Another Wild Ride

by Larry Levin

It has become a daily mania: the indices plummet, rally, plummet, and rally again. The Dow started with a 500-point range trading lower, and then rallied 507-points, fell 268-points, and then exploded 576-points from the intra-day afternoon low with a range of 816-points. Holy smokes! The S&P range was also a massive 82-points.

The early sell off was due in large part to the Philly Fed index, which measures economic activity in that area. Moreover, it is a barometer of national economic strength or weakness. The Philly Fed index plunged to a reading of -37.5 in October from a +3.8 in September. It was the sharpest one-month decline in history and marked the worst overall reading of this index since 1990.

No surprise here; the decline was much larger than the expected drop to -11.0, which was the best GUESS of economists in multiple surveys. That's a sweet job - economist. You can be wrong month after month, after MONTH, yet still command a hefty paycheck. Once again, the so-called experts were not even close to being correct. Weathermen predict rain better than economist's crunch numbers.

Although the Philly Fed index was bad, the industrial production data was worse. The Federal Reserve reported an astonishing 2.6% drop in industrial production in September, the biggest one-month drop in 34 years! Yep, it's going retro - back to 1974.

And I failed to mention yesterday that the New York region's manufacturing data was in a word: abysmal.

The cold hard facts of the data now make it clear that manufacturing has made a sharp turn for the worse, and the folks at Action Economics agree - In total, since August, the economy has shifted from a profile of remarkable resilience to one of freefall at a pace that is consistent with a sizable, rather than mild, recession.

There is some goods news out there though: consumer prices are falling. Over the last few days we've also received the CPI & PPI reports, which show prices declining. A few weeks ago I wrote in this blog that the coming recession would take down oil prices, as well as other prices, due to a shift from consumer price inflation to asset deflation. And asset deflation is now here in spades, spreading like a malignant cancer from one economic cell to another.

Tomorrow's potential market moving reports are housing starts and consumer confidence. If they are not absolutely horrendous and there aren't any bombs that suddenly blow up from nowhere, like a huge hedge fund reporting bankruptcy with connections to everyone on the Street, then the market could advance further.

Although everyone on the major stock market channels have been wrong 100% of the time as the market made its swan dive, this time they could be right, albeit temporarily. They are saying (as usual) that the bottom is in. Well, it looks like we tested that low today, which led to a crazy rally despite to sickeningly bad economic news. If it continues, look for a pop to 1050 - 1080.00.

However, if a hand grenade is lobbed into the market soon, the resulting swoon should take the S&P to 800.00 - 770.00.


Previous Day's Trading Room Results:

Trade Date: 10/16/08

E-Mini S&P Trades*
(before fees and commissions):


1) OTF sell @ 10:30am at 881.25 = -2.00 (1 lot)

2) Engf buy @ 11:30am at 908.00 = -2.00 (1 lot)

3) Algorithm positions (6)...combined total...+6.25

ZB (30 Year Bond) Trades*
(before fees and commissions):


1) Sell @ 9:27am at 114.045 = +2.5 (1 lot)

2) Sell @ 11:31am at 114.045 = -1.5 (1 lot)...total...+1.0



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