How long will the crash last?

After one of the worst sell-offs in history, a look at what's next.

By Anthony Mirhaydari Aug 8, 2011 5:06PM

Wall Street traders returned to work Monday in the mood to sell after mulling the consequences of America's first-ever credit downgrade last week. Main Street investors, with a mix of fear, anger and uncertainty, piled on, too.

 

The result was one of the deepest sell-offs in market history and a continuation of a now 3-week-old wipe-out for stocks. Out of the 3,085 issues that trade on the New York Stock Exchange, just 42 managed to move higher. That's less than 1.4%. And that's the worst result in more than 70 years.

 

Over the past 11 trading days, the Dow Jones Industrial Average has lost nearly 1,900 points, falling to levels not seen since September 2010. That's a drop of nearly 15% -- enough to nearly wipe out the gains from the Federal Reserve's most recent $600 billion stimulus. This is a drop on par with the 2008 financial crisis, the 1987 Black Monday crash and the various Great Depression meltdowns. 

 

For beleaguered investors, the question is: When does this nightmare end?

 

 

The good news is, at least a temporary reprieve seems to be in the cards.

 

Could we see a turn?

History points to a bounce. SentimenTrader looked back at all the times since 1950 that the S&P 500 had sunk at least 5% in one day to a six-month low after having already lost at least 5% in the previous week. In all five cases -- 1962, 1987, 1998, and twice in 2008 -- stocks rebounded strongly during the next several sessions.

 

The median gain three days later was nearly 10%, with a max gain of nearly 15% and a max loss of 3.7%.

 

Technically, by just about any short-term measure you'd care to use, the situation is extremely overextended to the downside. I'll review two.

 

The first is the McClellan Oscillator, which is a measure of breadth momentum. Right now, the measure has dropped to a level that has been seen only four other times over the past 11 years. One was the 9/11 sell-off. The other was in October 2008 after Fed Chairman Ben Bernanke seemed to downplay the need for additional monetary policy stimulus at a time when interest rates were near 2% even as the financial system was collapsing. The other two were during last summer's "flash crash" and eurozone collapse.

 

In all four cases, the deep oversold reading marked a point of maximum downward velocity. Back in 2008, which is probably most like our current predicament, stocks bounced more than 10% in the days that followed.

 

The second is the ARMs Index, which measures the intensity of selling pressure. High readings, like Monday's, happen when down volume relative to up volume outpaces advancing issues versus declining issues.

 

Translation: Investors are much, much more focused on the stocks that are falling. That's a sign of panic. And panic tends to mark the washout selling events that occur near market lows.

 

All of this suggests that, for a few days at least, the downside pressure should begin to dissipate.

 

But is the bull dead?

Now for the bad news. The sell-off we've all just witnessed may have been enough to kill the long-term bull market. It's too early to know for sure. But there are troubling signs.

 

For one, long-term measures of market breadth, such as the cumulative NYSE advance-decline volume line, suggest buyers were less interested in stocks heading into the mid-July highs than they were back in May and February. These types of declines in interest typify major market tops such as the one seen in mid- to late 2007.

 

I recommend investors move to a 100% cash position if they've been short. If you've been holding on to your long positions, there isn't much sense in selling now. Give it a few days.

 

My newsletter subscribers covered their remaining short positions Monday after riding the market down since July 22. For the month to date, they are up more than 7% versus a 13.4% decline for the S&P 500. 

 

 

Highlights include a nearly 20% gain for our short in high-end retailer Saks (SKS) -- a pick that was featured in the Edge Sample Portfolio, which tracks picks for my MSN Money readers in real time here. You can see how the trade progressed since we added it on Aug. 1 in the chart above.

 

Time will tell whether this is a dip to buy or a temporary reprieve on the path to new lows. Tuesday's Federal Reserve policy meeting could provide the catalyst needed for a rebound rally. If it does, I'll have new recommendations soon. Stay tuned.

 

Check out Anthony's new investment advisory service The Edge. A two-week free trial has been extended to MSN Money readers. Click here to sign up.

 

The author can be contacted at anthony@edgeletter.com and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below. 

VIDEO ON MSN MONEY

15Comments
Aug 8, 2011 6:41PM
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working people stop putting your hard erned money in the market,how many times are you gonna let these greedy bastards steal your money-retirement.
Aug 9, 2011 12:58AM
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Edward

 

It is necessary to remember just 11 years ago there was a $110 billion surplus.  Bush's tax cuts, two wars in Iraq and Afghanistan, prescription drug benefit, the TARP bailout of billions and the recession caused by Wall Street's banking melt down of mortgage backed securities and credit default swaps caused this mess.

  Get out of Iraqi and Afghanistan, cut the bloated 526 Billion defense budget significantly, let the Bush tax cuts expire and you are quickly half way there if the economy recovers just a bit.

 

For 40 years we have listened to the same tired nonsense, just cut taxes, mostly on upper income people and corporations, deregulated everything and just stand back and let the magic of Wall Street and lassez faire capitalism make us all rich!

 

People never learn

Aug 9, 2011 7:17AM
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I believe that there wont be a Recession because I don't believe it will get any better than this. This is the new Normal, the unemployment will be what it is now for many years if not decades. Spending will hold the same for most people. THIS IS THE NEW NORMAL and you folks that think things will get to be like it was during the booming FALSE economy need to get a grip on reality.

Welcome to reality!!!!!!!!!!!!!!!

Aug 9, 2011 9:30AM
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Anthony: How can we believe you? Read your advice from 3 weeks ago:

7/13/2011 4:24 PM ET by Anthony Mirhardari: Time to buy: Here's what and why.

And kjho, yes this is the new normal as long as Obama is president.

The two thousand page financial regulation bill, two thousand page Obamacare bill, the EPA declaring carbon dioxide to be a pollutant, the NLRB ordering Boeing not to open a billion dollar aircraft plant and the refusal to drill for our own oil are all placing an unreasonable burden on  our economy. This is not rocket science! We can make our economy better if we want to.

Aug 9, 2011 9:17AM
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Basically you were wiped out of every gain back to 2008. You made no money on any investment since before 2008. Cd's blew the market away as far as a return!! Get this through your head!!!

--------

Randy clearly doesn't understand dollar-cost averaging.

Aug 9, 2011 6:56AM
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Dow has only lost around 1,900 points in the last 2 weeks. We'll be fine! Sarcastic
Aug 9, 2011 9:33AM
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FIGURES DONT LIE. BUT LIAR'S FIGURE.
Aug 8, 2011 10:37PM
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The trigger mechanism, which would split spending reductions equally between U.S. defense and domestic programs, is the product of months of unsuccessful negotiations among congressional Republicans, Democrats and the White House to strike a broader deal to rein in entitlement programs like Medicare and to overhaul the tax code. While the cuts are supposed to be automatic, Congress can delay or override them if they prove too painful -- defense spending would be reduced by 9.1 percent over a decade while non-defense programs would be cut 7.9 percent. That’s what lawmakers did with the 1985 Gramm-Rudman-Hollings Balanced Budget Act, the template for the trigger.
The trigger mechanism also won’t include the entitlement- benefit cuts that rankle Democrats or call for tax increases reviled by Republicans, both of which may be necessary to pose a credible threat of mutual pain on the two parties that would motivate the super committee to reach a compromise. The legislation calls for the committee to find savings through spending reductions and tax increases, beyond the $917 billion in cuts that lawmakers agreed to on Aug. 2. If the panel agrees on a plan, Congress has until Dec. 23 to hold an up-or- down vote on it or the trigger will be set off, prompting $1.2 trillion in automatic, across-the-board spending cuts over nine years, beginning in 2013, after the presidential election. One target would be Medicare, though the spending reduction would be capped at 2 percent and aimed at health-care providers, not benefits. Funding would also be threatened for the National Institutes of Health, alternative energy programs and hundreds more government agencies

Smile The Congressional liars are already figuring out how to renege on the cuts. The US doen't even desire a A, it should be a B-- credit rating.

 

Aug 9, 2011 1:38PM
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There's nothing unusual about the current situation.  It's happened before and it'll happen again.  It's juvenile to think our point in history is somehow special because we're losing money in it.

 

Pick good companies, invest in them, and have patience.  This too shall pass.

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Some people are taking the S&P, DOW and other indexes too seriously and do not relate the market to their own portfolios.   The market went down yesterday by 634 (DOW) and I lost X amount of dollars in my portfolio.  

 

Today the Market was up by 88 and then dropped to -160 on the DOW and my portfolio made back 2/3 of what I dropped Yesterday.   At 429.92 my portfolio is up 1.4283 times the loss of yesterday (today's gain/X).    I have only four stocks in the S&P 500 index and 2 in the DOW.   The two stocks in the DOW, namely MO and T are also in the S&P 500. 

 

So be wary of pundits that cry about the DOW and other indexes.   They probably may affect you, but not in a direct relationship if you do not own stocks included in those indexes.

 

I would say buy good dividend stocks and they will rebound faster than those without Dividends.   Also if stocks are not on everyone's radar they can be too stable for some in an average market, but for a large drop in the DOW like yesterday, stocks not on the radar may weather the storm a lot better and even come back stronger from a resultant DOW upturn.

Aug 9, 2011 4:21PM
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Anthony, could you please predict another roaring bull market like you did on 6/14 (“Rebound rally just getting started….sentiment has become overly pessimistic as investors price in a new recession that is a few years away”)?

 

This time could you please predict one that will last at least 30 years. These fluctuations are making us all dizzy.

Aug 9, 2011 11:32AM
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yes, three weeks ago this "EXPERT" was saying it was time to buy.......

try being a weatherman.....you are just as accurate........mindless "EXPERT" cheerleaders, unprinciples talking heads and us, the mindless sheep just follow.......need to re-boot the system.....including the draconian tea baggers....all we have now is "give it all to the poor"......Dems......"give it all to the rich"...Rebs......"dont give anything to anybody, dont do anything"...tea-baggers..........

Aug 9, 2011 3:03PM
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all the times since 1950 that the S&P 500 had sunk at least 5% in one day to a six-month low after having already lost at least 5% in the previous week. In all five cases -- 1962, 1987, 1998, and twice in 2008 -- stocks rebounded strongly during the next several sessions

What was the policy reaction to the previous events described?  Looser monetary policy? Additional spending by the government?  Neither are likely this time around, for evidence look to what the FED just "announced".
Aug 9, 2011 12:01AM
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the crash will last forever because if there is any sign of a recovery as there was this time the oil speculators will kill it before it happens with there uncontroled futures greedballing they will do agin as sure as the sun will come up tommo0ro if there not regulated now this time......
Aug 8, 2011 6:33PM
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Now we gotta hope for the Great Recovery, as what happened in August, 1982 when the market and the Dow began its great ascent.  That was under Reagan and the Black Monday crash was under him too in Oct. '87.  The ebb and flow of the market and our economy.  
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