Trader’s Narrative

Here’s a recent screenshot of thestreet.com:

In the first article, he is pessimistic about the outcome of a concerted financial rescue plan and offers the kind of target that I’m used to seeing from Bob Prechter:

Why I’m Negative Now (2:02 PM Sunday)

This strategy, which I presume will not be adopted, but which makes the most sense, would allow for shotgun weddings for all the weak banks to eliminate the bleeding. Without this kind of action I am reverting to a downside target of 6,700 for Monday and then 4,700 for Tuesday in keeping with the hopeful ‘87 playbook.

A few hours later, as Asian markets and overnight futures traded higher showing confidence back in the markets, he writes:

Don’t Fade the Opening (9:13 PM Sunday)

I say, play it out, don’t sell. Let’s see if we can’t get something going for a couple of days, unless you have some stock you bought into the down-600 moments from Friday. Even if you are down a lot, you are being too greedy…

Within a time span of a few hours, he has contradicted himself. But that’s not all. Here he is, just a few days ago telling people to sell and take their money out of the market:

Whatever money you may need for the next five years, please take it out of the stock market right now, this week…I don’t want people to get hurt in the market.

Got that Cramerica? Clear as mud, right? Booya!

It looks like Cramer is just throwing everything at the wall and hoping something will stick. Whatever scenario plays out, he will have ample “opinions” to choose from and point to, and many others to conveniently sweep under the rug.

Far be it from me to criticize a luminary of technical analysis but it certainly appears that Richard Russell is confused.

For those who are unfamiliar with him, Richard Russell is known as the Sage of the Dow for his expertise in Dow Theory. He has been writing about the market non-stop for more than 50 years and has made some truly legendary calls.

In the past few years Russell was very bearish and recommended gold instead of equities. This changed in May 2007 when he surprised everyone by turning into a bull, saying, “an unprecedented world boom lies ahead”.

But recently Russell has changed his mind again, saying, “the long-term trendline has been violated… Until proven otherwise, the long-term trend of the Dow is now down.”

He was referring to the red support line in the chart below:

Russell drew the trend line from the low in 1982, the launchpad of the great bull market in modern history, to the low of the bear market in October 2002. Clearly, this support is now violated to the downside.

This sounds very logical but if you stay with me for a bit, I’ll explain why I have a tough time accepting it.

Let’s imagine that we have gone back in time to the desolate bear market of 2002. Prices are careening into an abyss, pessimism is so thick you can cut it with a broker’s statement.

Now, standing as we are back in 2002, we follow the same process that Russell did and draw a trend line showing the support level in the Dow Jones from the bottom of 1982, connecting it to the low in 1995 and the low created in the aftermath of the September 11th 2001 tragedy. The line would look something like the dashed purple one in the chart above.

Obviously, even if we imagine ourselves in October 2002, for the sake of this exercise, we had no way to know for sure that this was the bottom. So rather than use it as the point through which to draw the trend line, we would use the points mentioned above.

So the conclusion that we would then draw is that the long term chart of the market is broken and the trend of the Dow is down.

But that would be incorrect.

Because not only would the worst of the bear market already have been over, within a very short time a new bull market would be born.

So clearly, hunkering down into “bear market mode” at this point in time (mid to late 2002) would do us no good at all. In fact, the smartest thing would be the opposite, to have cast around for beaten down stocks to buy in anticipation of the termination of the brutal bear market that we had so far endured.

Richard Russell usually concentrates on the Dow Jones but here is the chart of the S&P 500 for good measure, showing the same thing:

In the end, I’m afraid this leaves us where we started: confused. But it is one thing to flop around randomly, switching sides as the wind blows, and quite another to confess in frank humility before the power of the market that one is confused.

Depending on the framework you use to understand the market, at times it is possible for the market to be “confused” or even “wrong”. Of course, according to some, the market is the perfect amalgam of all relevant information so that isn’t possible.

But then again, any student of the financial markets can easily call up many examples where the market exhibited what can perhaps be best described as collective temporary insanity.

As I look across this market, checking the advance decline breadth, the highs and lows, the VIX, put call ratios, and all the other technical indicators, I can’t shake the feeling that it is a bit confused. Or perhaps, it just can’t make up its mind and is trying to hedge its bets as best as possible.

Just look at the past few trading days! Up, down, up, down, up, down… ending up at pretty much the same place we started.

I’ve been accused of having a penchant for the bullish side so I’m trying to be more than careful in scrutinizing the weight of the evidence, on both sides. And for the most part, there is really no compelling reason to be in either camp right now.

Maybe (gasp) the retail investors are right and cash is the best spot right now.

The market certainly feels heavy, but while intuitively I think it wants to go down, I don’t see any strong reasons to push it down with my own measly contributions.

Here is a snapshot of the sort of thing I mean. This chart shows the percentage of S&P 500 stocks trading above their 10 day moving average. Notice how in mid July, as the market was pulled sharply lower, this very reliable indicator (check out the research report from Lowry’s), did not perform its usual magic:

Is it too much of an obvious to say that this market is being driven by the financials? They were responsible for the mid July spike down in the behemoth S&P 500 Index. Pull up a chart of the 90 day Treasury Bill and you can see the epicenter of the quake that shook the markets.

I’ll go more in depth in tomorrow’s weekly sentiment overview and we’ll see if we can make any sense out of this crazy tape.