Yesterday's intraday action in the S&P 500 index proved to be one of the more difficult sessions to navigate as the repeated testing of a key level around 1430-3 appeared at several points to have held but then cracked at the end of the session. The index closed down 1.8% and registered a new closing and intraday low since the more recent turmoil began in July.

The next level which may need to be tested, perhaps in a hurry is the 1380 level which marks the lows from the earlier sell off in late February/early March.

The troubles in the credit markets continue to surface and this is a particularly treacherous time to be position trading and to that extent I have no specific stocks today. I plan to spend at least a few minutes of today re-reading elementary statistics texts on why one cannot infer much about the future from previously observed correlations and why the normal distribution is not a good framework for calculating risk probabilities.



The investment banking sector (^XBD) seems to be unable to stabilize and continues to drift lower. Those that listened into the Goldman Sachs conference call in Monday's session, when the company acknowledged that some of its funds had lost about 30% of their value in recent weeks, may have had a hard time with squaring the notion that a statistical arbitrage strategy which was fundamentally flawed could somehow now be providing those injecting new capital with a great investment opportunity.



Reviewing the chart for the CBOE Volatility Index (^VIX) one could make the case, as some analysts are doing, that the markets have been transitioning during the last few months from one volatility "regime" to another. Such a regime shift, as it has been described by some academics, points to a radical change in the outlook for market conditions based on a fundamental change in market psychology.

The 1999-2002 period was a period or "regime" that saw substantial and prolonged high volatility in contrast to the 2004-even up to early 2007 period which was characterized by much more subdued volatility.

The current spike appears not be the relatively isolated phenomenon that the June/July 2006 or the March 2007 were and the heightened risk dynamics and uncertainties may be with us for an extend period.



New concerns emerged yesterday about the "robustness" of the consumer sector after downbeat outlooks from WalMart and Home Depot. This is where the fallout from the financial sector will begin to impinge on asset allocation decisions made on the more traditional (and saner) quantitative modelling of equitiy performance based on the quality of future earnings for the corporate sector.

The consumer discretionary sector fund XLY made a new low for the year and could be headed towards the $31 level which was seen in July 2006 when the markets also were recovering from another financial scare - this time largely based on a different variation of "low risk" quant inspired strategies. That time the problems were caused by the downgrading of GM's debt and the large investment by Kirk Kerkorian in the common stock. Yet again this did not turn out exactly as the convertible arbitrage specialists were expecting.



Clive Corcoran is the publisher of TradeWithForm.com, which provides daily analysis and commentary on the US stock market. He specializes in market neutral investing and and is currently working on a book about the benefits of trading with long/short strategies, which is scheduled for publication later this year.

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