Trader’s Narrative

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Tuesday’s rocket ride was attributed to a news trifecta:

Rep. Barney Frank, made public that the SEC is considering the reinstatement of the uptick rule. Bernanke’s mused on more flexible accounting for banks to allow them to replenish their capital base and to prevent them from limiting their lending in a downturn (as they are now). Finally, Pandit made wildly optimistic statements about the profitability of Citigroup (C), based on the first two months of the year.

Whatever the actual rationale, Tuesday, March 10th, was yet another Lowry 90%-90% days. Of course, if you’ve been paying attention, this is nothing new. In fact, if we just count the times that we’ve fallen to a 52 week high, only to zoom higher on a Lowry 90-90 up day, it would be the fourth time:

The last time was just a few weeks ago (February 25th) when I asked cynically, Does Yesterday’s 90-90 Lowry Up Day Change Anthing? If you’re unfamiliar with what a 90%-90% Lowry up day is, follow the previous link for an explanation.

Of course, this bear market has been remarkable for its lack of significant counter rallies. So it isn’t surprising that although there is a lot of chatter about a bear market rally, not a lot of people actually think it will materialize.

Believe it or not, we’d gone 288 days without a rally (that lasted 80 days or more). That is among the longest stretches ever. It is only topped 3 times in market history since the 1920’s:
Continue reading ‘A Close Look At Yet Another Lowry 90-90 Up Day’

As promised in yesterday’s post about the NYSE bullish percent index, here are some notes from the Lowry Research meeting. You can view the accompanying charts by downloading the PDF file from the free trading resource section. The file is in the Reports & Articles folder:

In case you’re not familiar with them, Lowry is one of the most respected technical research firms. Their prestige flows not only from their longevity (they are the oldest continuously published letter on the US markets) but also due to the quality of their analysis. Their principal, Paul Desmond, won the Charles H. Dow award in 2002 for his research into 90-90 days and their role in market bottoms. They have mostly institutional clients with some retail clients paying $1000 a year for regular access to what you’re about to glimpse.

This also has some poignancy today since we have now fallen appx. 55% from the 2007 top as Paul Desmond opined: How brutal can this bear market get? We are now below the S&P 500 2002 bear market level. Is that enough? has the bear extracted its pound of flesh? Read on to find out what Desmond’s firm thinks.

The presentation was given by one of their junior analysts, Tracy Knudson (CMT). First she reviewed what happened at the market top in 2007 and then moved forward to today and Lowry Research’s view on where we are headed from here. Then a brief overview of sectors and the changing role of 90-90 days:

• Lowry is now known for Paul Desmond’s research into 90-90 days but they primarily use proprietary indexes: buying power and selling pressure
• use these two metrics to gauge health of the market and the underlying momentum to measure who has upper hand
• important to look at both components of 90-90 days: total price points gain/lost and total volume of advancers/decliners
• buying power & selling pressure calculated from public information released by NYSE for that exchange
• Lowry is working on beta versions of same for NASDAQ and international markets (still private)
• mid-July 2007 first warning sign that bull market losing strength
• new high on index not confirmed by adv/dec breadth of NYSE (OCO) operating companies only, S&P 500 or NASDAQ
• this was a sign that rally was becoming selective rather than continuing as broad-based

Continue reading ‘Lowry Research On Current Market Conditions’

Yes, today’s decline was yet again another Lowry’s 90-90 day and it took us perilously closer to the ledge. Or over the ledge, depending on which index you’re looking at and how thick you draw your support lines. Weinstein’s support level is still not breached, for whatever that’s worth. Is everything lost? I turned to an ancient way of looking at the health of a market.

You already know how to use bullish percent indices to time the stock market. Although they are usually shown in point and figure charts (those X’s and O’s), I prefer to look at a line chart because it moves in tandem with time and the market proxies like the NYSE index, Dow Jones and S&P 500.

But the original way that bullish percent charts were interpreted was to gauge where we were along a continuum of bull or bear market. The short version is that when the NYSE bullish percent index moves up above the 70% line and closed below it, the market is on notice. Similarly, when the NYSE bullish percent index moves lower than 30% and then breaks above it, there is an indication of underlying health, and a portent of a nascent bullish rally.

Looking at a very long term chart of the NYSE bullish percent index, it is easy to see the efficacy of this measure of market internal health:

Recently though, the NYSE bullish percent index has been breaking down through the 30% level not only often but to such a degree that it has fallen lower than it did after the Black Monday crash of 1987.

Here’s a chart zooming into the past two years to show more detail:

Each successive piercing of the 30% “maginot line” brings about a weaker and weaker counter rally from the market. Until in July, the market barely manages to plateau before falling again. So what’s up? Why is this once solid indicator start to sputter and fail so badly?

My hunch is that what changed over time was the inclusion of non-equity securities on the big board. Right now half of the securities traded on the NYSE are closed-end funds, ETFs, ADRs, municipal bond funds and other funny pieces of paper that do not represent fractional ownership of a public company as it used to when traders started pushing paper under the Buttonwood tree.

This is why Lowry Research service started to keep “operating company only” NYSE data. Speaking of Lowry’s, I went to a presentation by one of their analysts last night and will share the details with you tomorrow.

Before we say goodbye to not just a bad October but the worst month since the 1987, here is a quick roundup of the sentiment landscape:

Sentiment Surveys
According to ChartCraft, the Investor’s Intelligence sentiment survey shows newsletter editors little changed in their outlook this past week: 23.1% bullish and 52.7% bearish. That is still an extremely high level of pessimism for a normally cheerful bunch. Remember, doom and gloom doesn’t bring in the subscription coin.

The retail investors on the other hand continue to be nonchalant. The AAII weekly sentiment survey showed a small uptick in bearishness to 40.6% and a small downtick in bullishness to 37% but still the over all mood is way too cheerful for me. As a contrarian I’d be much more comfortable to see the average person continuing to be pessimistic about the market before getting too excited about a lasting rally.

Options Market
Like many, I continue to wrestle with the options market, trying to make some sense out of the data it generates. For more, check out not only my own thoughts about this crazy options market but some of the most respected technical analysts out there today.

The ISEE sentiment continues to be ambivalent about this whole chapter in the stock market. I have no idea why but it has totally broken down and although I continue to watch it, it is tough to ascribe a rationale for its moves or to glean a message from it.

The CBOE put call ratio (equity only) went up on Thursday and Friday implying that options traders on average were not totally buying the most recent rally.

Short Covering or Real Buying?
The reluctance to see Tuesday’s rally as “real” is shared by many. After all, the majority of the biggest one day gains in the stock market have occurred during brutal bear markets. A reader contacted me wondering if it was “just short covering” or “real”? I’m not sure if it makes much of a difference. The short interest ratio for the Nasdaq is very high, which is traditionally a bearish omen. Any other ideas on how to distinguish between a “real” rally and a short covering one?

Lowry’s 90/90 Day
The market continues to make people stare at their screen like goldfish, widemouthed and blinking in amazement. Tuesday’s rocket ride sure felt like a 90-90 up day, which according to Lowry’s research is a prerequisite for a new bull market. We’ve seen repeated 90-90 down days but finally got a decisive buying stampede. Up volume demolished down volume by a ratio of 19:1 - the most exaggerated ratio since last year.

If you still haven’t, read Paul Desmond’s seminal work in my free trading resource section (Reports & Articles)

Consumer Confidence
This should be an interesting holiday season for the retailers. The American consumer is not only incredibly dissatisfied with everything in general, they are extremely pessimistic about the future. Like so many other indicators we’ve been watching during this bear market, the Conference Board Consumer Confidence (Expectations) plunged to its lowest level ever.

That is lower than the aftermath of the 1987 crash, the bear market in the 1970’s and the public’s reaction to the tragedy of 9/11. Which says a lot. Consumers are basically shell shocked. The spending orgy, fueled by easy credit, is gone. Now comes the hangover.

From a short term perspective this may appear to be bad news but historically troughs in consumer sentiment have been a great contrarian indicator. After I mentioned it as a condition of a new bull market, it rebounded briefly but the message is unmistakable.

Greybeards
In the past few weeks we’ve seen Warren Buffett, Doug Kass and Steve Leuthold all saying pretty much the same thing: they are buyers. Which leaves one wondering. If you are going to fade these guys, you better be incredibly lucky and incredibly smart. It is possible they are wrong - but highly, improbable.

After yesterday’s decimation of the indices, today’s sharp bounce was not that surprising. We had almost the mirror opposite: +90% of volume flowed into advancing stocks on the NYSE and 85% on the Nasdaq.

Advancing issues far out numbered the decliners also but not as much as the opposite yesterday. The percentage and points gained were similar in that the market clawed back some lost territory, but not nearly all that it lost on Monday. So I’m not sure if today’s brave snap back rally qualifies fully as a Lowry’s 90-90 up day.

Option Traders On Valium
The state of the options market continues to befuddle me to no end. The retail options ratio compiled into the ISEE sentiment was an eyebrow raising 112 yesterday - which means that retail option traders opened more trades with call purchases than with put purchases. On a day when the Nasdaq lost 9%. On a day which was referred to by blaring newspaper headlines as “BLACK MONDAY”. On a day where we had 98% downward pressure in equity volume.

And today, it came in much, much higher. OK, I’d expect it to do what it did today, but yesterday’s action just doesn’t make sense. Unless the ISE is on the fritz and made an error.

Similarly, the put call ratio from Chicago came in at 0.79 and 0.73, yesterday and today, respectively. Ho-hum. If you had just been given these figures you would never suspect that we had just gone through a stomach churning roller coaster ride. Would you?

Go figure that out and then come back and explain it to me (no really, please do).

TED Spread
What is another day if we don’t set another record. The TED spread pushed above recent high which itself was in multi-year record territory and closed at 3.5 points. For an explanation of this important fixed income indicator, see the link.

Dejavu, All Over Again
Here is a long term chart of the bullish percent for the S&P 500 Index (SPX):

Sure, we are back down where we’ve seen the market rally, but do you notice anything about the chart?

While the bullish percent has been hitting extreme lows, it hasn’t subsequently recovered to extreme highs. All it has managed to do is push back to the neutral zone. It hasn’t once in 2007 and 2008 (so far) reached +80-85% as it did during the bull market.

September…
It only seems fitting on the last day of September to revisit the historical pattern that I brought up at the beginning of the month: Why you should write off September

No argument that it would have been much more profitable to have sold every long position at the start of the month and taken a long nap. As Tim suggested back then, you can always short… except when the government doesn’t let you

Don’t Spill Your Drink
I’m not seeing as much negative sentiment out there as I’d like. Take for example, the Hulbert measure of newsletter editors which is showing that market timing stock newsletters are absolutely sanguine about Monday’s drop. And they are more bullish now than during the spike low in July… even though the market is trading lower than back then.

My own anecdotal evidence comes from a cocktail party over the weekend where no one was at all concerned about the stock market, although most were familiar about the crisis and its effect on the financial markets. If anything, there were guests which argued that this was a great buying opportunity. Now, I know this is just anecdotal but when I look at the options market action (ISEE sentiment) I see parallels. And if that doesn’t concern you… it should.

Dazed & Confused
So I continue to be amazed at the action and watch cautiously, careful to not step into a sinking floor. We are seeing some good technical and market internal metrics build concensus towards a tradeable bottom. But I don’t believe we are there just yet.

As a caveat, you should know that I was premature in jumping aboard back in March when I saw indications which persuaded me that was an intermediate stock market bottom in the making. So perhaps now I’m playing it too safe?

Perhaps. Instead of second guessing myself though I prefer to stick to the most quantifiable measures and technical analysis, thereby removing as much “hunches” or “intuitions” as possible. I suspect that we will see today’s cosmetic recovery fade away and a cascade lower will bring much needed panic.