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e-mail: sidklein@sidklein.com

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CRASH MODE

October 20, 2005

Dow Jones: 10,281.10

NEW YORK:

Eighteen years ago today, the stock market completed the crash. I’m feeling nostalgic.

At the end of the previous day (Monday), around 10:30 p.m., I had looked over at a colleague, who had once been my mentor and, lifting my nose out of my charts I said: “The market should hold at about 1740.” He replied: “The Dow closed at 1738.” “Oh”, was my insightful comeback. The closing low had indeed been seen, to what had truly been a “crash”.

What made that a real crash is that it fit the definition: For the first time since October 1929 (the 29th?), there were dislocations. Bids and offers didn’t match up. This is what causes true fear, systemic fear. Second only to war in one’s own Land, nothing engenders such fear for the system as this, save for pestilence, one would imagine.

The reason, simply, is that there comes an enveloping sense that order has been lost, that the government cannot make life work. The deep-rooted fears that originate from childhood – that mom and dad cannot protect us – are ignited. Order before law, we humans demand. So, the word “crash”, is overused and misused. If the author may make use of the artistic license that others do, and in the context of the above “apology”, transcending nostalgia, let us look at two points in addition to the lengthy and in-depth analyses of the past year, in making the final cherry-on-top case for a now imminent “crash”:

Last month’s volume peak, which coincided with the market’s major lower high, was the highest volume since last December (2004), which was higher than this recent volume peak. Note, too, that the Dow’s peak of the past twelve months followed the volume climax.

On an even shorter term note, the VIX closed today at a higher high for this two-day period, even though the Dow did not close at a lower two-day low.

Add this fact: Implied volatility sank to new short term lows, based on key longer term Dow options that SKC follows. This means that “the crowd” made speculation and hedging really cheap, going beyond the effects of both the Dow, as well as the VIX. If not offering enormous opportunity, this point at least offers a wonderful contrary indicator.

NOTE: The VIX relates to historical volatility, while implied volatility is just a fancier way of referring to option time premiums. Hence, the knowledge and investment value referenced above.

CRASH MODE? En route to 6500 in 2006, 8900 by the beginning of November?

NB: Periodically, SKC reminds that the reprehensible conduct of transmitting the author’s property would be extremely frowned upon.

Sid Klein

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This newsletter is solely the work of the author for the private information of intended recipients only. The views (including any recommendations) expressed in this newsletter are those of the author alone. The information contained in this newsletter is drawn from sources believed to be reliable but the accuracy and completeness of the information is not guaranteed, nor in providing it does the author assume any liability. No solicitation to buy or sell securities should be inferred from either the contents of this newsletter, nor its dissemination. Each potential investment decision and its appropriateness must be considered within the context of the entirety of the individual investor's circumstances. This information is given as of the date appearing on this newsletter and the author assumes no obligation to update the information or advise on further developments relating to the information provided herein. Any reproduction or retransmission of the SKC report of any kind is strictly prohibited, and would reflect conduct of the lowest order.

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2006-05-31

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