06 Feb

6 Feb: Cashin’s Comments

Thank you to Art Cashin for this analysis:

On this day in 1858, that august deliberative body, the U.S. House of Representatives was calmly discussing a matter of import to the nation. Well…..maybe “calmly discussing” misses the point. The House was in middebate/mid-filibuster on the topic of admitting Kansas to statehood…..and whether such admission should be as a free state or slave state.

The debate had been going since the prior day and as it moved into the wee small hours of February 6th the tension, partisanship and weariness began to show. Since night-time in February, in Washington, in the Capitol building, in the 1850’s tended not to be too warm, several members of Congress were said to have sipped (or gulped) some alcoholic beverages…..just to stave off the chill.

Rep. Keitt of S.C. made a rather uncomplimentary remark about Rep. Galusha Grow of PA. (who had the floor at the time). Rep. Grow responded with an equally unkind assessment of Keitt. Keitt went for Grow’s neck, but was knocked to the ground. Soon most of the House was wrestling, spitting, kicking and punching their worthy and distinguished colleagues. Spittoons and inkwells flew through the air. The Speaker gaveled for order with no success. The Sergeant at Arms beat members with his staff (in a non-partisan way, of course).

Rep. Grow was being pummeled by Barksdale of Mississippi when Washburn of Wisconsin rushed to Grow’s defense. Washburn’s intention was to grab Barksdale by the hair with his left hand and knock him out with a right uppercut. But when he grabbed Barksdale’s hair, it came off in his hand. Shocked, Washburn screamed. The rioting representatives looked up and saw a suddenly bald Barksdale…..and Washburn waving his wig. “My God, he’s been scalped!” shouted someone and the riot broke up in riotous laughter.

To mark the day, suggest to Congressional leaders that as they begin to debate the debt ceiling, they should consider appointing someone from the Hair Club as Sergeant at Arms.

It was the bulls that got scalped Monday as stocks continued Friday’s unravel.

Early Testing Fails And Leads To Trapdoor Plunge In A Vacuum – Stocks opened lower, circled the wagons and floated back up to the unchanged area. They then sputtered and began to roll over I sent this email to some friends:

Market going into the normal retest. If they test and re-hold the morning lows, the bounce could gather a crowd. If they make notable lower lows, it hints the process could last days.

They held the lows for a matter of minutes and then began to slip below. I then sent this follow-up:

Apropos my prior email, the markets appear to have failed the retest of the morning lows. If they bounce, they may then roll over and test the lower lows.

Traders will also look to other mileposts like moving averages, etc. S&P 50 DMA is around 2715.
Shortly before 2:00, the S&P began to test that 50 DMA. As you can see, the S&P is now testing the 50 DMA. Cross your fingers.

The testing lasted nearly thirty minutes. When the S&P broke below the 2715 support, it was as if a gun went off. Selling began to accelerate and bids rushed to cancel, creating the same kind of market vacuum that we saw late Friday.

Around 3:00, the trapdoor opened and stocks went into freefall. Media pundits reminded folks of the flash crash in 2010 and a few even speculated that some of Monday’s selling was due to rogue machines as it had been in 2010. I could find no such outages, only strained phone lines and the like, as a nervous public flocked to call advisors and funds.

The late air-pocket selloff took the Dow briefly below 24,000 before a mild rebound. Volume was moderate, suggesting that the lower prices were more a result of a buyer’s boycott than a stampede of sellers.

Contributing Factors – We find a lot of media chatter on the market “panic” and very little on contributing factors. Among these are margin calls, redemption selling and, equally, fear of redemption selling. Also, there is the popularity of ETFs, which are easy to sell but that can result in unrestrained selling in the equity components.

Also, there are ETNs set up against volatility. The VelocityShares Daily Inverse VIX Short-Term ETN, down 14% in session and down 59% more after hours.

Overnight And Overseas – In Asia, markets are playing catch-up to the recent sharp selling in global markets, particularly in the U.S. Tokyo was down the equivalent of 1100 Dow points and Hong Kong sold off more steeply. Shanghai and India were down a bit less drastically.

In Europe, markets are lower but somewhat less severely. Losses in Europe are more on the order of 400 or 500 Dow points.

Among other assets, Bitcoin dipped below $6000 before stabilizing slightly above. Gold is higher and pushing against the upper edge of its resistance band. Crude is weak again, with WTI trading around $63.50. The euro is basically flat against the dollar, while yields are a few ticks lower on a bit of a stroll to safety.

Format Explanation – We ask you to suffer through the replication of our intra-day emails so that you can see many of the market moves can be seen as probable or even predictable. If I waited until after the fact to describe the action, I think that would have less credibility.

Consensus – We will likely need a bit more whipsaw volatility to establish a viable trading bottom here.

Stick with the drill – stay wary, alert and very, very nimble.

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