back to blog homepage

Technical Observations

Wise words this morning from Vince Farrell:

Technical observations on the market hold out hope that the relentless selling we have seen has put the market into a deeply oversold condition that is due for a rebound to the upside. Investors Intelligence has reported the most bearish sentiment in the market (and the least bullish sentiment) since 1994.

There have been seven other times since 1960 where you saw two days in a row of 90% down volume. Monday and Tuesday of this week was the eighth such occurrence. The other times didn't all mark a bottom, but they did mark a turning point for a rally. The VIX index, a measure of fear in the market, rose Wednesday to its highest level ever. Records are made to be broken, but on the other hand, the lessons of history shouldn't be ignored.

Regarding historical references, this year is already the third worst year for the S&P 500 average since 1928. The two years that have the dubious honor of being first and second were 1937 when the market was down 35%, and 1931 with a 43% decline (thanks to Jason Trennert of Strategas for the research.)

During those years of the Great Depression, the policy makers did everything wrong. Taxes were raised, tariffs were imposed that chocked off international trade, and the money supply contracted between 1929 and 1933 by over one-third. Contrast that to Wednesday's global reaction by central banks to flood the system with liquidity.

The coordinated interest rate cut, the Troubled Asset Relief Program, the huge expansion of the Term Auction Facility, which will be larger (if needed) than the TARP program so laboriously passed by Congress, paying interest on bank reserves, a new program for the Fed to buy commercial paper directly, and the ability of corporations to tap overseas cash without tax liabilities will serve to liquefy the system.