Did anyone see that one coming?

We had written in recent commentary that given the course of the US markets since July 2006, some type of correction was most likely in the offing, and that it would most likely be swift and explosive.  We maintained, however, that when the move might occur and of what magnitude it might be was anybody’s guess.  Let us be the first to say that we would not have believed yesterday’s price action had we not watched it with our own eyes.

Here are several of the statistics being cited with regard to yesterday’s decline:

- Nasdaq Composite closed down 96.66 points, or -3.86%.

- NDX closed down 74.32 points, or -4.06%.

- DJI closed down 416.02 points, or -3.29%.

- SPX closed down 50.33 points, or -3.47%.

- VIX closed up 7.16 points, or 64%!

- The largest single day point decline in the DJI and SPX since the market reopened following the Sept. 11 attacks.

- The largest single day percentage decline in the DJI and SPX since March 2003.

- Trading curbs put in place on the NYSE to restrict program trading.

- Only 3 stocks in the S&P 500 index closed higher.

Take a look at this chart of NYSE Up Volume vs. NYSE Down Volume.

Each set of ascending lines represents NYSE up volume by day (green) and NYSE down volume by day (pink).  The shaded area is Tuesday, Feb. 27.  You can barely see the line representing up volume, because there were no buyers whatsoever.  Everyone was selling.  This was a panic situation, and in our view does not follow the general pattern of a healthy correction of a market which is overextended to the upside.  Generally, when we see a UVOL/DVOL ratio of 2.5:1 in either direction, that is fairly significant, i.e. the side with the higher volume must be respected on an intra-day basis.  Yesterday, Feb. 27, this ratio was over 100:1 in favor of the downside.  Wow!

Where we go from here is anybody’s guess, but we are watching for more downside, at least in the short term.  Our trading and position management will represent this bias in client accounts.