What if you gave a party and no one came?

[Jim Nickerson]

Re: What if you gave a party and no one came?

Good, Jimmy.

I'm not going to look it up, laziness on my part, but John Hussman in his weekly comments has recently noted once at least that by the time a recession sets in the "markets" are down about 20% and then may fall another 20%. I hope I got that correct.

He also has noted several times, and perhaps last in his note from Monday, that after a steady fall as this market has been experiencing, there may be a "clearing rally" I believe he called it such as there might be something on the order of a 400 point gain--I think that must refer to the DJI, only then for the market to crash. Here's what he wrote Monday:

"The stock market is oversold short-term, which invites the potential for a spectacular “clearing rally” of the typical variety – fast, furious, and prone to failure. While such an upward spike might be embraced as some sort of message that the market has “fully discounted” negative conditions and mark a successful “test” of prior lows, the data suggest that underlying market and economic conditions are rapidly deteriorating. In that context, a spectacular short-term rally (particularly a one-day barn burner) could provide a setup for concerted selling. As usual, I have no intention of encouraging investors to depart from well constructed investment plans, but investors should recognize that a 30% market decline is only a standard run-of-the-mill bear. It's a good idea to evaluate your investment portfolio to ensure you could tolerate that outcome, should it occur, without abandoning your discipline."



The importance of Hussman's caveat is that were the scenario to happen, and if one has the cojones to act, such a "clearing rally" would provide an addtional opportunity to go short or to rid one's portfolio of long positions in equities.

I got "unlazy" and looked up what Hussman wrote originally on 12/17/07 http://hussmanfunds.com/wmc/wmc071217.htm

I'm back to the more typical position of having no specific short-term views. That said, there is one particular scenario that would be ominous in my view. That would be if we see a relatively uninterrupted series of declines that breaks cleanly through the August and November lows, followed by a one-day advance of 200-400 Dow points. That's a script that markets tend to follow pre-crash. Though it's not a strong expectation or forecast, it's something worth monitoring, because we've started to see the pattern of abrupt jumps and declines at 10-minute intervals that is often a hallmark of nervous markets.

Note Hussman's comments were written on 12/17/07, then from 12/26/07 we have witnessed an "uninterrupted series of declines that breaks cleanly through the August and November lows." Without starting a debate about what "cleanly" absolutely means, the intraday low on the DJI on 1/9/07 took out the 8/16/07 intraday low by 16 points, and the closing low day before yesterday definitely took out the August and November closing lows.

Since 2:16PM ET yesterday (1/9/08) until 3:10PM ET today, the DJI went up 428.96 dollars. That covers a bit over the length on one trading day and occurred in the course of two trading days. [edit:7:30PM CT, I believe it is correct that from the intraday low yesterday 1/9/08 to the intraday high today 1/10/08 the DJI gained 499.76. I had and continue to have some trouble with the 2 day charts with one minute intervals in seeing the reported lows for yesterday which I believe was 12431.53. The reported intraday high today was 12931.29. From that high to the close today the DJI lost 78.20 dollars.]

Whether or not over the next few days, or today's decline from the intraday highs and several more days, we see a crash is going to be interesting to watch. My thinking about the odds of anyone actually calling a crash is that the odds must be small, but then I watched Marty Zweig do it on Wall Street Week in 1987, only to then watch utterly dumbfounded on Monday after his Friday night call as it occurred.