The First of the Capitulation

Nothing like walking into a meeting with a market down 350 points and walking out and seeing down 700 points. Instantly you knew that folks in DC had to have screwed up. This entry is not to debate wether we should or should not have a "bail out" wait thats not it...I mean "rescue package" nope thats not it... I mean liquidity injection. This post is an attempt to begin to try and put some of this into perspective.  What did yesterday mean....

In a much too simple theory... 

The bad news, package or not we are probably in at least a mild recession within a bear market. The length of the recession will be determined by the ability of funds to generate enough liquidity to entice folks to risk assets again. The Ted spread has certainly been indicating that banks are not willing to loan to each other much less to the public. 

The good news, congress and main street are now beginning to realize we are all in the same life boat.  Something will get done and it might even be a better package then the revamped original (OK I am an optimist.)  However, the fact that sentiment is so negative has to begin to excite even the mild contrarian. Expectations are now so bearish that even a dead cat bounce might turn into a little excitement.  Yesterday's breadth was the worst since 1987 by my calculations with almost -20 to 1 decliners versus advancers. Yesterday was a Lowry's 90% down day as well. With a 6 standard deviation move in the VIX we got enough capitulation to create at least a decent backdrop to begin to build a base which is more of what I am expecting versus a blast off from here but again the role is not predict but to summarize possible situations and build a plan for how to profit from the eventual outcomes.  

For the sobering news...if this is fact the worst financial crisis since the great depression as many pundits have called it,  then based on history we could see more weakness at some point. If the Tech correction was almost 50% of the S&P then a "crisis" such as this could be potentially  as bad. Again, not predicting but trying to judge the risk to reward to evaluate the signs the markets offer in forming a game plan.


 (copyright 2008, duke dot jones at gmail dot com)