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A Technically Driven Market at Trader’s Narrative




A Technically Driven Market


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While the bulls flex their muscles day after day, it is daunting for those who believe that the economy is not on sound footing and that the latest earning season is not about to suddenly provide a cornucopia of better than expected earnings - especially since expectations have been ratcheting up so much recently.

More and more, this is a technically driven market, decoupled from such mundane things as P/E or the economy or any type of anchor we may think is rational to attach to it. We just ricocheted off the S&P 500 index’s 50 day moving average. If you recall back in June and July it was the 200 day moving average which buttressed the index before turning up itself.

But arguing with the market is about as useful as standing in front of a runaway train and doing a PowerPoint on why it should stop in its tracks. Remember that bears have always had the most lucid and convincing arguments.

I’ve been guilty of comparing this spring rally to the 2003 cyclical bull market. If you’ll indulge me once more, here is yet another point of similarity.

The percentage of S&P 500 components which trade above their 50 day moving average fell through the floor to hit the basement in the summer of 2002. Those were dark days indeed. Then even as the S&P 500 index went lower, this metric did not - suggesting that less and less individual stocks were participating in the continuing bear market:

percentage stocks SPX 50 day moving average 2002 bear market bottom

The first sign that things had changed was the almost unanimous involvement of the components in the ensuing rally. In June 2003, out of the 500 stocks in the index, 471 of them closed higher than their intermediate moving average. Then it started to show a remarkable resilience as each subsequent low in this metric was higher than the previous one.

Here is the recent chart of the percentage of stocks above their 50 day moving average, showing a remarkably similar script:

percentage stocks SPX 50 day moving average Oct 2009

A caveat is that we are starting to see some speculative fever getting stoked in the options pit. But even this is not extreme enough (yet). The market resilience continues with few signs of abating.

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13 Responses to “A Technically Driven Market”  

  1. 1 Dave

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    “Remember that bears have always had the most lucid and convincing arguments.”

    From March til now, they can have the superior arguments, i prefer the money.

  2. 2 Wayne

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    Dave,

    I just hope you are not a permabull?

    “Remember that bears have always had the most lucid and convincing arguments.”

    You know as well as I, that is what makes a market. The bulls need those equity holders that refuse to interpret the evidence to continue to sell them their shares at reasonably prices. As you alluded, in the end, the market is right, no matter “how lucid and convincing the argument. As long as there is compelling reasons to be bearish and readers calling the Bulls “crazy”, the market can climb a Wall of Worry. When no one refutes the Bulls, the Bulls need to reconsider their position.

    I can not remember a day in my market life, when I could not find a very good reason to be bearish (recession, unemployment, inflation, deflation, rising interest rates, money supply, trade deficit, budget deficit, divergences, Elliot Wave Theory, On Balance Volume, Jerry Granville, Kublai Khan, etc). And every decade, it was something different . What do you think the bears were saying in the summers of 75, and 83. It was obviously a Bear Market rally, that only a fool would buy.

    And for the record, it works both ways. More on that in 12-18 months.

  3. 3 Wayne

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    Didn’t Jerry Glanville coach the Oilers? I meant his cousin Joe Granville. funny me.

  4. 4 tradeking13

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    So, using 2003 as a guide, the market should move 5-7% higher from here and then churn sideways to lower for most of 2010 before resuming an uptrend?

  5. 5 Dave

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    @ Wayne,

    whatever

  6. 6 wayne

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    Dave

    “Whatever’s” are often used as a polite way to say “I don’t give a s**t”.

    Did you understand that we were in total agreement and I was simply expanding on your comment?

  7. 7 Babak

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    Wayne, that’s a good point. In reality, if you really look, you can always make a case for both sides. The fascinating thing is that we somehow are able to have a bias and choose one over the other. I think that’s where behavioral economics comes in or maybe there’s another explanation from neuroscience.

  8. 8 Dave

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    Answer: i didn’t take it that way.

    “lucid and convincing arguments” are like opinions & noses. Most people have one (at least to them).

    Yogi Berra used to talk to the opposing batters in order to distract them. Hank Aaron tells the story about the 1958 World Series, with Yogi behind the plate. Yogi kept telling Hank that he was holding the bat the wrong way & to hold the bat with the label up so he could read it.

    Finally, Aaron turned and said “Yogi, I came up here to hit, not to read.”

    Most off-the-floor traders have an opinion (convincing arguments). When their opinion is right, they make money. When their opinion isn’t right….. When you talk to most pit traders, they profess to not have an opinion. The best trade the paper flow.

    I think many trading coaches would agree that most off-the-floor traders trade to validate their opinions not to necessarily make money.

  9. 9 wayne

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    That is why my trades are dictated 95% of the time by a model and not my instincts, else I trade my opinion and not the odds.

  10. 10 wayne

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    Dave,

    I should have wrote,

    “Dave, you are dead on, I just hope you are not a permabull (wink)”.

    A shame we can not see the facial expressions with which comments are posted.

  11. 11 Dave

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    You seem fixiated on my having asked that question once. This is the 3rd time you’ve brought it up.

    I would have written the same thing in response to ““Remember that BULLS have always had the most lucid and convincing arguments” last year.

    It’s not about “lucid and convincing arguments”; it’s about price action. That’s where the rubber meets the road.

  12. 12 wayne

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    When I was 12 years old, someone called my sister a permabull and when I stood up for her, he beat the dog crap out of me. I have never been able to get over it.

  13. 13 Dave

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    Wayne,

    I think that he was calling you a “bull - y”; you made me cry. And as for “beat the dog crap out of (you)”. Don’t think so. Think you got plenty left.

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