Monday, August 8, 2011 11:14 AM – Stocks Down – Bottom Near or is it 2008 Again?

The S&P 500 is off 3.5% this morning, about the same as Europe and Asia. Gold is up $57 today. Bonds are better so far.

The big news is the downgrade of US Treasury bonds from AAA to AA+ with a negative credit watch, signaling that further downgrades might follow.
Moodys’ and Fitch, the other two big ratings agencies held to their AAA rating for the US but have said that downgrades are being considered. Egan-Jones, the best ratings company downgraded US debt July 26. I think AA+ is still much too high.

Volatility is spiking up to 40, a level that over the past 25 years has usually marked a selling climax and an immediate rally as in the bottoms in 1998, 2002 and 2010. The exceptions were 2001 and 2008. In both cases the bottom was till months away. Note in the chart below that today’s spike at the far right should be 43, not 32.
Click on chart to enlarge.

We also came 2-3% away from what I thought was as low as we might go and are now gaining ground.

This is not 2008. No sizable financial institution is going under. Corporations are awash in cash. Our financial system is not hanging by a thread as it was then.

But memories are short and people are selling first and asking questions later. We will stick to our sell discipline of selling any holding that declines at least 15% in a six-month period.