Assesing the damage

Wow Thursday was really nasty!  We've basically seen a mini crash in the market with it down 11% in 5 trading days. Although now were are extremely ST oversold and very well IT oversold, the fact that the market closed at the low point of the day suggests that we haven't seen the worst yet, bounce or no bounce. How much worse could it get? My best guess would be the November lows which is about another 25 points down but as always, I'll look for clues from Mr. Market and make adjustments if neccessary.

Given the crash like nature of this decline, even if a bottom is not far off it will likely take several weeks of basebuilding and whipsaws before the market will be able to regain any bull market behavior on a sustained basis, in other words, it's very unlikely we will do a V bottom from here onwards and upwards to new highs. Look at the period from after the flash crash in late May to September of 2010 to get an idea as to what we could be in for assuming the LT bull case is still in tact.

Let's take at the damage here. The % of SPX stocks trading above the 200DMA is now at 22% putting us well into oversold IT conditions....even more oversold than the depths of the flash crash.  On  a more shorter term basis, the % of SPX stocks trading above the 50 DMA is only at 3%! Only during the crash of 2008 was the market able to decline significantly more when the market was this oversold on both IT and ST time frames and that was a once in lifetime situation where the system was in collapse. Are we in such a situation now where financial stress is exploding and earnings are collapsing? Far from it. Oh but wait, the market could be anticipating these things happening right? After all, I did make mention of weakening leading indicators didn't I? This is true, but without any actual evidence yet of earnings turning around for the worse, a drop of this magnitude seems more like a panicky over reaction to these fears.

A month ago I said  I think we needed to see the market reset. Here's the checklist I mentioned

Oil back in the 80s.....check (but we need to see this last for more than just 1 day)

VIX above 30.....check

10 year bond sub 3%....check

Add to the fact that the market is extremely IT and ST oversold and you have a market that's in the vicinity of a correction bottom and so at this point it makes sense to do some cherry picking opportunities for individual names that you've had your eye on for a long time and you feel they got unduly trashed.  Go for it...but keep a healthy cash reserve and be prepared to be early. 

Given that we closed right at the low of the day tells me the market was simply "saved by the bell" which is why I expect to see lower lows - not necessarily tomorrow or next week, but in due time before this correction is over with. In the interim there could be and will likely be big bounces along the way as the market will likely undergo base building for several weeks if not months. 

If something more ominous is in the cards then I'll deal with it. It's important to not be a hero and aggressively catch falling knives when the market closes at the LOD like this. Again, some selective buying is warranted at this point but respect for the market is even more warranted. 

By the way did you see those bonds? Wow! TLT is at 105 and a month ago I was talking about potentially buying December 90 calls which were at about $4.50 at the time. Now they are at $15!  I didn't end up pulling the trigger on that trade but I was so close. Fuck me. Oh well, there's always another train to catch if you miss one...just be careful not to go on tilt when you miss an opportunity by endin up playing weak setups trying to make up for it.