Watch VIX Today

I think VIX will cross 30 today and on a bit of panic will set a new market low. This low will be in the same range as the market low on July 15 at around SP500 (1180-1200) and will set up a reasonable period of market recovery. This is a continuation of the bottoming process that started back in March, with the Bear Stearns takeover by JPM. Because of the severity of the financial crisis, and its continuing ripple effects around the world, this bottoming can take a long time.

If we remember back to the 2000-2003 market decline at the end of the Tech boom, there was ripple after ripple that unwound separate excesses, from the Teleom sector, to the Internet sector, to the Large Cap growth sector, to Enron and Tyco. One after the other of these segments came apart until all the previous excess was exhausted.

This is what we are seeing again. It started with the riskiest of the mortgage companies (those specializing in sub-prime) and has continued through home builders, banks, insurance companies and then spread overseas causing export declines in Asian and European economies, leading them to recession and market declines (check out China, FXI, which has declined by 70% from its peak last year). Now, the energy, metals and commodities sectors, which were overheated, are getting taken down because of the reversal of the Yen and Euro carry trades against the US dollar (with the strengthening dollar). The Hedgies are dumping their commodity positions and some of those hedge funds will crash.

But, we are getting closer to the end of the chaos. It is hard to think about any other sectors that were run way up that have not already come down. So, the bottom will likely hold (1200) and we will rebound once again. Eventually, I am saying after the election uncertainty is eased in November), the market will rebound and continue working its way higher. The Fed is now in a position to drop interest rates (with spreads stabilizing with the GSE rescue) and the Euro in trouble with recession in Europe. That should signal the turnaround. Expect the Fed to drop by at least 0.25% by year end.