September 3, 2002 7:00 PM All Stocks Drop Brady Willett
It is a rare occurrence when investors become so united in their selling that ‘all stocks drop’. To be sure, during the current bear market there has always been a collection of stocks that traded higher when the broader markets dropped. That was, of course, until July 2002, or a period when even gold stocks were be hammered because the markets were void of liquidity.
What was the end result of the July 2002 sell-off?
With the help of numerous Wall Street professionals, it can be said with a high degree of assurance that the July sell-off represented a ‘bottom’ in the markets – a psychological launching pad for stock market gains. And although the perception of a bottom is not a fundamental reason in and of itself for the investor to run out and buy stocks, it is the reason why the markets rallied nonetheless.
That said, today’s action in the markets would suggest that the previous rally was built upon shaky ground. To be sure, the carnage on the street today was not selective but widespread, and with the exception of gold stocks (XAU) ‘all stocks dropped’.
Accordingly, the psychological bottom that helped propelled stocks higher yesterday is forcing prices to collapse quickly today. Why? Because the directional volume of the markets has turned abruptly negative. More specifically, the volume trend has turned negative without the help of any new information (today’s ISM Index was a little lower than expected and downgrades to some key blue chips didn’t help matters. Nevertheless, these events in and of themselves would not seem to be a reason for ‘all stocks to drop’). What this suggests is that the previous rally harbored negative sentiment, but the rally had to be exhausted before this sentiment bubbled to the surface. In sum, the previous rally was a bear bounce (aka. suckers rally, bear rally, etc).
As suggested in mid-August, ‘watch the directional volume heading into September’. Suffice it to say, there wasn’t much to watch - it was negative all day. This negative volume trend is telling of negative sentiment in the marketplace, and this suggests that the ‘top’ is in (it was largely assumed that a ‘top’ was in before this week -- now it is fairly certain).
Not only did traders and investors take vacation in August, but bears did to. However, they all went back to work today.
