The 2002 Market Bottom Analogy

From 1990 to 1997, Kevin Haggerty served as Senior Vice President for Equity Trading at Fidelity Capital Markets, Boston, a division of Fidelity Investments. He was responsible for all U.S. institutional Listed, OTC and Option trading in addition to all major Exchange Floor Executions. For a free trial to Kevin’s Daily Trading Report, please click here.

10/10/08

Today is the anniversary of the 10/10/02 769 bear market low, and the SPX has declined -24% in the last seven days (-0.3, -4.0, -1.4, -3.9, -5.7, -1.1, -7.6) This decline over the last 7 days qualifies as the 8th worst bear market of the 16 bear markets since 5/29/46-5/17/47.

The SPX total decline so far since the 1576 top (10/11/07) is -42.3%, which is now the 3rd worst market of the last 16 bear markets in the post WW 2 era, surpassed only by the -50.5% 2002 bear, and the -49.9% decline from 1/11/73 - 10/4/74

In the previous commentary I said that the rate cut had to show immediate improvement in the credit markets or else there would be another sharp leg down, and that hedge funds will continue to liquidate positions as investors pound on their doors to pull money out, and also because their prime brokers are making them deleverage. The SPX lost -7.6% yesterday to 909.92, and there was a meltdown in the last hour of -5.3% on liquidations, redemptions, and margin calls, which is a significant amount of forced selling. The electronic execution intensifies the "air pocket"

In the last 3 days the SPX has taken out the 1077 .618RT to 769 from 1576, the 1005 .707RT, and then the 942 .786RT yesterday. This has significantly increased the probability that the 769 2002 low will get taken out, unless there is significant PPT intervention, like they did in 1987. It is significant to note that the -22% decline from the 994 7/8/02 high to the 776 7/24/02 low was in 12 days, and was a sharper momentum decline then the one to the final 769 low. The SPX rallied +24% off that 776 low to 965 in 21 days, and then declined -20.3% in 34 days to the final 769 low.

The SPX has declined -24.8% on a 180 Deg angle in the last 9 days, from the 1209 high on 9/29/08. Looks very much like that July 2002 knife down, so I expect a significant low this month, followed by a sharp rally. If the low this month takes out 769 before the rally, then the probability of a bear market bottom is obviously much higher, and sets up the possibility of a classic 123 higher bottom. If not it puts a decline below 769 in play again.

The SPX futures are -27, and INDU futures -232 as I complete this article at 8:40 A.M. EST, so the initial 1st hour major index trades will be first hour contra moves, just as it was yesterday with the SPX RST reversal that ran +18.5 points from entry. The primary focus has to be on the major indexes today and not individual stocks.

Have a good trading day!

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