Another dismal session in the equity markets transpired yesterday as sellers continue to press the marketplace lower ahead of Hurricane Rita's
landfall and in response to the FOMC statement on Tuesday. Breadth and volume figures remained sharply negative and while some short term
indicators are now approaching oversold levels, there does not appear to be anything holding the marketplace back from breaking below August's trading
lows in the near term. However, one aspect of the current trade that cannot be overlooked is the potential that this decline is in ANTICIPATION
of Hurricane Rita. If this is the case, yesterday's sharp increase in trading volume on the NYSE (1.93 billion shares, the highest session since the
April 15, 2005 low) could be looked upon as a positive. Keep in mind that during the April low and subsequent July decline, volume surged before the
indices staged a turnaround. While I feel it is too early to bottom fish in the current situation, it is worth keeping a close eye on as we move
forward in today and Friday's session.
I have always implemented a 3 day rule on trading rallies and declines. This rule is pretty simple and it reminds me not to be the last guy
to the party. The following are the moves for the current week of trading in the major index markets:
As you can see, this week has gained serious traction on the downside, in the SP500 we have had 3 consecutive sessions with Declining Issues
readings of greater than 400. In addition, the down volume each day this week in the index has been greater than 75% each session. These are warning
signs of a potential bounce, but, they are also warning signs that this time something could be different. We have had a great number of discussions
as to the complacency within the index markets and their respective price action. Similar to the volatile periods we witnessed in both March and April,
the current state of the trade is at key inflection points. If the sell side is able to gain more traction, or the indices are unable to bounce
into the end of this month it should signal a continuation of the current downtrend. That move, which I expect would occur within the first 3 weeks of
October, could push the indices lower by another -5% across the board. The catalyst to this move would be the buyers we witness in the next few sessions
being forced to liquidate trades at lower levels, creating a cascade effect. Again - this is only a scenario, we need to see how this plays out in the next
couple of sessions.
Brad Sullivan's Morning Commentary
