A bloodbath on Wall Street

Mid-week market update: I had expected to begin to wind down and relax for the holidays this time of year. Instead, we got a bloodbath in the stock market.

To say that the market is oversold is an understatement. Sure, standard measures indicate oversold conditions, such as the VIX Index had risen above its upper Bollinger Band. Interestingly, the VIX Index failed to rise today despite the carnage in the stock market, which could be a sign of hope for equity bulls.


The Fear and Greed Index is also showing extreme conditions.


Oversold markets can become more oversold. How oversold? This report from UBS puts the velocity of the sell-off into context.


Here is the full chart from UBS:


Rebound ahead?

Here is what happened next. Out of the 14 instances, 8 of the following years saw very positive returns of +12% to +44% while 6 saw very negative returns.


SentimenTrader also found that returns in the following quarter tends to be positive, though it is difficult to generalize with such a small sample size.


In other words, expect fat-tailed performance in the coming year. For what it’s worth, the stock market weakness created a Zweig Breadth Thrust oversold condition, which is a setup for a possible ZBT buy signal. Should the market rebound sufficiently to achieve a breadth thrust in the 10 trading days after the recovery from the oversold condition, it would generate a rare ZBT buy signal indicating positive momentum. Even without a ZBT buy signal, such oversold conditions can be useful signals of a market that is stretched to the downside.


My inner investor has de-risked his portfolio, but my inner trader remains bullishly positioned in anticipation of a relief rally, but he is feeling the pain and getting very nervous.

Disclosure: Long SPXL


13 thoughts on “A bloodbath on Wall Street

  1. The AD line is an indicator of direction of the S&P500. In attempting to match the S&P500 and the AD line, I boosted the beta of the AD line wonkishly, and found that the result resembled the IWM.
    Regardless, IWM:$SPX can be a useful breadth indicator. Downward moves reflect lack of breadth and indicate increasing risk; upward moves are bullish. The chart has forecast pain since 26 Nov.

  2. Cheers, good work. Seems trend following, mean reversion and buy and hold are currently facing challenges. We are all humble students now.

  3. I don’t know how useful this is, but in 2015/16 when there was the double dip, the VIX diverged, and it seems to be doing it again.

  4. At this point, reality is probably more useful in thinking about market directions. Basically there is no buyers except the market makers by mandate. Nobody wants to get in front of algos train, even if you see something undervalued. There are several factors against a rally: tax loss selling, fear of another 50% draw-down, hedge fund liquidation, margin call. This situation might lead to a shockingly large drop in a single day, based on velocities of these algos. The probability is rising. Nobody wants to see it happen. If that does happen, it will probably wake up Mr. Powell and the Fed members. Do you trust these eggheads? Look at our last two crashes. Did you see the Fed did anything to mitigate the risks in advance? I remember they said things are fine, and then we made history both times. Powell just does not get it. This whole thing is all hinged on sentiment and psychology. He would rather gather ammunition to use in the fast approaching recession, which is induced by his wrong polices by the way. Instead he should recognize that the economy is now in slow growth forever, because of demographics and large debts all around the world. Pause and reassess would be a better approach. Let’s hope for a better day.

  5. Spot VIX remains fairly subdued. We need a spike here to create a bottom. Cam’s SPXL position is under water and a VIX spike that caries SPXL to below 30 may be needed to add to SPXL. Stay safe. We have now broken through a giant H&S pattern that formed i 2018. We may be heading for a third month back to back close below 200 DMA. Cam’s calls were prescient. Kudos, Cam.

  6. Well. it appears that my comment below from the 12/12 post turned out to be spot on…

    “Most of my dumb money sentiment indicators reached their extreme oversold readings on 10/29, and since then we have basically chopped around in a sideways range for the last month and a half. Meaning those oversold extremes are being worked off through sideways consolidation and many are approaching neutral readings now. Makes me wonder if the next big leg down is not that far away… could the Santa Rally that everyone expects be the hook that traps short-term bulls?”

    Now retail sentiment it getting back to extremes and as long as it remains this dour we should be at major intermediate-term (and maybe even long-term) low within the next 2-3 weeks.

  7. I agree with other comments that the current price action is algos and market makers only. Based on intraday price action and what I hear from algo traders, I suspect that, in fact, everyone is feeling a pain this month (except short-and-hold trades and those in cash). If institutional buying won’t come back to the market soon, a major liquidity hole/flash crash event might follow, as algos start to exit from a harmful environment. I think an extreme caution is required in the current condition no matter how oversold stocks are.

    I could very well be a contrarian indicator. Cam’s inner trader has an excellent track record. However, I can’t wrap my mind around Cam’s latest long trade. It doesn’t feel very manageable at this point.

  8. Based on my study of similar washout moves like this we should be 1-3 trading days from a tradeable short-term low and then a bounce back to at minimum retest the FOMC day high. Question is how much more damage we will see in the next 1-3 trading days. Most likely scenario based on my work is that we see the low on Monday around 2375 SPX. Time will tell…

  9. The current price action is absurd and scary. Everything is vertically down. Let’s not talk about bottoming any more. Even the market makers together have a limit in absorbing all these short trades. Every charts I saw the short interest is among the historical highs. So to protect themselves, market makers keep on doing gamma hedging. And who are their counter parties? At certain point every one of them just folds. The situation is very similar to 2008 Lehman Brothers’ bankruptcy. Every big banks just ganged up to short Lehman’s stocks to drive it into ruin so they can collect Lehman CDS payout. The counter party was AIG. Of course AIG was going to file bankruptcy and the CDS payout would be worthless. Then Hank Paulson (one-time GS chief) engineered a bailout of AIG so that these big banks can collect payout (taxpayers money). These crooks were willing to set the whole world in flame just to collect 20B payout. Truly unbelievable. You can search the list of banks who received the payout. It will open your eyes. Back to current market price action, it just smells foul play. I am not paranoid. There are decent chances some bad actors are behind the scene. At this moment US has enemies inside and outside working very hard to undermine its sovereignty. Who said globalization is all good. Look at the spread of disease and terrorism. Perhaps I am wrong.

  10. I would like to offer my two cents. But the heads-up first is for everyone here to consider going 100% cash if you can. Once everyone lost confidence in Jay Powell then market would accelerate rapidly downward at warp speed. There are no positive catalysts on the horizon. Everything we see is big negative. There will be no satisfactory trade war resolution. Xi just declared a few days ago there would be no structural change. Otherwise it would be the end of CCP. Next two years DC atmosphere will be even more militant. Potentially some tragedy might ensue. The most important: the next earning season. There will be lots of guide-down which will break the market. Clues are already here: ACN, MU, FDX, CCL earnings conf calls. These companies as a group represents the bulk of the economy. At this stage the forward estimates are still close to 10%. It will be dramatically reduced. Even we get a rate cut, it would be still difficult to turn around, since Powell will be having lost his credibility already.

    At this moment it looks like he has lost all the credibility. Every time he opens his mouth, market drops. As an institution the FED probably does not have much credibility. Why bother with them? All they have done is destroy the US from within. Just look at Greenspan and Bernanke. Now Powell is coming to finish the job. We can actually replace the FED with a software system. It would do a much better job at a much lower cost. The Fed system employs thousands of economists, but for what? The conspiracy theorists have a point. The establishment of the FED is the most important step to advance to the one-world government.

    Even spx has lost 500 points, another 1,000 points loss will not be a surprise. That would be a 50% total loss. Everything accelerates and overshoots these days. So be mentally ready.

  11. the last time I recall things feeling this bad was March 2009 when I read comments just like I am reading here. maybe this bear is a bull set up in disguise if there is no financial or credit crisis looming. an economic slowdown is one thing, extreme asset bubbles, credit lending contraction and extensive leverage is another. biggest concern is Europe where there is contraction and a 1% GDP next year would be a victory IMO. essentially risk assets are discounting so much that will go wrong in the coming quarters, unless we get significantly worse news things financial markets are now overshooting to the downside (opposite of December 17/Jan 18 spike up earlier this year on earnings optimism). Fed is truly distrusted here and until you get the word “pause” in Powell’s statement and see China’s easing policies they have recently announced begin to show progress we remain in an uncomfortable place where capital remains on the sideline. Both could happen in the coming months, but it appears the financial markets are now betting nothing works. so that risk premium we have had in equities went flying out the window this quarter!

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