The State of the Markets:
My guess is that after Wednesday's action, everyone is feeling a little better about the state of the stock market. While the bears and their algos mounted another series of attacks yesterday, good prevailed over evil and stocks managed to avoid getting hammered for a second consecutive day. Feels like progress, right?
But... Given that the S&P 500 recently tanked 6.7% over seven trading days and wound up scaring the bejeebers out of just about investors in the process, the question of the day is if the recent dance to the downside is over. To which I will reply (with tongue firmly implanted in cheek), maybe yes, maybe no.
Before you hit delete in disgust over the my response, please allow me a chance to "esplain." You see, what we've got going here is termed a "waterfall decline." And the good news is that these types of declines tend to follow a script or pattern - something I like to call the "Crash Playbook."
I've written on this subject a time or two over the years. As such, long-time readers that can recite the six stages of a waterfall decline may be dismissed. For the rest, keep reading as you may find some of this stuff useful both now and in the future. In short, professional traders all have the "crash playbook" memorized. And thus, the patterns tend to repeat. So, let's review...
Stage 1: The Initial Dive
The initial move of a waterfall decline is easy to identify. It's the gut-wrenching selling where the indices shed points at a rate that boggles the mind. The 838-point decline on the Dow Jones Industrial Average on October 10 qualifies here. As does the more than 500-point dive seen the following day ...