring the hammer down, causing a break through the 200 and sending the s & p down to 1000.

Any thoughts?

Thanks,
Steve

Anyway,

Howdy, Steve!

Nice to see you branching out with the blog.

Thanks for the kind words! I like the content-management systems at both the Google (http://tinyurl.com/3c5co5e) and Seeking Alpha (http://tinyurl.com/3zo3u49) sites, so I could be at each location for a while.

I was wondering if there is any chance you are related to a childhood friend. I spent a few months in Lowell, MA when I was young and knew a kid name of Dennis McGrath. His dad was an air force colonel. Any connection?

In the narrow sense, I have no recollection of a Dennis McGrath at the family reunions of yore. In the broad sense, I have been advised the two great bottlenecks in the human population mean all of us whose forebears made it through them are more closely related than our apparent dissimilarities would indicate (http://tinyurl.com/66rm7pc).

On the stock market business...some are preaching a big bounce, nay, a major move in the offing.

With the Chicago Board Options Exchange Volatility Index (VIX) in the area of 41.25, I anticipate a big bounce in the Standard & Poor's (S&P) 500 (SPX) on an almost daily basis. There have been 36 trading days during the volatility storm that began Aug 4. Irrespective of sign over this period, the SPX's median daily closing move has been 1.42%, its mean daily closing move has been 1.96%, and its standard deviation has been 1.68%. Therefore, I consider any SPX daily closing move in the wide range between being up 3.64% and being down 3.64% to be normal in these abnormal circumstances.

At this point, I don't see it. As far as I can see, there is nothing in upcoming earnings that will precipitate such a move. If Europe does a TARP of sorts, then such a move seems plausible. Short of that, things look less than bullish.

I agree. Based on my definitions, the SPX is the only index I follow that it is not currently in a bear market, and I expect that to change within the next month, unless something dramatic happens along the line you suggest.

What concerns me is the weekly moving averages. If we don't see a move upward soon, the 20 sma appears ready to bring the hammer down, causing a break through the 200 and sending the s & p down to 1000. Any thoughts?

If the SPX bottoms circa 1,000.00, then I will consider us equity-market types to be fortunate indeed. However, I believe there is a high probability the U.S. will repeat the Error of 1937, so a look at Doug Short's excellent "The 'Real' Mega-Bears" (http://tinyurl.com/5uzgr9w) may be helpful.

Good luck!

MackTheKnife

Hey Mack,

Thanks for the link and the response.

Steve

Howdy, Steve!

Thanks for the link and the response.

My pleasure.

Meanwhile, I note the SPX came within 2.46 points of confirming its bear market yesterday, according to my definitions.

Good luck!

MackTheKnife

Hey Mack,

Good call on the SPX.

I do wonder about the effect of this latest news about European banks being backed. This may turn out to be no more than a temporary calming of the markets, much like Bernanke saying in last months Fed meeting that they are actively monitoring the markets and are prepared to move. (apparently some form of QE)

If this rhetoric is not backed by action within the next week or so, I expect there to be another big slide.

As I said on another's blog, I have been playing calls and puts on the SSO. In a volatile market like this both can be good plays. Right now, I'm waiting for the sso to bounce to the 20 weekly sma, where I will sell some calls and buy some puts.

Good trading,
Steve

Hey Mack,

If we don't break into a bear market, we will have to break into a currency collapse because massive amounts of money will be spent that does not exist. I don't see Germany putting up with this, but we will see. Therefore I go with your predictions.

Also, it doesn't seem that employment will improve appreciably,(which would be the appropriate solution) and it may get worse. Strange days are ahead. Hope I'm wrong.

Steve

Howdy, Steve!

Good call on the SPX.

Thanks for the kind words! And speaking of the SPX, the index is the focus of my latest J.J.'s Risky Business blog post (http://tinyurl.com/3c5co5e).

I do wonder about the effect of this latest news about European banks being backed. This may turn out to be no more than a temporary calming of the markets, much like Bernanke saying in last months Fed meeting that they are actively monitoring the markets and are prepared to move. (apparently some form of QE)

I believe this so-called news is more or less immaterial in any but a day-trading/short-covering sense. The European banks have to be recapitalized, which means there will be dilution of their equity, sooner or later. Meanwhile, the Dead-Cat Bounces in multiple market indices yesterday struck me as fairly typical bear-market behavior -- especially given VIX levels in excess of 40.00 -- so they were well within the range of reasonable expectations.

If this rhetoric is not backed by action within the next week or so, I expect there to be another big slide.

I agree. And I think we may see another big slide this month, with or without such action.

As I said on another's blog, I have been playing calls and puts on the SSO. In a volatile market like this both can be good plays. Right now, I'm waiting for the sso to bounce to the 20 weekly sma, where I will sell some calls and buy some puts.

SSO's 20-week simple moving average appears pretty good, but its 42-day SMA seems to suit my style even better (http://tinyurl.com/3rvg7or).

If we don't break into a bear market, we will have to break into a currency collapse because massive amounts of money will be spent that does not exist.

As far as I am concerned, the SPX bear market began May 2 and was confirmed yesterday.

I don't see Germany putting up with this, but we will see.

Certainly, Germany is the key to the mess in the Euro Zone.

Therefore I go with your predictions.

Well, I personally give more credence to my observations than I do to my predictions. Because almost all my financial-market analyses are founded on statistics, I constantly remind myself identity and similarity are two very different things.

Also, it doesn't seem that employment will improve appreciably,(which would be the appropriate solution) and it may get worse.

Although the U.S. employment situation is bad, I believe one could make a reasonably good case that it is unlikely to get either appreciably worse or appreciably better any time soon (e.g., the coming or current economic contraction could be both comparatively shallow in magnitude and relatively short in duration).

Strange days are ahead. Hope I'm wrong.

Me, too. But I have no reason to think so.

Good luck!

MackTheKnife

Hey Mack,

42 moving average, huh? You're looking for a good bounce here. That's interesting. Which brings me to my next question. What one book would you say has been most beneficial in your study of the markets, if you wouldn't mind telling me?

Thanks,
Steve

Hey Mack,

After looking at your blog today, I suspect you have studied many books, but most of your analysis has come from your own work.

Thanks,
Steve

Hey Mack,

Nevermind the big bounce comment. I was looking at the weekly moving averages.

Steve

Howdy, Steve!

What one book would you say has been most beneficial in your study of the markets, if you wouldn't mind telling me?

Benjamin Graham's The Intelligent Investor. As it happens, I mention both it and four other books in my very first J.J.'s Risky Business blog post (http://tinyurl.com/3tjmzo4). Of course, I appreciate the help provided by many other sources of information about the markets -- not only books but also blogs, magazines, newspapers, and Web sites.

After looking at your blog today, I suspect you have studied many books, but most of your analysis has come from your own work.

Sure. I mean, Graham's parable of Mr. Market provided me with a strong foundation in understanding the psychology at work in the equity marketplace, but it is my job to build on that foundation.

Good luck!

MackTheKnife

Hey Mack,

Couple of thoughts...

I'm guessing France and Germany are gonna drag this bank recapitalization proposal (plan) out as long as they possibly can. They may have no other choice. Probably mid November, though they say end of October.

As you said before, the market may dive even with significant action. I don't have any thoughts either way on that event. (beyond my pay grade)

So here is where I stand: There probably will be something to come out of the EU leaders. Because of that, I will be positioned with precious metal call options, probably Dec calls. I will also have calls on EUO, double euro inverse. I will however maintain some options on the Dec puts of SSO, just in case it all hits the fan. (recap or no recap)

What I don't expect is a market that maintains current levels for the next month or two.

Best to you,
Steve

Howdy, Steve!

There probably will be something to come out of the EU leaders. Because of that, I will be positioned with precious metal call options, probably Dec calls.

Gold certainly appears more attractive to me today than it did circa Labor Day (http://tinyurl.com/64hwqmc).

I will also have calls on EUO, double euro inverse.

The recent strength of the euro versus the U.S. dollar is one of those mysteries that make me happy I am not a currency trader.

I will however maintain some options on the Dec puts of SSO, just in case it all hits the fan. (recap or no recap)

Personally, I believe there has to be a recapitalization of the European banks and a concomitant dilution of their equity. To me, the only issues center on how they are recapitalized and when the process begins and ends.

What I don't expect is a market that maintains current levels for the next month or two.

Based on the persistence of the current market-volatility storm, I agree.

Best to you

Ditto!

MackTheKnife