Silver has dropped more than 30% only three times previously in the current bull market (since 2001).

I don’t think the bull market is over, but I also don’t think the correction is over. The previous times that silver dropped more than 30%, it took much longer than 5 days for the correction low to be in place.

I ran some quick vol-by-price charts, and thought I would share. We’ve dropped 5% back into a pretty good congestion zone. A lot of shares have traded near current prices… We could very well wobble around in this range for a while yet. (chart source)

And here’s the longer term (3 year) chart:

Looks like there is some bigger price gravity between 800-900 and back up around 1450. There are compelling arguments for going in either direction, so be careful with your commitments in one direction or the other.

While the S&P has only dropped 5%, it has happened in only 3 days.

I’m positioned for a bounce Monday morning, the three day drop is “too far too fast”. But I don’t expect a bounce to last.

And I consider this the warning shot that good times are over. If there is a bounce, it will likely be short lived. Then we can expect to see lower highs and lower lows… basically a return to a bear market.

When I make observations like this, I like to identify what would indicate that my analysis was incorrect. In this case, if the S&P is able to crawl back above 1150… especially if it is able to do so on higher volume.

Side Note: It’s worth commenting that 1150 was just a hair over a 50% retracement from 1576 all the way down to 666 (the 50% level was actually 1121).

But a less-noticed intrigue occurs on the date when Russell measures stock-market caps to determine index membership. It is May 29 this year. Working as a trader at Morgan Stanley some years back, Rosenthal noticed stocks that surged suspiciously up the ranks on the day Russell took its snapshot. “People actually forced stuff in…that is just evil,” says the finance prof. “It isn’t like you figured something out, but that you made it happen.”

Those suspicions seem borne out by the data of Zhan Onayev and Vladimir Zdorovtsov, researchers at State Street who studied the past nine years of Russell reconstitutions. Among the stocks that just squeaked above the Russell 2000 threshold, a disproportionate share of the gains for May occurred on that measurement date — in- deed, in the last minutes of that day.

…Last year, about 200 new additions made it over the Russell 2000 threshold, which was the market cap of the 3000th stock at the close of May 30, 2008-or $167 million. In this year’s still-recovering market, analysts like Citigroup’s Lori Calvasina predict the cutoff will be down around $72 million. A would-be manipulator might hoard illiquid stocks with market caps under that level, in hope of pushing them up on May 29.

The easy way to curtail this sort of stuff would be to take the average market cap over a period of time (say, 6 months) as criteria for inclusion…

Kinda similar, Friday’s close was nothing short of spectacular. Karl Denninger has more over at his blog, but suffice it to say, a rather large order showed up in the futures for the SPX  in the last minute (/ES is the S&P 500 e-mini futures contract). The total margin for the number of contracts pushed through was close to $22.5 million, with a dislocation that cost the order giver a whopping $1.25 million disadvantage for trying to push it through in the way they did.

I assume, and Dennninger agrees, that it was most likely a short position that got liquidated. But I think it raises more than a few eyebrows amongst those that are usually impervious to conspiracy theories…

From The Chart Store via Ritholtz.

I’m quite impressed by my performance this year. My best portfolio ranked 5,673rd place at the end of the contest which put me in the top 1.1% of contestants with a cumulative gain of 73.6% since November 17 when the contest started (9 weeks).

Wow. If only I could boast about that type of return in my real trading accounts…

Here are the results broken out by portfolio:

• Shiny (gold stocks) : +73.6%
• Important (giants) : -8.4%
• Dividend : -11.8%
• Growth : +15.7%
• ou812 : +5.3%

Incidentally, over the same time period the S&P 500 returned -2.2%.

Obviously, my Shiny portfolio benefited from the sector the holdings were in (Gold Stocks) more than anything, and gold stocks returned around 69% over the same period.

If only the other 5672 people who finished in front of me would be disqualified so I could compete in the final trading round…

The rules this year are a little different… only 5 portfolios per person, and you can’t buy more than 25% of a given portfolio in a single stock / ETF. Oh, and they’re getting advertising money from starting to offer 10% of your portfolio in a Forex account.

Trading opened on Monday, and end-of-day purchases are all that is allowed.

I’m setting up 5 portfolios for fun:

• Shiny – Gold stocks
  • Unfortunately, many of my favorite “moon-shot” stocks didn’t have sufficient market cap to be included in the trading game.
• Important – giant companies that should fare the best in a contracting market
• Dividend – some natural gas and oil trusts with high yields (despite the fact that dividends aren’t included in trading returns)
• BDC – Business development companies
• ou812 – the most popular of the last bull market — AAPL, AMZN, EBAY, GOOG, and BIDU

Each portfolio has an arbitrary (and silly) name… only to identify them to me. Also, I’ve decided not to use the Forex account for now, but may hop in with some long-term trend following system at a later point (if I have the energy).

After one day of trading, my best performer is in the top 4.4% (16,000th place) — the Important portfolio with a 2% gain.

We’ll see if my strategic buy and hold portfolios continue to do so well after more than one day…

Most of my thoughts about bottoms recently have focused more on the beach-bathing variety I’m starting to see as spring creeps back to the beach. But since everyone is wondering about the market bottom, I’ll bounce the proverbial quarter off of it and see how high it goes.

I’ve talked before about market “gravity” and price clusters that attract future bids. It’s based on basic auction theory: the price that attracts the most bidding represents the best guess at the value of an item even if people who really want the item badly (or are ill-informed or excited) will pay more (or in reverse auctions, less).

I’ve advanced my work on the idea by taking to the computer and working with the R statistical platform to analyze markets from an auction theory perspective.

So how does the S&P look in this context?Well, I thought it made the most sense to take a snapshot as of the most recent major high, which in this case is 10-17-2007. I went back to an arbitrary 01-01-2005, just enough to make sure that I had prices included well below the recent low. Below is the output after the close on 10-17-2007. The right-hand panel is a display price on the x-axis and density on the y. Think of density as proportional to the popularity of a price. The dotted lines mark the peaks of detected clusters. These are the prices that stand out as most important. The left-hand panel attempts to delineate the clusters. Think of it as the current sphere of influence on price. The same dotted lines appear here. Each black bar corresponds to the range of prices around each dotted line price. When price is in a certain bar, it is most likely testing the value of the associated dotted line. Obviously, there was an attempt to make them mutually exclusive for clarity, but that in no way means they are. Just because price may fall in one cluster doesn’t mean it has no probability of belonging to another nearby cluster.

Now look at the red line. That is the recent low. Let me reiterate here that these charts were produced with data only up through the market’s high in October. This fingerprint was already in place as price retraced. While that sinks in, look at the solid vertical line. That is the Tuesday rally’s close. Notice that while price move into another sphere of influence, it is still contained in the lower mass of price density. I’ll leave the forecasts to others but a pull back to the read line would be like warm apple pie to the market. It’s familiar and “safe”. Maybe what the market wants is some time to move sideways in this general area for a while.

I’m facinated that when the fear hit, everyone ran right to the most popular price of the last three years. In some way that makes me feel comforted. Could fear lead to a rational conclusion? Was it mere chance? Maybe. This is just one example pulled out of thin air. But the fact that I didn’t know what I would find but that I knew I’d likely find exactly what I did leaves me a bit breathless…in a good way.

It is far more important to look to simplicity (and common sense) than it is to look to increasing complexity as a means to better control investment outcome.

A model whose robustness is unknown or unknowable should never be employed.

Sophisticated tools should only be used if it is possible to verify that all required assumptions are satisfied (at least to a good approximation).  When this condition can be met, a simple application of a sophisticated technique is preferable to a complicated one.