March 13, 2001

Related Stories

Monday Meltdown: Full Coverage

Investors Don Rally Caps, But Will Markets Follow Suit?

Rubles, Anyone? Mulling How Low Tech Stocks Can Go

Afraid Yet? Options Measures Say Fear Hasn't Swelled

Will it ever end?

Folks are calling Monday's meltdown a late-day panic selloff. It might be just that, but I've always equated panic with high volume, and I certainly don't call 1.2 billion shares on the New York Stock Exchange high volume. Nor do I call just over 2 billion shares on the Nasdaq high volume.

Oh, sure, these numbers are higher than we've seen in the past few trading days, but they are not extreme. And extreme volume is what I associate with panic.

Take a look at the chart of Nasdaq volume from last April. Ignore the peak volume just to the left of the circled volume, as that was the day the Microsoft decision came out, but notice how that peak volume that I circled stands out. That was the April panic low.

Now have a look at Monday's volume compared with the past month or so. (I use February onward only because that's when the Nasdaq began counting volume differently, so we're comparing apples to apples.) You can see that Monday's volume isn't even as much as we saw a couple of weeks ago.

Let's take the oscillator. With the way the numbers line up (please refer to last Monday's column for an explanation of this), the oscillator says we can get a lift as we are still in oversold territory, having never even reached any sort of overbought reading.

In addition, the put/call ratio reached quite a peak reading Monday (91) and, on a 10-day moving average, is still hovering in an area from which we have seen rallies come.

And the Volatility Index, or VIX, did skyrocket after these two big down days, so on a short-term basis, there was some measure of fear -- at least for the options folks.

But here's the problem: The intermediate-term indicators, such as the McClellan Summation Index and the 10-day moving average of new highs minus new lows, are not in any position to call for a sustainable rally. These two indicators need to be heading upward for us to have a sustainable rally, and right now they are both still heading down.

But let's get back to the panic that wasn't apparent to me in Monday's slide. Too many folks are looking for some sort of panic capitulation. Well, that's not going to happen. We are beyond that phase of the game now. Capitulation is what comes when a move is fast and furious. These moves are no longer fast and furious; they are slow and grinding.

I say slow because the volume is not there. I say grinding because it's an everyday occurrence now for the market to rally a bit and come down some more. This is what I call the give-up phase. It grinds investors down. It's the period when investors begin to realize that maybe tech really won't come back, and they begin to sell. But they sell slowly. Let's not look for the big panic whoosh down anymore, as I don't believe we're going to get that sort of clean-out bottom. Too many folks still feel it's too late to sell, so we're not going to get that panic in here.

Can stocks rally after this two-day debacle? Yes. But the key question is, Can they go anywhere on the upside? The answer is still no.

This unwinding of the excess will take time, and there is not much Alan Greenspan or anyone else can do to change that part of the equation.

Note: I inadvertently left out the ticker symbol for the New York Financial Index in Monday's column. On most services, you can find it as NF.X. And it handily broke that uptrend line in Monday's action, having closed at 578.