Order and Chaos in the Stock Market

It's time to pause and take a look at the past two months, give or take a few days. The top chart is a daily view of the Dow. On 9/29/08 the Dow opened at 11,140 and by 10/10 it cratered to 7882 before closing at 8451 - a 29% drop from top to bottom. A little short of two months later (12/05), the Dow closed at 8665. During this time we have been reading about the forced liquidations and deleveraging amongst hedge funds and massive withdrawals. TrimTabs reports that net outflows of all US equity funds starting 10/1 has been 134 billion dollars; post 10/10 the net outflow has been 69 billion. This number, obviously, does not include hedge funds, privately managed portfolios, individual selling and selling by overseas funds.

Here's my take on this action: the first week of liquidation was horrible and driven by unmitigated fear; that's when half the total liquidation took place. Since then, the liquidation has been controlled (do I dare say managed.) Fund managers, now more level headed, are using short term rallies in the market to liquidate positions. They have some limited patience and are willing to wait for better pricing to sell. Hence, when the market rallies to obvious resistance levels, we have big down days as the funds liquidate what they can.

The bottom chart is a weekly view of the Dow. It shows in even more graphically how the market has remained somewhat level since 10/10.

So now what? I will post my thoughts later.