Anatomy Of A Market Collapse

Tyler Durden's picture

Via Michael Naso of FBN Securities,

On August 14, I penned a Daily Missive which outlined the various fundamental and technical characteristics of each of the three stages of a standard rally such that one could use the blueprint in identifying an imminent top which I officially called for on September 7.  The piece received more positive feedback than most such that the 6.6% drop in the S&P 500 from the September 14 peak merits a similar commentary on the different phases of a market pullback.  The chart below leverages statistics compiled from the prior decade from various selloffs (i.e. > 7%) which have produced consistent patterns that help traders ascertain the potential depth and duration of the current downward move:


Negatively skewed prices mark a key hallmark of selloffs in that stocks descend much faster than they rise.  Although the duration of a rally may last months or possibly years, a soft market may only exist for a few weeks or less.  Consequently, when a decline lasts for several months or longer, such as the collapses of the Dot Com bubble and the financial crisis, shares suffer massive dislocations.

No sustained drop in equity prices ever fits perfectly into one of these three pockets; however the current pullback appears close to crossing from Mid-cycle to Exhaustion.  The average monthly NYSE Closing TICK has dipped to +87 which I would classify as oversold albeit not excessively so.  This represents my most reliable buy signal such that without this trigger, I will remain negative for the days ahead even though the average intraday TICK has fallen solidly below +15.  Open interest has now increased by 150K E-Mini equivalent contracts over the prior two sessions indicating that long-short managers have panicked somewhat and subsequently reduced the beta of their portfolios.  The average intraday range over the prior week has increased to over 20 handles while the difference in intraday volatility between the cash index and the E-Minis decreased sharply yesterday.

Fundamentally, earnings have stumbled, but have not worsened as we have progressed through the reporting season.  The economic data has improved, but I anticipate a negative inflection point in these statistics as the effects of Hurricane Sandy and the fiscal cliff start to make their presences felt over the next several weeks.  Most analysts foresee the FOMC will supplant Operation Twist, which expires on December 31, with unsterilized Treasury purchases totaling $45B.  While the fiscal cliff looms as a massive exogenous shock into year end, additional selling may entice buyers with attractive valuations since Congress and the President still has nearly two months to arrive at some resolution.  I expect the risk associated with the event will not heighten dramatically until after the Fed meeting on December 12 such that investors would judge a forward P/E that drops to 12.0x in the near term as reasonably cheap to engage in bottom fishing.


Extrapolating the current landscape from this historical reference yields a market not too far off from a significant trough such that I currently estimate a bottom for the S&P 500 between 1355 and 1360.  For many, the current index level is close enough to this target to start picking away from the long side.  I am a bit more demanding when calling for an official turn, such that I will use my aforementioned test associated with the average monthly NYSE Closing TICK as my guide.  Fundamentally, if and when I do call for a reversal, it will be modest and cyclical within the context of a larger pullback that arises from a butting of heads in trying to assuage one of the most serious fiscal crises facing the Federal Government in its history.

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GetZeeGold's picture



Better drive home....we're too screwed up to walk.


disabledvet's picture

I thought you were going to the gym for your "work out"? back so soon?

Spirit Of Truth's picture

The stock market is currently following an analogous pattern to the 1929 and 1987 stock market crashes. If the parallel holds true, then we are about to enter a free fall:

The question is: Why?

Let's hope and pray it's just Greece to worry about.  My concern is high regarding Syria and the potential for all-out war to erupt in the Middle East:

Chupacabra-322's picture

@ Spirit Of Truth, "then we are about to enter a free fall:"

Got news for ya, we're already "off the cliff" and in free fall speed.  Rule number one.  Remember, these Criminal Politicians talk in double speak.  Whatever they say, think and interpret in terms of exactly the opposite. 

holdbuysell's picture

"Subprime is contained" - Chairman

I am more equal than others's picture

While the fiscal cliff looms as a massive exogenous shock into year end, additional selling may entice buyers with attractive valuations since Congress and the President still has nearly two months to arrive at some resolution.

Gee, a whole two months.  I feel secure knowing that politicians are serious folk and willing to make hard decisions.  /sarc off

What possible solution is there to the massive debt?  The Wiermar Solution - Bernakes a studen of history of the depression.  Does that includes Germany's?

eatthebanksters's picture

Aslong as Bernanke keeps printing there won't be a top...just sayin'

TruthInSunshine's picture

As a factual matter, measured in real terms, we're already in a depression. The majority of MSM watching sheeple could never realize this (cognitive dissonance). Peope don't understand that the 47 million Americans on SNAP (as well as the 1 in 4 Americans on other direct transfer payment government assistance programs) are the new soup lines that were seen in the 1930s. Most people believe that the unemployment rate is what the MSM headlines say it is, when in reality its close to 25% (using U6 calculated the way it was prior to 1994, when the real manipulation of employment data began), and the compensation of those Americans who are working, whether full or part time, and with or without benefits, is stgnant or falling in real terms.

Governments are papering over the real decline in productivity, while papering over (or up) the real decline in consumption, through credit/debt/fiat expansion, and in the process of this massive increase in indebting themselves & their citizens, governments all across the globe have already ensured the depression will go on for some considerable time.

As this takes place, governments are also ensuring that the fall will not only be inevitable, but will be far steeper than it would have been had they let they let market based mechanisms continue to purge the toxins in the system (akin to letting the forest fire burn, so that the scrub and dead wood be consumed), rather than prop up the diseased institutions and mark assets (or liabilities) on balance sheets to unicorn levels.

The majority of people won't realize that everything I've mentioned is what's actually happening until either their standard of living falls at a pace that's so significant that it hits them over the head like a hammer and/or creditors attempt to call in their notes and other debt/credit instruments.

As these things are realized and the faith in the system is lost by the majority, those who do have equities or other assets in the form of ostensibly redeemable paper instruments will rush to liquidate them in order to trade the proceeds for necessities of life, and this is what will produce the 1932-1933 style market crash (part of the crash will be attributable to a generational/demographic trend whereby those about to retire or those retired attempt to convert more of their paper assets into purchasing power for necessities, as well).

The entire gobal economy is a true ponzi scheme built on pillars of faith in government printed fiat that has zero value and is whose volume is spectacularly disproportionately higher than the amount of real, inherent wealth it's alleged to be correlated to or with.


prains's picture


very true words, the initial 2008 crash caught the boys at the helm napping and in order to delay long enough to arm,drone build, train suppression teams TIME was the necessary ingredient. What's even more ridiculous is the majority of Amercians still believe there is a RED/BLUE paradigm still operating. Since Glass Steagall was repealed by Clinton the entire operation has been corporately controlled to crush workers pensions and living standards. A hungry,angry,broke,over indebted, dispossessed (and young) unemployed workforce can eventually be manipulated into a long protracted oil seeking war. This too takes TIME to build both the propoganda and disenfranchised energy required to false flagg a skeptical populace to do the bidding of major corporations.

if the last 30-40 years is calculated around the rise of american corporate control of government and their singular need to control the globes diminshing energy supplies in order to survive, the entire plan starts to lay out quite clearly.

leftcoastfool's picture

"Deficits don't matter" - V.P. Dick Cheney

madcows's picture

we are not monitizing the debt


GetZeeGold's picture



I thought you were going to the gym for your "work out"? back so soon?


that was someone else...and I did warn him against it. If you're really going to do this you need to work on your focus.

DeadFred's picture

You ain't seen free fall if you think this is free fall. It can get lots diceier than this but this is the type of environment that can lead to real exciting times. I half expect today to be one of those Wile E. Coyote moment where the market hold still for the day before realizing there is nothing but air below. I have a bad feeling about this weekend, Monday could be memorable. (my bad feeling plus $1.50 can still get you a cup of coffee at the Starbucks down the street)

falak pema's picture

You know President Hollande evoked that to explain current uncertainty in the market according to French media last night. It surprised me to see a french president being quoted about potential war in IRan as reason to explain current market slo-down...normally these guys never talk real issues before they occur, only afterwords to say it was an unforseeable expense...bla bla bla.

Made me think was he raising a false flag to divert debate from his own weak economic package...but I wonder if Obammy has not given the green light on Syria/Iran/Lebanon cauldron, after all. 

We'll soon find out.

vast-dom's picture

I call for SP at 650! And that's using those purdy charts too! have no clue nor do I....well I do....but....the QExcrement......

Robot Traders Mom's picture

"I currently estimate a bottom for the S&P 500 between 1355 and 1360."


Not sure how that equates to the anatomy of a market collapse, I tend to agree with you that we could see 50% off the recent highs.



falak pema's picture

better crawl home, we're too wormed to drive.

Didn't have my apple 'cos its full of worms, and now they love my insides. 

Is this what a rotten apple feels like? I am all a goggled. 

HD's picture

This guy got lost on the way to the CNBC site...

TideFighter's picture

Next buy sig: Hillary 2016. Forward.

LawsofPhysics's picture

Where is this "market" they speak of.  Stop it, just stop it already.  There is no fucking spoon and there is no "market".  Technical analysis of the "mark to fantasy" accounting numbers doesn't mean shit. 

Henceforth, there will be a "paper" price and a physical price.  hedge accordingly.

SilverDOG's picture

Paper is as paper does,...Bitchez.

krispkritter's picture

It's good for fires and covering the bullet holes in the walls...

malikai's picture

The market will win. Even if it dies in the fight.

Count on it.

aerojet's picture

But it was the truth--real people need real things and the markets were created to support that, not to support a bunch of bots making sub-microsecond trades and politicians maniuplating numbers to paint some rosy picture.  We're headed for a major collapse, we've been headed for it ever since 2008, and papering over reality isn't going to change a damn thing.

TideFighter's picture

The designated driver flew home in his helicopter.

pods's picture

With Groupon puking out the window!


cowdiddly's picture

ZZZZZZwake me up at SP 600 then after the market is priced right, I might try to frontrun an alogo.

Cursive's picture

I agree that any reversal will be modest and tempororay.

AU5K's picture

Why do i get the feeling all the bad news that's been suppressed is suddenly going to come out, in order to justify even more government action.

crusty curmudgeon's picture

This isn't brain surgery.

If capital gains taxes will go up sharply in 2013, as appears likely, I'm going to go out on a limb and guess people will sell more stocks before January 1st then they otherwise would.  I'm thinking that might have an adverse effect on the stock market.  Me thinks this, without even considering the other myriad reasons for lack of optimism in the stock market, will be significant.

JPM Hater001's picture

Said it 2 days ago.  You will not believe the shit they will release in the next 60 days.

Elections over ladies.  Looks like it's rape for everyone.

Lost Wages's picture

We all know the "fiscal cliff" is bullshit right? 

SheepDog-One's picture

For that matter, its ALL just bullshit. But everyone still pretending 'I got this!' when last week it was 'Obama win good for stocks, Romney win buy bonds'....LOL already totaly flipped the script on that one. Well, I dont have any money near this machine so they can go do what they want.

overmedicatedundersexed's picture

covered my shorts end of day, now I wake up to a red market ...WTF..I know if I put the shorts back on I am screwed, but but the zh buzz is this is the big one everybody on the down escalator..i must fight the urge to short i must fight the urge..

overmedicatedundersexed's picture

did not short today, ben came thru as I have learned over the last few years..go short be very very nimble. end of day it may break i will tip my toe in for another short but I never learn stupid is as stupid does..con fident I am.

Ljoot's picture

I'm long Debbie Wasserman Schultz.

GetZeeGold's picture



Sick and twisted.......nice.

Oldballplayer's picture

I would be long if the ear plugs stayed in, and as long as I could keep my eyes closed.

krispkritter's picture

Debbie 'Was Her Name' Schultz? "I know nothink!" I wouldn't fuck that with Bernanke's dick...if he had one...

madcows's picture

No, but she'll pork us with hers.  I'm wondering if I spread oralgel around down there if it will ease the pain.

JohnnyBriefcase's picture

Ugh, that's got to be one of the least pleasant images (and audio) ever.

Translational Lift's picture enjoy eating dog shit too??

mess nonster's picture

From the Palm Beach new Times....


One of the major rules of party décor is that you show up to your own shindig. Just don't tell that to Fort Lauderdale Congresswoman Debbie Wasserman Schultz, who skipped her victory bash last night for the national spotlight in Chicago.

She left her supporters, dizzied with political victory, to feed on stale corn chips and goldfish crackers. Not that anyone seemed to care that much. Except us, apparently.

Instead, the party was all about Obama, who defeated M. Willard Romnom last night. And though supporters at the Signature Grand admitted the enthusiasm of 2008 had faded, something more real, more visceral had replaced it. Pragmatism has trumped idealism.

"This time we're not just buying into the hype," said Erin Wood, who had traveled from Dallas for the party. "It's not about his charisma or his immediate appeal. It's faith in his accomplishments and it's now less about the honeymoon period."

But here's to hoping he'll get one this time! With the Romneytrons vanquished once and for all, perhaps a peace will settle over the land, some party attendants mused. "The Tea Party has lost a lot of momentum, which may free up the more moderate Republicans to vote more with their heart and how they actually feel without fear of reprisal," Kyla Cole said.

Such analysis, while we sincerely hope comes to pass, was disappointing for one reason -- it was offered by a surprisingly sober person on a surprisingly sober night. This was a major problem with the Democratic fiesta. Everyone was drinking coffee and tea. It was like you crashed your mom's book club halfway through a rousing discussion of Tuesdays With Morey.

Meanwhile, in a conference room next door, at Broward County Sheriff Al Lamberti's postelection party, Republicans got their party on with beer, meats, and wine. We accidentally wandered into this party at first, under the misguided assumption it was for local Democrats. We suspected something was amiss, however, when we noticed only white people were in attendance. But at least these were drunk white people.

Among the Democrats, it was a diverse, coffee-swilling crowd. This was also confusing, but perhaps it was because the bar was cash-only -- and there wasn't an ATM in sight. (Who plans these things???)

Things began to get desperate among several partygoers.

"I love beer!" explained a forlorn Gene Ouellette.

We all do, Gene. We all do.

But at least at this party -- unlike the one thrown by the Republicans -- there were kegs of vindication to guzzle from.

vato poco's picture

"......'It's faith in his accomplishments (!) and now less about the honeymoon period', [the silly whore] gushed."

Translation: "We're hoping he'll use lube this time!"

madcows's picture

Is that you Janet Nepolitano, or Rosie ODonnell?