Daily Investment Interpretations

September 18, 2008

2008-9-18  The big news today is the VIX. It opened at 36.1, spiked to 42.1, and then settled back to close at 33.38... and this qualifies as a major turnaround signal. (We have to go back to 2002 to find another VIX spike this high, when the VIX reached the 40's on three occasions.) The Market indices behaved inversely, with the Nasdaq Composite opening at 2,137, falling to 2,071, and then closing up 100 points at 2,199; the Dow opening at 10,609, dropping to 10,460, and then closing up 400 points to 11,019.69; and the S&P beginning the day at 1,057, bottoming at 1,135, and ending the day up 50 points at 1,205.71, or only 8 points below where it closed on Tuesday. What's perhaps most significant is that in every case, the markets staged a significant rally after such spikes in the VIX, and in late 2002, touched its absolute bottom for the 2000-2003 bear market. (It didn't start back up until 2003 after retesting its 2002 bear market bottom.) 
    Today, central banks flooded the world's economies with liquidity. However, the boost that turned the tide was a plan to establish a bailout agency: Bailout agency on table: Sen. Schumer. Britain has barred short sales altogether in an effort to stop the trashing of leading financial corporations by short sellers/rumormongers. So far, my concerns that money market woes might initiate a run on money markets haven't materialized. There have been major withdrawals from money market funds, but not enough to melt them down: $90 billion pulled from money funds. This crisis is far from over. Gold closed at $897 an ounce today, up $47 an ounce from yesterday's close, and up $117 from Monday's close: Can Congress put Wall Street together again? Obviously, concerns remain over the integrity of the world's financial and monetary systems. In spite of its apparent turnaround, are the markets apt to relapse soon because of further shocks to the financial system? Stay tuned for tomorrow's exciting episode.
11:00 P. M. Update: I'm anticipating various commentaries on today's dramatic market action, and here's the first of them, from Mark Hulbert: Thursday Dow drama set bullish tone. I notice that's he's calling for short-term bullish consequences rather than, necessarily, a major market bottom. He mentions that 87.8% of all stocks rose in price--just short of the 90% required to confirm an intermediate-term rally, and "even shorter still of the double nine-to-one up days that have particularly bullish intermediate-term significance". Mark Hulbert also observes that the Hulbert Stock Newsletter Sentiment Index (HSNSI) didn't register as high a level of fear as it did at the time of the July low.