Thursday, November 20, 2008

Another Volatile First Hour of Trading

The market opened under more selling pressure, but has since climbed all the way back into positive territory. Go figure. Of course, we know that its how the market closes that counts, and we still have what feels like eternity to get there.

There were several levels reached this morning that will make for shocking headlines. The S&P 500 touched the same levels (776) as its lows from the bottom of the last bear market in October 2002. Oil traded below $50 this morning, down -66% from its July highs. And Citigroup (C) hit $5. The company also announced it will get another investment from Prince Alwaleed, who plans to boost his stake in the company.

Asian markets were down sharply overnight, with several experiencing declines of more than 6%. The Yen is higher this morning, as is the dollar. Commodities are lower on global economic concerns. And the flight to safety is on. The 10-year yield has plummeted to 3.20%, its lowest levels since June 2003. And the 3-month T-bill yield hit 0.015%. Hard to believe.

The put/call ratio is high again, and the VIX is up +4.3% to 77.5. But it is still below the 90 level that it nearly hit on 10/24, so maybe you can call that a positive divergence. Also, while the indexes hit new lows this morning, the number of stocks making new lows on the NYSE remains well below the record hit on 10/10, another small, positive divergence.

The market remains extremely oversold, but its inability to bounce speaks to the fact that buyers remain on strike. Yesterday, downside volume totalled 98% of the total volume. I'm not sure I've ever seen that.

I continue to believe a strong bounce is in the cards. Fortunately, I have kept my powder dry and not made any big bets on trying to time it. I had some buy allocations loaded up twice in the last week, but never pulled the trigger as the markets faded into the close. I would like to see the market close on strength for more than a single day.

Our accounts have held 20-30% cash since September. And with our fixed income positions and ETF hedges, overall equity exposure is below 50%. At some point, those high cash balances will put us in good shape to take advantage of the declines. But I have to admit it has been painful in the interim.


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