Thursday, June 3, 2010

Twice in a Lifetime

At Dow 14,000, I described the situation as once in a lifetime opportunity to get short. That was the beginning of W1 down. Here we sit at W3 down, the most devastating wave, and it's Deju Vu alloveragain. Some will ask: How can you be so sure this is W3 down? Didn't it take longer than expected to develop?

The answer to question 1 is, you can never be sure, but it doesn't get much better than this. We had a crippling mega 5-wave down to kickoff our colossal bear, followed by a perfect 62% retrace.

The answer to question 2 is, the most common W2 retracement, especially in a major degree movement, is 62%. It's hard to argue with nature on that basis. The W3 down that follows should be unmistakable and devastating. Again, it's hard to argue that an "inexplicable" 1,000 point cliff dive isn't a suitable W1 of W3.

Accenture lost their entire $30B market cap in a matter of minutes, as the stock dove from $44 to $0.01 and stayed there for several minutes. Most of the shares changed hands from heavily vested owners to traders, some with little to no cost basis. Mind you, this is a "recession proof" stock with 60% of its 170K employees located overseas, with years of extreme growth under its belt--a little like the sewing machine stocks of the late 1920s (see first quote below).

That market malaise took days to sort out. Still, no one knows how to properly handle many of the transactions. Parallels to the death throws and two year collapse of the "Big Bull Market" (so it was called in 1929) are unmistakable, but no one wants to say so out load. Before "the glitch," which was simply an absolutely accurate manifestation of market value met with late, dozing government intervention, every scholar on the face of the Earth would have testified under oath it was utterly impossible to overwhelm our modern trading system.

In fact, as many Black Swan'ers have pointed out the past several years, modern complexity = ever-increasing market fragility. Speed of light trades that travel through the dark of night are, of course, infinitely less robust than a paper system with some form of physical tracebility.

I'll close with the wisdom of dead people:
"To give one single example: during the bull market the common stock of the White Sewing Machine Company had gone as high as 48; on Monday, October 28th, it had closed at 11 1/8. On that black Tuesday, somebody--a clever messenger boy for the Exchange, it was rumored--had the bright idea of putting in an order to buy at 1--and in the temporarily complete absence of other bids he actually got his stock for a dollar a share! The scene on the floor was chaotic. Despite the jamming of the Communication system, orders to buy and sell-mostly to sell--came in faster than human beings could possibly handle them; it was on that day that an exhausted broker, at the close of the session, found a large waste-basket which he had stuffed with orders to be executed and had carefully set aside for safekeeping-and then had completely forgotten."


"Coolidge-Hoover Prosperity was not yet dead, but it was dying. Under the impact of the shock of panic, a multitude of ills which hitherto had passed unnoticed or had been offset by stock-market optimism began to beset the body economic, as poisons seep through the human system when a vital organ has ceased to function normally. Although the liquidation of nearly three billion dollars of brokers' loans contracted credit, and the Reserve Banks lowered the rediscount rate, and the way in which the larger banks and corporations of the country had survived the emergency without a single failure of large proportions offered real encouragement, nevertheless the poisons were there; overproduction of capital; overambitious (expansion of business concerns; overproduction of commodities under the stimulus of installment buying and buying with stock-market profits; the maintenance of an artificial price level for many commodities, the depressed condition of European trade. No matter how many soothsayers of high finance proclaimed that all was well, no matter how earnestly the President set to work to repair the damage with soft words and White House conferences, a major depression was inevitably under way.

Nor was that all. Prosperity is more than an economic condition; it is a state of mind. The Big Bull Market had been more than the climax of a business cycle; it had been the climax of a cycle in American mass thinking and mass emotion. There was hardly a man or woman in the country whose attitude toward life had not been affected by it in some degree and was not now affected by the sudden and brutal shattering of hope. .With the Big Bull Market zone and prosperity going, Americans were soon to find themselves living in an altered world which called for new adjustments. new ideas, new habits of thought, and a new order of values. The psychological climate was changing; the ever-shifting currents of American life were turning into new channels.

The Post-war Decade had corne to its close. An era had ended."


  1. Its all getting to be a little bit scary. Thanks for another excellent post, FDR.

  2. 1000 point decline was brief lifting of the curtain and was most shocking.

    If it had been left to continue, I doubt anyone, long or short would have reaped the profits they wanted. A total market collapse, and societies reaction, would most likely nullify all paper assets.

    Got food?

  3. Fdr, one question which has been running on the back of my mind for quite sometime.Why has the DOW gone up even though the dollar has gone up? Can we be sure that this pattern will not continue in the future? The Dollar has moved from somewhere around 75 to 87 now on the dollar index but Dow continued going higher? Appreciate if you could throw some light on this

  4. "modern complexity = ever-increasing market fragility"

    I have often thought of technology based food supplies in the same way. We are yielding so much more per acre and population is dependent on this higher yield. If a massive drought were to occur, the consequences would be devastating.

    Too add, our reliance on modern medicine could fall to the same problem. This years special swine flu shot was done in a hurry and millions received it. What if they the screwed up with that one. I believe baxter may have sent out a flu shot with active h5n1 in eastern europe a few years back.

  5. powerful. these posts are what make this site great. thanks fdraoa!

  6. Thanks for these history reminders.

    They are most insightful and valuable to understanding why things happen as they do.

  7. Only Yesterday is a great read. I especially like the "Aftermath" chapter and the description of the "economic diseases from which business was suffering." Talk about history repeating. I don't think you could find a more strikingly similar synopsis of what ails the world today than what flowed from Allen's pen 80 odd years ago.

  8. I hope Cashzilla doesn't use his fire breath during the oilcane. Could be messy.

  9. Silver and Gold are being quite stubborn.

  10. Just a question on gold. Perhaps you can point to the right post if already answered this.

    Why are you expecting a big correction in gold in the near term? Or, are willing to wait a few years?

    All bubbles pop, the big money is made by correct timing.

  11. So are any of you having fun with this volitility or are you planning for the long haul?

    I finally sold FAZ at 17.38 after buying it before the last wave 5, where I bought down. I saw losses of at least 40% but I held on to make about a grand.

    I think solar stocks are looking very temping if you look at the trading window in the last year. Easy 20-40% in a few months. Any other traders want to share?

  12. Uh oh,

    Could this be related to gulf? Doesn't really matter, the outcome could be the same based on my post above.

  13. FDRAOA, do you still believe in holding shorts vs trading shorts?


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