Thursday, September 04, 2008

Will The July Lows Hold?

The market sold off with a vengeance today. I have to say it continues to feel like forced margin selling and liquidations among big hedge funds. We already know that $4B Osparie blew up, and today, an even bigger hedge fund (Atticus) had to publicly deny rumors they were liquidating.

Today's selloff puts us very close to the July lows. The question is: Will the July lows hold? The answer is a tough one. The bulls point to the fact that the July lows coincided with total panic in the financials, and that the sector has been acting much better since. I can't argue there.

But the bears will say that the rest of the market is now rolling over also, and that the September-October time frame is a notoriously difficult time period in the market, and one where market bottoms are often made. This argument holds a lot of water as well, and I would currently have to say that I think the July lows will ultimately be broken.

Tomorrow is Friday, and if the sellers emerge again ahead of the weekend, we could see the lows tested tomorrow. If not, I think there is a good change we bounce first, as today saw some panic selling. To wit:
  • 90% of today's volume was on the downside
  • The volatility index (VIX) spiked +12% to 24.03
  • The ARMS Index hit 2.89, an extreme level
  • Volume rose for a third straight session, signaling heavy distribution

I am still holding lots of cash as well as my SPX hedges. I do not anticipate putting that cash to work in a meaningful way until I see the typical signs of capitulation witnesses at prior trading bottoms. And if we bounce in the short-term, I would consider adding to my downside hedges. Risk management is an active process, but every little bit helps.

long SDS

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