The percent of NYSE stocks above their 10-day moving averages was 0.9% on Tuesday, a new record low. The reading was 1.8% for the Nasdaq, which was also a record. More over we have the CBOE Volatility Index in the mid-50s, an Arms Index at 3 and the McClellan Oscillator below 300. Every sector was down, every market cap cohort was down, and every region of the world was down.
A trifecta of market misery like this could only occur amid an environment of total global deleveraging, and that is what we continue to witness. I heard tonight from my sources in Tokyo and London that hedge funds, banks and individuals continue to unload assets that they bought with yen carry trade money as their creditors demand new collateral to back up margin.
Ultimately this conflagration of capital will end when there is no more fuel—i.e., when the collateral has run out, and funds are wiped out. At that point, their creditors will be in extreme danger too, since they will be on the hook to their own lenders, and that is why we call it a crisis. This is no time for sissies or babies.
The Mellon Solution
Like most things in finance, this is not exactly new. It just happens so infrequently that most people who lived through it once are not around to witness it again.
The last example occurred during the Great Depression, and you’d be amazed at the number of similarities to today’s experiences. Derivatives expert Satyajit Das of Australia sent me a clip of a comment made by Treasury Secretary Andrew Mellon in 1931 to President Herbert Hoover that is quite appropriate.
Hoover—who was one of our most intelligent presidents and, contrary to popular belief today, actually worked his tail off to figure out how to right the economy during the Depression—got this advice from his in-house industrialist: "Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. Purge the rottenness out of the system. High costs of living and high living will come down, and enterprising people will pick up the wrecks from less competent people."
Hoover was not in office long enough to see that guidance work out, as Franklin Delano Roosevelt took over two years later and ultimately got credit for turning the country around. But the concept of purging rottenness out of the system—by which he meant, in part, extreme levels of credit—is what we are seeing occur right before our eyes today.
Credit Tightening
The money market industry is dying…
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…and with it has gone the working capital of thousands of public companies who sold it short-term notes, called commercial paper. Likewise, the corporate bond market is trading at such high spreads that it appears to be indicating that a round of bankruptcies may be coming, either from bond issuers or holders.
Independent analyst Brian Reynolds says credit conditions are so tight, it’s as if the Federal Reserve had done 12 quarter-point tightening in the past two weeks. He says investment-grade spreads are now almost double the worst ever seen before this crisis!
Even when stocks have rebounded occasionally in the past few days for a few hours, the credit markets have continued to deteriorate. This means that even if the Fed cuts rates by 100 basis points, it might be shrugged off. And it also means that even if stock investors manage to rally the market, the credit bears are likely to come in hard again and attack. The lame-duck session after the election would be ideal for that, so stay tuned.
Reversal Could be Near!
Now I hate to leave you with such a negative vibe, so let me call something to your attention. You may recall that since Feb. 5, I have been calling for the S&P 500 to fall to 960. At the time, that sounded outrageous, as it amounted to a 40% decline from the 2007 high, but I have stuck to that number all year.
Well, the S&P futures hit 963 in the overnight market before bouncing back. We’re there! I have felt strongly all year that this level could be the threshold at which a new base could be built for the future. Now that we’re here, I might as well say that it’s very possible that an extremely robust rally would start as soon as Wednesday, or possibly as late as Monday. If I had to guess, it would be either Wednesday or Friday.
My recommendation will be that if a rally does develop, don’t fade it this time. Come check out Trader’s Advantage to see my recommended plays.
This article was written by Jon Markman, contributor to InvestorPlace Media. For more actionable insights likes this, visit www.InvestorPlace.com.
