The Crescendo Sell-off, its Relation to Universal Awareness

The crescendo sell-off is often preceded by intensified and universal awareness of economic strife. Two important measures of consumer confidence showed dismally this morning. Both the RBC Cash Index and the University of Michigan/Reuters Consumer Sentiment barometer indicated consumers are well-stressed and aware of economic issues.

(Stocks in this article: NYSE: GE, Nasdaq: FRNT, NYSE: BSC, AMEX: DIA, AMEX: SDS, Nasdaq: QQQQ)

Market legends the world over talk about the clear cut signs of a bottom and their wisdom often cites the broader awareness of trouble reaching Main Street as a sign to buy. Jim Cramer, for one, points to the news reaching the front cover of the New York Times as a clear cut signal. Ask yourself why this would be so...

The Greek believes the global consciousness, driven by the force of major media and Internet penetration, plays a role. So, as things get bad for Wall Street, and investors and media start to notice capital destruction, the viewpoint that "things are getting bad" pervades the global consciousness. We all become aware of it. Eventually, it pervades so deeply into the common man's thoughts, that it intensifies stock market sensitivity to bad news. I believe this is the reason for crescendo sell-off. Sure, on occasion a sell-off precedes the fundamental reasons for decline, and we could argue how important 9/11 was to the depth of the last economic contraction. Imagine if 911 occurred before dot com stocks started giving way. That would likely have offered an example of crescendo sell-off preceding economic softness.

However, most economic contractions get started before the crescendo sell-off, thus likely playing role in its eventuality. So, this intensified sensitivity seems to amplify volatility in the stock market. Over the past few months, we've seen increased volatility in the broader market, with three digit moves in either direction on any given day. And, the percentage moves were not negligible either.

We may escape the crescendo this time though

Over the past week or two, the market has shown another characteristic, that of resilience to bad news. We think this may be a sign of a defusing of risk of crescendo event. At the same time, global awareness of economic strife is clearly intensified, so how is this so...

Today's measure of the RBC Cash Index showed it dipped to an even lower level as seen in the graph here. Also, the University of Michigan Consumer Sentiment Index collapsed to 63.2, where analysts were expecting it to slip less dramatically to only 68.0.

We should not diminish the concrete factors behind consumers' lack of confidence. This precipitous decline clearly reflects the real pressures on consumers, including higher energy and food expenses, and other costs related to the depreciating dollar. It also reflects the loss or counter of the "wealth effect" as home values decline.

Still, within the factors driving such a steep drop in today's measure, is fear. When your colleague at the water cooler, your neighbor mowing his lawn, your doctor checking out your bum knee, your drinking buddies at the local brew pub, and the lover of the moment all agree, then there is universal awareness. This universal consciousness that things are actually pretty bad has even reached the Treasury Secretary and the Federal Reserve Chairman! Imagine that!

So, the market remains sensitive to a Bear Stearns (NYSE: BSC) debacle or the bankruptcy of a major airline. (In case you have not noticed, three have gone under in the past week and a half, including today's disclosure from Frontier Airlines (Nasdaq: FRNT). On an aside, FRNT happens to be a name I highlighted as a sell candidate to my old masters some years back.) Now, back to topic! We remain sensitive to risk.

Up until today's news from General Electric (GE) and the barometers of consumer sentiment, the market had recently taken to shrugging off poor economic report after difficult to swallow ECB decision. There exists a thing called seller exhaustion, but its more proper description might be "the discounting of risk to a point where its well embedded into valuation." That's where we likely are now, until the economy shows us things are worse then expectations, if they are. Today's selling (counter to this trend) is exacerbated by the day itself, being Friday... Bad news on the day before the market's time off leaves capital preservers wary. So, they take money off the table.

Even so, The Greek has noted the market's resilience to bad news. The importance of this seems clear. The risk of crescendo could likewise be defusing. So, just as the barber asks you how your stocks are doing with a half smile indicating his perverted pleasure in your loss, instead of becoming annoyed, consider the significant relation between universal awareness and the market bottom.

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