Don’t be a hero in this market
Published: Aug 25, 2015 3:51 p.m. ET
For perspective, through Monday’s close, the Nasdaq Composite has corrected 18.0% on a top-to-bottom basis, or 90% of the way to a bear market. The S&P 500’s decline is 12.5%.
While some may term this a “crash,” it does not compare at all with either the fall of 2008 or the granddaddy of them all, October 1987. For instance, the former saw the S&P drop 35% on an intraday basis from Sept. 19 to Oct. 10.
As the chart below shows, on Monday there was a wonderful (read: constructive) Flash Crash-inspired opening and flush. This opening gap was large, and the larger the downside gap, the more fear, and the higher the likelihood of a clean-out of sellers.
And it is to be remembered that it is sellers that make a good bottom, not buyers.
Liquidity virtually disappeared early on. For example, about nine minutes into the session, the S&P futures contract showed just one contract bid and two offered.
So the basic conditions of a selling climax were met.
Does this indicate a bottom was put in?
The casual medium-term speculator, one operating without a sound strategy, will spend more time trying to answer this question than will the more-experienced operator. The latter will wait until all the market’s cards line up, i.e., the averages, leading issues, etc., before pronouncing conditions as ripe for successful speculation.
The crash of October 1987 can be used as a model for all market plunges. A major point is that one waits for the test of the initial low. While this may sound rather basic to card-carrying technicians, back then virtually no one alive had seen anything like Black Monday — and how to deal with it was not widely recognized.