With all the horrific news over the weekend (and the past few weeks (and months (over a year really))), today's 500 point decline in the Dow should come as no surprise. Rather, I'm surprised it has held up for so long and that we didn't decline more today. AIG, one of the dow components and the largest insurance company in the world, declined over 50% today after losing $30B in market cap last week. That is jaw droppingly, mind blowingly insane to me. Just, wow. Luckily for the dow, the components are price weighted so an $8 decline is bad but not -50% bad when you compare it to the other dow 30.
Tomorrow the fed will come to the rescue (sarcastic smile on my face) and the bulls have a good chance for a bounce based on the dow chart I have above. There is support around 10,830 and today's decline brought the dow well below its lower Bollinger Band. Typically a drop below the lower BB leads to a short relief rally or at least few days of sideways movement. On the other hand huge volume today (over 2B) confirms a follow through of the long term trend lower as we made a new closing low for the year. Furthermore, the dow is not oversold on a daily time frame by any measure. I would expect any rally to be short lived. The only reason to buy stocks now is for a high risk, short term rally. Owning or buying stocks at this point is only for people who like loosing money. When (not if) minor support at 10,830 breaks, the measure rule targets another 1000 points lower and I bet it happens fast. Bears rule the world right now. The god damn hurricane brought the bears with it:
And here's the S&P, it actually broke down pretty bad today but there is also some minor support just below at around 1,175. Similar to the dow, the S&P closed well below its lower BB and a bounce seems likely tomorrow there as well. Of course the longer term trend is down so anyone playing for a bounce is doing so with a low reward to risk ratio.
One thing worth noting is that futures on both indexes are down significantly right now, currently at:
Dow: 10,823 (just below support)
S&P 500: 1,177 (at support)
Here's the VIX, it had a nice breakout today. The VIX is actually getting up to levels that most would say is a sign of capitulation. While the VIX is indicating some sort of bottom here, I think it has plenty of room to go higher. Why shouldn't the VIX break all the previous bear market highs (37.57), shouldn't market participators be more scared now than ever? Many traders will see VIX in the upper 30's and cover their shorts as a result. That might catch many off guard and allow the market to fall further. Its just that far too many people are now using the VIX to find bottoms. For now I don't want to try and be too smart for my own good and I will just be cautiously expecting a rally.
So if you put a gun to my head I would say the market does gap down to support tomorrow and rallies all day until the fed does what ever it is they do, then shortly after the plunge resumes. Tomorrow around 3pm EST (FOMC decision at 2:15pm) may be a great time to sell stocks. If the fed cuts rates significantly (0.5% or more) then we may get a nice rally in commodities. My favorite, as you know, would be agriculture (DBA). Good luck tomorrow, its gonna be crazy.
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