The New Crash Monday Phenomenon

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Three weeks ago, Monday was an ugly day in the U.S stock markets. The Dow was down around 500 points. The drop two weeks later on Monday was even worse, the Dow was down 778 points. At the bottom yesterday, another Monday, the Dow was off 822 points (it closed down only 370 or 3.6% however). The other indices were hit even harder. The bank failures, bailouts, and sometimes lack of bailouts that are taking place over the weekend are the cause of these Monday downward spirals. When the major bank failures end or the market hits a definitive bottom, Monday will once again be a safe day to be long in the market.

Unlike the previous Monday routes, significant intraday buying came in during the afternoon to lift the stock indices off their lows. It was reported that the shadowy U.S. government operation known as the plunge protection team had met in the morning and just before noon, a number of new Fed money pumping operations were announced (a lot more of the same things that haven't worked in the past). This didn't immediately reassure the market, which kept dropping until approximately 2:45. At the lows, the Dow hit 9503, the S&P 500 1008 and the Nasdaq 1777. The S&P and Nasdaq lows were in areas of strong chart support (mentioned in last Saturday's posting), the Dow's low was not. A strong rally followed and the Dow managed to close at 9955 (the first close below 10,000 since 2004), the S&P at 1057 and the Nasdaq at 1863. Europe though having closed before the rally period began lost heavily. The Euro Stoxx 600 index was down 7.6% on the day. As usual in times of market crisis, gold rallied closing up $33 and oil tanked closing down $6.07 at 87.81.

While yesterday's market action didn't feel like a definitive bottom, a number of indicators reached levels that have previously signaled bottoms. New Lows reached 1078 toward the close and anything over 1000 is typical of major bottoms. The VIX, a measure of market volatility, hit 58 during the day, it's high during 2002 was only 55 (however, it rose to 150 during the 1987 market meltdown and this could happen again). The TED spread, a measure of perceived credit risk in the economy, which had already blown past it's 1987 highs of around 3.00 in September, reached 3.91. Market breadth, with 15 to 1 declining stocks to advancing stocks on the NYSE was also indicative of a bottom. However, it was even worse last Monday. Volume was high on the Nasdaq, but not outrageously so, and only somewhat above average on the Dow - not signs of a washout. A successful test of yesterdays lows would create some reassurance that the market has indeed bottomed (at least for now).

Crash Mondays seem to always be followed by rally Tuesdays (although today may be an exception). The panicky authorities pull out all the stops to get the market going back up again. The Fed first announced that it's TAF auctions would now be for $150 billion each (they started at $20 billion last December). Funding limits for its other operations were raised as well. Last night Australia lowered rates a full percentage point, jumping the gun on a possible coordinated world-wide central bank interest rate cut. This morning the U.S. Fed announced that it will buy worthless commercial paper on the open market to unclog the credit system. Let me assure you that the stock market will eventually succumb to these manipulations and rise appropriately. Unfortunately, so will the price of everything else. You may have to sell some of those higher priced stocks in the future to pay for your $100 hamburgers.

NEXT: The Third Crash is the Charm - Fed to the Rescue

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.