The October Bear Market Symmetry

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.

I have not seen a week like this since the 1987 crash. In the previous commentary (9/30) I pointed out that Wachovia (WB | Quote | Chart | News | PowerRating) was essentially going belly up in the Citigroup (C | Quote | Chart | News | PowerRating) deal, which had assistance from the FDIC. We wake up this morning and read that Wells Fargo (WFC | Quote | Chart | News | PowerRating) is taking over WB for $7 a share, with supposedly no government assistance, which is a positive, especially this week after the dislocation we have had in the markets.

Despite the expected approval by the House (second time around) we have witnessed short term funding dry up, and the rate that banks are willing to lend to each other spike above the overnight index swap rate which is evidence of how reluctant they are to lend to each other. Commercial paper rates have spiked which is choking the corporate borrowers and has forced a company like General Electric (GE | Quote | Chart | News | PowerRating) to do a terrible deal with Buffett for a meager $3 billion dollars, which is nothing in GE capital structure. In fact, GE had gone from paying 4% to 10% in 9-month commercial paper which points out how bad the credit market seized up and/or that GE was in bigger trouble than anyone thought. Buffett took his vulture deal at 10% Pfd stock and the option to buy shares at 22.50 so GE had to be desperate to give those terms for $3 billion. The extent of the credit market crisis is best evidenced by the extreme extent of the Federal Reserve funding to the financial system through the discount window.

The daytrading has been excellent this week within our (trading service) primary focus in the major indexes, ETFs, Energy, and to a lesser extent, the defensive issues. The key to the success is to understand the relationship of volatility relative to the expected actual price levels. You can read about how I do this by taking a free trial to the trading service, and see the actual extended volatility trades taken so far this week, by just checking the archives.

The Generals did a great job at month end with the SPX +5.3% on Tuesday, but they obviously blew out some of that mark up stock these past two days as the SPX has declined from the 1164.70 close on Tuesday to 1114.28 yesterday. The hedge fund liquidation continues which has accelerated the downside, and we can expect more of it. The commodity sectors have declined to the downside in the same parabolic angle way they ran up in the bull cycle. The global slowdown panic has taken hold, on top of the ongoing "Derivative Meltdown" crisis so all the ingredients for the coming bear market bottom are in place.

There is significant longer term symmetry this month as the SPX makes new bear market lows, and it is outlined in today's trading service commentary, which you can access with a free trial to the service. It is significant to note that of the 13 previous bear market lows since 1949, 8 of them have been in OCT.

Have a good trading day!

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