There are two defining moments from late last week - an incredible rush to safety, and a washout in terms of market breadth.
There are many ways to watch for extreme moments of risk-aversion. One sign of that came from Rydex mutual fund traders, as they were three times more likely to invest in a "safe" fund than a "risky" one. But in the bigger scheme of things, Rydex funds are small potatoes. The Treasury market is not.
And in that Treasury market, we saw a huge rush to one of the safest of all instruments - the three-month T-Bill. Over a two-day period, the yield on T-Bills dropped by more than 20% (near Thursday's nadir), which means that there was a big demand for those Bills. Like all credit, when demand is strong and supply is restricted, then prices rise and yields fall.
That two-day decline was one of the steepest in five decades. Using data from the Federal Reserve for secondary market rates on T-Bills, I could find only two other times since 1950 that yields dropped so much in such a short period. Those two times were February 24, 1958 and September 17, 2001. Both led to an imminent halt in selling pressure in equities (or very close to it in 2001), and the S&P 500 was about 8% higher a month later both times.
That rush to safety was accompanied by traders dumping shares at a record rate. NYSE volume set a record on Thursday, and the past two weeks have seen several days with volume nearly as high. Large share turnover in the midst of a decline is typically a mark of a bottoming market.
Going back to the 1960's, I looked for any time total NYSE volume was at least 50% above its one-year average for at least five out of the past ten sessions, AND the S&P 500 was at least 5% below it's highest point of the past year. Looking ahead three months, the S&P was positive 90% of the time (92 out of 102 days) with an average return of +7.6%.
Much of that volume was traders wanting to get out of their shares, and selling at any price. By Thursday, a phenomenal 1,132 stocks had hit new 52-week lows, the second-most in history.
Expressed in terms of total stocks traded, that comes out to 33%. There have only been three times in the past 20 years that more than 30% of stocks hit a new low on the same day - 10/19/87, 8/23/90 and 8/31/98. Those were exceptional times to initiate intermediate-term long positions.
Also near a couple of those dates, we saw extraordinary one-day reversals on heavy volume, and brokers exploding out of one-year lows…just like Thursday. Fundamentally, there are many reasons to expect more bad news and possible selling pressure to come. And technically, the markets look quite weak. But looking at some of the intangibles, a good argument can be made that despite some likely short-term testing of Thursday’s low, that testing should succeed and result in a one- to three-month recovery.