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Divergence: Wishful Thinking Or Bottoming Process? at Trader’s Narrative

The world central banks are busy injecting liquidity into the financial markets and the financial markets are busy injecting liquidity into the pants of investors. Today’s market was so bad about the only thing that can redeem it is just how bad it was.

For the third time we are at the precipice - 850 on the S&P 500 Index (SPX). I’m curious how this will influence the retail investors sentiment. If they will continue to be nonchalant or once again turn to historic pessimism.

We had 12 times the number of declining stocks to advancing stocks on the NYSE. For the Nasdaq the ratio was half. Not surprisingly then, well over 90% of the volume flowed from declining stocks.

There divergences popping up all over the place. The CBOE equity only put call ratio, for example, continued to act strangely when it didn’t even rise above 1.0 - in fact, since this waterfall down move began, it has managed to put in lower highs. First in mid September, then in early October and then now. Such a negative divergence would be bad news for the market, except for the fact that the options market has been absolutely crazy lately.

Another divergence that caught my attention was the Bullish Percent Index (of the S&P 500) compared with the S&P 500 Index itself:

S&P500 and bullish percent divergence

Grasping at straws? Maybe. We are sitting at the ledge, peering down to who-knows-where. Paulson has just thrown up his hands, all but admitting that he has no idea what he is doing. Do you really expect the same person who oversaw this crisis in the making and who just a few months ago assured everyone about the soundness of the US financial markets to be the same person that would actually solve the problem?

We may even break down through the 850 “line in the sand” but even if we do, all may not be lost. Looking back through history, it isn’t rare to find lasting bottoms which occurred after a slight penetration of previous support levels. The most recent example would be the 2002-2003 bear market bottom.

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6 Responses to “Divergence: Wishful Thinking Or Bottoming Process?”  

  1. 1 buzgz

    The Oboma election working out about how you figured, so far ?

  2. 2 Babak

    buzgz, I agree. Let’s blame Obama (who hasn’t even taken over). The Bush administration which was in power for 8 years, and the Republican controlled senate for 6 years mean nothing.

  3. 3 truth

    except the stock markets are *forward discounting* so the previous six years doesn’t mean a whole heck of a lot.

    If people really thought Obama could fix things they’d be buying while they still have a chance. Instead it looks like more of the same, and with Obama planning on bailing out the Auto’s now, the market seems to be spot on.

    All that talk of change, the markets clearly show us was just talk.

    You load sixteen tons and what do you get? Another day older and deeper in debt.

  4. 4 Victor Berry

    The stock markets are “forward looking” no more than about five minutes into the future.

    The only way Obama could please the paper traders would be to set the long term capital gains tax at 0% while allowing 100% of all losses to be deducted.

  5. 5 truth

    poor, victor…

    can’t see the forest for the trees.

    yeah zero tax, or I dunno, maybe not piss everyone’s money away on autos that are going to fail no matter what.

    Socialism for the banks et. al. was a bad idea when bush went with it, and it’s still a bad idea now obamas going to do it.

    Where’s my goddamn change!

  6. 6 Babak

    the market’s up 550+ points, back to where we started on Monday, I don’t know about you but I for one hold Bush responsible for this one day gain ;)

    but seriously, daily moves with the very rare exception of say a 1987 crash, are meaningless. the market is now responding to a confluence of decisions and events which took years and years to create.

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