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Can Pigs Fly Under the Red Sky?


...a mirror image of the kind of panic that gripped the Street twenty years ago seems to be playing out in a kind of slow motion unwinding.

It's unbelievable like a lead balloon,
It's so impossible to even learn the tune.
Kill that beast and feed that swine,
Scale that wall and smoke that vine,
Feed that horse and saddle up the drum.
It's unbelievable, the day would finally come.
Unbelievable (Bob Dylan)

"The time has come,' the Walrus said,
' To talk of many things'
Of shoes - and ships - and sealing wax--
Of cabbages - and kings--
And why the sea is burning hot--
And whether pigs have wings."
-Lewis Carroll (Alice In Wonderland)

The DJIA and S&P were at all-time highs one month ago. Despite Friday's large range volume reversal and the fact that Friday scored a 90% up day, I doubt the decline has corrected the excesses enough to support a sustained advance.

Why? Firstly, the selloff has overbalanced in time and price. In other words, the current decline measuring 185.30 points is larger than any correction since the May 2006 peak. The decline from May to June 2006 was 107.40 S&P points. The selloff from February 22 to March 14 this year was 97.55 points. The drop from this year's July peak has also overbalanced any correction over the last four years in percentage terms.

The sharp selloff from Feburary 22, 2007 lasted fourteen trading days. The decline into August 16 encompassed twenty days.

Interestingly, the May to June 2006 decline found a low on the sixth week down from the weekly closing high. This week marks the sixth week from the weekly closing high. Consequently, any decline beyond this week that scores new lows for the move would be a sign of the bear.

In my view, the February/March decline distinguished itself as a shakeout, a deep quick pullback, because the ''C wave'' was shallow. In other words the first leg or ''A leg" down into March 5 was deeper that the C leg or second leg down from March 12. Note how shallow in price and duration (two days) the move down from March 12 was.

The current selloff paints a different picture. The first leg down from 1555.90 to 1427.40 S&P (on August 6) measures 128.50 points. The second leg down from a high of 1503.90 on August 8th ran to 1370.60 or 133.90 points. Both legs are nearly identical declines with the second leg actually larger versus the scenario in March.

It is notable that while the second leg in March lasted two days, that the countertrend rally from August 6 to August 8 comprised two days. Moreover, the August 8 peak of the snapper occurred on the 14th trading day from the July closing high while the 14th trading day from the February 22 peak marked the low. Unbelievably, it appears a mirror image fold back is playing out. Unbelievably, if this is the case, then a mirror image of the February 22 peak, or opposite February 22 on the calendar, August 25, is a date worth watching. August 25 was of course the high on the twenty year cycle. Likewise, there is a mirror image change in the news backdrop between the two periods while complacency greeted the February "crashette" and panic embraced the current rout. This is likely not the kind of shakeout that occurred in February that is quickly offset.

Unbelievably, a mirror image of the kind of panic that gripped the Street twenty years ago seems to be playing out in a kind of slow motion unwinding. There is a sense permeating the tape that no one knows and a palpable fear that anything is possible, both up and down intraday and day over day. A fragmented tape is riddled with uncertainty.

Unbelievably, there have been four 90% days since the all-time high. Lowry's service has shown that three or more consecutive 90% down days without an intervening 90% up day occurs in bear markets. Friday's 90% up day signaled a rally phase but it is only within the context of the preceding four 90% down days. The sign of the bear has already come.

In looking at past panics, they play out over a minimum of 55 to 90 days. The time factor is a critical ingredient suggesting Thursday was a temporary low. As W.D. Gann indicated, time is more important than price.

Additionally, the weekly number of stocks hitting new highs less those hitting new lows is near the levels of 2001 and 2004. For the market to go from an all-time high to such oversold levels in just a month is unbelievable. It is a sign of the bear. It suggests the beginning of something rather than the end of something. It suggests kick-off momentum, a first thrust.

Bulls are cheering the prospect that Thursday carved out a meaningful low and that antics from cheerleaders needled the Fed into "saving the day". If so, that is a truly unbelievable state of affairs. But, followthrough for more than three days on a significant increase in price and volume and above 50% of the range at 1464 S&P will tell the tale of the tape.

Bears are expecting a snapback to play out towards the end of the month. To be sure, the last week of August will be critical because it is the anniversary of many significant turning points, including the 1929 and 1987 pre-crash highs. It is unbelievable, that those crashes unfolded quickly off all time highs similar to the current angle of attack to the downside perhaps.

Unbelievably, besides the fact that August 25 this year is also opposite the significant February 22 peak, the date also coincides with a lunar eclipse on August 28. W. D. Gann devoted a book to eclipses, the most powerful of astronomic forces, so it may be a period to pay particular attention to.

However, because surprises happen in the direction of the trend, if fund(s) are going out of business there may be pressure into the end of the month, which short circuits the notion of a rally phase.

Additionally, the August 8 snapper peak was defined by the S&P tagging its overhead 20 day moving average. Currently, the 20 dma is at 1460 and on a pace to dovetail with the 200 dma at 1455. Unbelievably, this coincides with the aforementioned midpoint of the decline. Could the S&P commence a fifth wave down from here, surprising both bulls and bears? A plunge that breaks 1420 S&P opens up that possibility.

Be that as it may whether the market holds up for a week and the cheerleaders waddle back to the troth or whether the rally phase terminates sooner, from where I sit we are still looking at a pig with lipstick.

The redemption notices have been given. If the clamoring for the safety of three month Treasury paper is any indication, redemptions will loom large when the rubber meets the road at the end of September. Consequently, all rallies will be viewed as selling opportunities by those who must sell. Where hedge funds once were able to bank on cushy credit lines to swagger their positions and play the momentum game by pushing their own inventory higher and thereby generate more buying, this former 'cushion' is more like a thousand pin cushions today. A credit line is not a lifeline if it can be and is being pulled.

Is it reasonable that bulls should be snorting and squealing about the prospects of a cut in the Fed Funds rate to seal the deal and save the day once again? It is unbelievable that the Street is heralding as heroes those who helped created the crisis, failed to monitor it and let it get out of control in the first place. It is unbelievable tat the Fed must interfere to stop what they helped create. It will be unbelievable if the money the Fed is infusing is not overwhelmed by trillions of dollars of derivatives. A poke at a pig, so to speak.
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