Market Anthropology: Make or Break

Monday, October 3, 2011

Make or Break

Here is a post close update of the analog study contrasting the current market and the 87′ crash. As in 1987, the market has taken out the previous low from the initial crash. This was anticipated once the market pivoted lower in the previous week after failing to recapture 1220. After today’s close, the S&P 500 has now undercut the low to a greater percentage then the 1987 test. You typically like to see an undercut of the prior low to set up a successful test of the bottom of the range. It accomplishes two things – it washes out the weak hands and adds propellant to the reflexive bounce on the backs of those dogmatic bears that expected another leg lower. 

With that said, it can at times lead you to extend a leash on a position you should otherwise have kept tighter or waited for more clarity. To that point, and although I am clearly biased with several positions acquired today – I am encouraged by the small retracement in the gold/silver ratio in contrast to the extreme weakness in equities, and the relatively modest rise in the VIX. 

I also like what I have been seeing in the outperformance of my unusual, but useful, credit risk proxy – FCT. In contrast to the beginning of the credit crisis in 2007 and 2008, FCT has outperformed the SPX over the past six months – more specifically the past two weeks. This has typically been a leading indicator for me towards the underlying risk appetite in equities.