Periods of Financial Distress: the Swinging Dow

Periods of Financial Distress are also periods of significant swings in market price and sentiment, often intraday. Here is a list of the largest intraday swings in the Dow Jones Industrial Average by points and by percents.

We can vividly recall one day in July 2002 when the Dow was down over 600 points and a short term bottom was made, when the money honey herself Maria Bartiromo bared her milky neck and pursed her lips to say 'capitulation,' at which point the Dow turned right around and we had a buying panic rally that took us back into the green in the period of about an hour.

Here is a chart of that period, that significant market bottom.



Here is a view of the same market bottom showing the two month lead into it.



Here is the 2000-2002 bear market shown with an SP 500 chart, from the second high in September 2000 which the SP made after the initial 2000 decline



Here is the list of the biggest intraday swings in the DJIA which we received from Barry Ritholz.



For reference, here is the decline in the SP 500 from the recent market top in October 2007

Periods of Financial Distress

As regular readers will remember, we have a mathematical model of 'periods of financial distress' called CrashTrak. We bring it out in market moments in which we have had a long ramp up to a decided market peak, and then a decline that achieves at least 10 percent. We gave an initial nod to the developing crash scenario which we are now in back in January of this year.

Crash: the Rally that Fails as a Hallmark of Major Market Dislocations

Market 'crashes' are low probability events that are notoriously difficult to predict accurately. CrashTrak did predict the tech crash of 2000-2. Unfortunately we were not able to forecast the great stock market reflation of 2003-2007 which the Fed had engineered until it was well underway.

This points out the weakness of using technical analysis in forecasting markets priced in fiat currencies that can be used to mask the actual market dynamics of real values, especially if the deflators and actual rates of inflation have also been rendered opaque. Simple models that worked in the past may not work in this environment of economic obfuscation.

Nevertheless, it can be used successfully if one couples technical analysis with fundamental analysis. The movements on a stock chart are an abstraction that represents an underlying marketplace of individual transactions. There are other ways to assess these transactions to obtain enough data to forecast a 'crash,' again reminding the reader that forecasting a low probability event is notoriously difficult. The flow of money in the market is one of these tools which we use, and is listed on a number of the charts which we provide almost every day.

We will be publishing updates of CrashTrak now that we have reached a second threshold of probability with the dip of the major indices below the -20% decline from the top level again.

The underlying mechanics of crashes is interesting and informative. Here is one of the best descriptions of how a crash happens that we have found, quoted in a paper by Barkely Rosser. For those of you who are students of market dislocations, Charles Kindleberger is a 'must read.'

Falling from the Period of Financial Distress into the Panic and Crash

In 1972, Hyman Minsky described the "period of financial distress," in a paper in a journal that no longer exists (Reappraisal of the Federal Reserve Discount Mechanism, vol. 3, pp. 97-136), "Financial Instability: The Economics of Disaster."

Charles P. Kindleberger picked up on this and followed Minsky's analysis in his famous book, Manias, Panics, and Crashes: A History of Financial Crises... The period of financial distress is a gradual decline after the peak of a speculative bubble that precedes the final and massive panic and crash, driven by the insiders having exited but the sucker outsiders hanging on hoping for a revivial, but finally giving up in the final collapse.

According to Appendix B of Kindleberger's 2000 edition, 37 of the 47 great historical speculative bubbles exhibited such a period before the final crash...

Federal Regulators Take Over IndyMac After a Run on the Bank

Reuters
Regulators to run IndyMac until buyer found
By John Poirier and Rachelle Younglai
Friday July 11, 8:10 pm ET

WASHINGTON (Reuters) - Banking regulators on Friday swooped in to take over mortgage lender IndyMac Bancorp Inc, the second-largest bank failure in U.S. history and the fifth bank to close this year.

The Federal Deposit Insurance Corp estimated the cost of the California-based bank's failure to its $53-billion insurance fund at between $4 billion and $8 billion and will run the bank while it looks for a buyer.

The takeover of IndyMac capped a tumultuous day for U.S. financial markets that saw stocks slide on a surging oil price and renewed fears about the stability of the top two home financing providers, Fannie Mae and Freddie Mac.

IndyMac's primary regulator, the Office of Thrift Supervision, blamed comments by New York Democratic Sen. Charles Schumer for causing a run on the deposits at the largest independent publicly traded U.S. mortgage lender.

Schumer responded quickly on Friday, blaming the OTS for not doing its job and for letting IndyMac's loose lending practices continue.

The OTS said depositors have been withdrawing cash at an elevated pace since late June, when Schumer questioned IndyMac's ability to survive the housing crisis.

In the following 11 business days, depositors withdrew more than $1.3 billion from their accounts, the OTS said.

"This institution failed today due to a liquidity crisis," OTS Director John Reich said. "Although this institution was already in distress, I am troubled by any interference in the regulatory process," he said.

The successor bank run by the FDIC will open for business on Monday. Over the weekend, depositors will have access to their funds by ATM, other debit card transactions, or by writing checks. They will have no access via online banking and phone services until Monday.

Earlier in the week, IndyMac said it was unable to raise new capital, would slash staff by 60 percent and had stopped making home loans. Its stock slid precipitously in the past week and last traded at 28 cents on the New York Stock Exchange, down 95 percent from the beginning of the year.

The FDIC insures up to $100,000 per deposit and up to $250,000 per retirement account at insured banks.

At the time of closing, IndyMac had about $1 billion of potentially uninsured deposits held by about 10,000 depositors. The FDIC said it would pay those depositors an advance dividend equal to 50 percent of the uninsured amount.

OTS told a conference call with reporters that it did not expect significant market impact from IndyMac's closure as the firm is not a systemic institution and does not have numerous counterparties. Reich also said he did not expect a larger thrift to fail.

Former FDIC official Ann Graham said it was not unprecedented for the FDIC to start running a bank after it fails. "It happens when they need to move more swiftly with the closing than they can move with a potential sale," said Graham, a law professor at Texas Tech University.

"They don't have to sell the institution over the weekend," she said. "They have the time to shop around." (Put it on Craigslist - Jesse)

Graham said the FDIC has the authority to operate an institution for two years but expected the agency will dispose of it much sooner than that.

(Reporting by John Poirier, Karey Wutkowski, Rachelle Younglai; Editing by Toni Reinhold and Braden Reddall)

US Dollar Long Term Chart with Commitments of Traders as of July 8 Market Close

US Dollar Weekly Chart with Moving Averages



Ugly Selloff in the Long Bond - Continuation with concurrent Dollar and Stock declines Implies 'Capital Flight' from dollar financial assets