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Back To Back Weekly “Selling Climax” Extremes at Trader’s Narrative





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A few days ago in the weekly sentiment overview we noted the capitulation of newsletter editors, as measured by the Investors Intelligence sentiment survey. Last week was the first time, since March 2009, that the number of bullish newsletter editors fell below 30%.

Now, a separate market metric, also from Investors Intelligence, has given us yet one more reason to expect a market rally. The metric is the number of weekly “Selling Climaxes”. If you’re unfamiliar with the term, it means the number of individual stocks that have traded below their 52-week lows, only to close higher before the week is over. As you’d expect, this is a measure of capitulation, just like last week’s extreme sentiment.

buy sell climaxes Sep 2010

The last time we noted this metric was in early June as the number of selling climaxes spiked for the first time in many months. Overall, that wasn’t a great call as the market lurched up and down without really going anywhere. The next few months brought about a few weekly spikes, for example in mid-July. But we never saw back to back weekly extremes in selling climaxes as we are seeing now.

Not surprisingly, Investors Intelligence had been suggesting to their clients for the past two months to sit on their hands and wait for the market to finish drifting sideways. But in the final days of August and early days September, based on the back to back extremes in selling climaxes and other measures, they swiftly changed their posture. They went from 100% cash to 80% long stocks.

Lowry Research’s proprietary indicators of demand and supply show a continuing improvement for the bulls. Selling Pressure has decreased by -33 points and Buying Power has gone up by +25 points resulting in the best “spread” between the two indicators since March 2009.

Personally, I’m still taking a wait and see approach as the S&P 500 index is clearly mired in a lengthy sideways chop. When, or if, the S&P 500 index is able to chew through the resistance at 1130, I’ll take another look at where things stand. That level by the way is the 50% retracement for the bear market. But for now, back to back extremes of weekly selling climaxes is something to keep in mind.

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5 Responses to “Back To Back Weekly “Selling Climax” Extremes”  

  1. 1 OntheMoney

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    Thanks for keeping us long-term bears on our toes, Babak. The amazing mix of bearish and bullish signs is reminding me quite alot of ‘07 - ‘08 when many indicators were worsening to levels which should, contrarily, be bullish, yet the market was not responding. If we get a strong rally here I’ll have to regroup, but meanwhile here’s an intriguing technical sign for the bulls to chew on:

    I wondered if last week’s set of big gaps higher might be a powerful bullish sign. Turns out not so. Checking back on all SPY data since 1993 using my software:

    3 consecutive gaps higher, with each day’s close higher than the open, indicates:

    1. a pause at best during an uptrend and quite often a topping signal
    2. potentially big trouble during a downtrend.

    Defining a downtrend as a downward-sloping 200day simple MA (I have it falling with today’s close), this brings up 7 dates:

    June 5 2001
    Jan 4 2002
    Aug 8 2002
    Feb 18 2003
    Feb 12 2008
    Jan 2 2009
    Jan 28 2009

    Check ‘em out, top-pickers.

  2. 2 Wes

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    @OntheMoney

    Your software seems unable to distinguish between the market coming off a bottom with high negative sentiment and ordinary 3 up days in a row.

  3. 3 OntheMoney

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    If you check the dates, Wes, not only will you find that all the above dates except Jan 02 and Feb 03 were coming off a two month low - which is what we see today - but that most occured in periods of equally negative if not even MORE negative sentiment.

    If we’re in a downtrend, negative sentiment can simply deteriorate, as in 08, without resulting in a meaningful market rebound. That is the definition of a bear market.

    We also have an important bearish signal from the VIX, which popped back above its lower Bollinger Band yesterday in a repeat of the signs in Jan and April this year.

    Whether we take a bath or just dribble back to the August lows who can say, but the technicals are trying to tell us something here - we just have to listen when they speak.

  4. 4 Wes

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    But you are comparing bear market dates to the current date. We are in a bull market (until proven otherwise) and extreme negative sentiment levels are much more significant in bull markets. Negative sentiment in a bear market is almost meaningless.

    I can think of many positives about this market, but there are some negatives. We are short term overbought and there was significant selling into strength on the SPY. I sold a partial position today in hope of re-buying at a lower price in the next few days. But, the daily cycle low seems to be in, and I think we will take out the August highs shortly.

    In any case, an honest difference of opinion is always refreshing and I wish you good fortune.

  5. 5 Tyler

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    Wes - if you truly think we are in a bull market, you may want to be careful about being too cute and selling positions (even partial ones) to buy back in at lower prices. Revisit Reminisces of a Stock Operator and note what the old hand has to say on this.

    Sorry for the unsolicited advice, just a thought.

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