- Me, yesterday.  10% ago.

Just to demonstrate that "experts" don't know much more than you do.  Heck, if us "experts" did know, we wouldn't have created this mess in the first place.

Somebody with a bit of pride would pack it in after being so spectacularly wrong less than 48 hours ago.  But shameless self-promotion is the real secret behind staying power on Wall Street, not any actual skill, so why would I stop?

Before we get to today's market action, let me add a few more graphs to yesterday's post on valuation.

Price to book of the market.

Price to sales.

My favourite valuation metric is price to book, especially when I'm hunting for Stupid Value, both because earnings can be ephemeral, especially in a recession, and because it was drilled into my head when I was a young trainee at a fabulous value shop in Toronto.

So, anyways, the market is getting cheap.  I will be looking to add to long-term positions if it continues to get cheaper.

Near as I can tell, the market is selling off into the nonfarm payrolls (NFP) number Friday morning, and perhaps because of the call from FTI Consulting (more below).  With the election out of the way and investors scared out of their minds of a horrific NFP print, sellers banged the market down with impunity as buyers stepped aside.

The official expectation for the NFP print is -200k.  The whisper number, however, is -250k, with a few out there saying -300k.  If you thought that the print could be horrible, why would you buy in front of it? 

It appears that a few macro funds were selling the futures hard, particularly the e-minis.  My traders noted that unlike last month, the selling action today was not liquidation, which was corroborated by what I heard from a few other trading desks.

EDIT - Or at least that is what I thought it was until I read this story

Hedge funds are selling billions of dollars of securities to meet demands for cash from their investors and their lenders, contributing to the stock market's nearly 10% drop over the past two days.

One of the biggest funds, $16 billion Citadel Investment Group, is being asked by several major banks to post additional collateral to cover big losses on its investments, according to people familiar with the situation.

Citadel, which is run by Kenneth Griffin, was until recently considered a possible savior for troubled Wall Street firms. But his biggest hedge fund has fallen nearly 40% this year, prompting the firm to hold conversations with lenders including Goldman Sachs Group Inc., Deutsche Bank and Merrill Lynch & Co. that finance Citadel's trades.

If a big hedge fund is under liquidation, all bets are off.

But let me pimp my book here and tell you why the next big move may be up.

(And let me remind you of my opening paragraph in this post.)

First, problems in the inter-bank market are receding, as one would expect, given that the government has come in all guns blazing to unjam inter-bank lending. 

The TED spread has been trending lower, and is half the level it was a month ago.

And despite the 5% drop in equities on Thursday, 2 year swap spreads were essentially unchanged.

Also, volume has been lighter over the past two days during this 10% decline than it was during the 18.5% upswing over six days beginning October 28.

The second column at the top is the NYSE composite volume.  The third column is the S&P 500 daily closing price.  The fourth column is the daily return.  The first number in the fifth column is the return from the close on October 27 to Tuesday while the second number is the loss over the previous two days.

"Up" is the average volume for the four up days.  "Consolidating" is the volume on the two days when the market pulled back during the six-day upswing.  "Down" is the down volume over the past two days.  "Average" is the average volume. "Up phase" is the volume over the six-day upswing. "Down phase" is the volume over the past two days.

Breadth has been horrible, volume accelerated today over yesterday, and maybe I am making too much of a deal about this, but volume of 5.96 billion shares during the upswing was higher than volume of 5.59 billion during the two-day swoon.  Thus, the market is pulling back on lighter volume, typically not a bearish thing.  It is also nowhere near the volume of 10-11 billion seen at the lows last month.

The other item that may have spooked the market was the conference call after the earnings announcement for FTI Consulting.  Who is FTI?  FTI is a consulting company specializing in litigation, restructurings and bankruptcies, amongst other things.  They thrive in a recession.

I listened to a replay of their earnings call today.  On a question about guidance, the company gave this response.

Management extrapolated their thinking about the environment later in the call when asked if they believed more problems were coming.

I would just say two things in general. Number one, there are several industries that have their tentacles all through the country that you hear just as well as we are that if there are only a few players in them. If they go down, the networks that will go down around them will be staggering. And I think we have to be careful that if they do go down, it's going to be quite a jolt to the system.

Secondly, I think there are much deeper problems in Europe even then what we're seeing in the papers. I think that clearly that could have an influence on currency. It could impact us. That's one of the reasons we're trying to be so cautious in the overall impact of currency. And if some of these things happen, it could be very country centric over there to where you have a systemic problem, but it races through the country not just an industry.

Does the management have any great insights into the macroeconomy that is not already well known?  I have no idea.  But if their worst fears are correct, then the market is going a whole lot lower.

I believe that negativity and pessimism is extremely widespread.  I have heard from investors that they think unemployment could get as high as 10%.  Again, they might be correct, but the bar is being set really low.  If the news is merely bad as opposed to catastrophic, there could be a significant run in stocks.

I am not being dogmatic, however.  I have both trading and investment positions.  I am currently long in both.  If we are going lower, I will liquidate my trading position and add to my investment positions whilst putting a hedge onto my longer-term holdings.  I think we are in the process of putting in an intermediate-term bottom, but I will cut my losses if I am wrong.