I wonder what's eating Richard Russell of the Dow Theory Letters (Sell it All, Risk of 'Major Crash').
Of course, I agree with Russell's outlook. I'm curious, though, what makes him say, "by the end of this year [people] won’t recognize the country."
One technical development adding weight to Russell's view is evidenced via the NYSE Advance-Decline differential. Note how its wide swings — first, to the downside, coinciding with May 6th's flash crash, then, to the upside on May 10th, following Bernanke's helicopter run over the European continent — find precedent in October 2008.
Most fundamentally noteworthy is insight this reveales about the market's underlying psychological state. This plainly is different than what was in evidence from May - July 2008 when the market was tracing but its initial leg lower in a far larger decline.
Thus, a reasonable doubt might be cast upon yesterday's view suggesting the market could go lower, slower over the next 12 months. Richard Russell instead might prove correct. Lord knows, the long-term chart of the S&P 500 presented in OTC Derivatives-Driven De-leveraging was intended to visually support the possibility of a stunning collapse over the next 12-18 months.
At last, some measure of long equity hedging typically preceding a period of sustained support (albeit likely only amounting to a counter-trend rally) entered into the picture today. Two things worth noting here, though...
- Being the intermediate-term risk at hand is a projected collapse in equity markets (this following on the initial downdraft from October 2007 - March 2009), the measure of buying support and commensurate put option hedging necessary to affect a counter-trend rally probably will be greater than anything seen since October 2007 top. In other words, the CBOE Put/Call Ratio might spike toward 2-1 before any sustainable bounce develops.
- One wonders whether much of today's put option buying was directed toward hedging new positions in financials established on the hope that, regulatory reform being debated in the U.S. Senate would move forward in its presently weak state with today's cloture vote. Minutes before today's close, however, we got word the Senate's cloture motion failed. The risk of momentous regulatory change (read: Glass-Steagall) remains on the table.
The case made by Fast Money trader Gary Kaminsky in raining on the parade of those who were impressed with today's close appears to have technical merit.
Note how during yesterday's late-day bounce (and then again at the start of trading today) there was no marked improvement in relative strength compared to mid-day yesterday. True, there were divergences this morning as the S&P 500 sank to its bottom ... however there was no indication previous to this suggesting buying strength was building over the course of yesterday's selling as it carried forward and ended today.
Thus, a presumed fifth wave down from last month's top — forming since last Thursday's peak (which seems like 100 years ago!) — might feature further selling before completing. How this might take shape is difficult to say, yet one thing is certain: development of technical divergences indicative of a bottom forming require indexes close below May 7th's close (the day after the flash crash, when a presumed third wave down from last month's top ended).
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