Trader’s Narrative

This is a guest post by Wayne Whaley (CTA):

It was recently pointed out by a reader of this blog that we have had several days this year where no stocks made new lows and the reader theorized that this is a very rare and potentially bearish event. Databases vary, but my database has 73 such days since 1970 where no new lows occurred.

If you measure from the initial occurrence of each time period, we can see the trading record of these events:

My personal take is that the occurrence of no new lows in March of 2009 was a very bullish event since it occurred in combination with very strong breadth thrust from the advance-decline line and up/down volume. Tape action that could potentially support the case for higher stocks for sometime. The observance of new lows in August is not as bullish, because the results for no new lows, 5 months after the initial read is mixed with a bullish bias. However, I would be hesitant to view the recent no new low days as a sign the market is overextended, especially given the repeat advance/decline thrust in August.

A more revealing bearish characteristic of the new highs and new lows tape action would be a period of an abnormal number of issues making both new 12 month highs and lows suggesting that the market is no longer trending and potentially confused.

A recent mention of cumulative TICK on Trader Feed blog caught my attention and I looked at this indicator today. Now I know, Dr. Steenbarger’s chart of cumulative TICK is using the NYSE TICK data and it is very short term in contrast to my analysis.

But he does briefly mention that “…the Cumulative NYSE TICK has stayed well above May levels.” And then goes on to extrapolate:

Continued strength in Cumulative TICK would suggest to me that we’re experiencing a correction in a bull market, not the start of a renewed bear.

I’m not so sure we can draw that conclusion. For reasons that I’ve outlined many times before, I prefer to use the internal breadth data from the Nasdaq. So here is a look at a few years worth of cumulative TICK for the Nasdaq:

If a higher high is a sign of a correction within a bull market, then by that account according to cumulative Nasdaq TICK we’ve never even entered a bear market!

Now I know this is the Nasdaq data but the NYSE chart doesn’t look all that different. Which reminds me of the uselessness of cumulative breadth numbers (advance decline) as any type of indicator - NYSE Breadth Is Strong: Why It Doesn’t Matter.

Instead of looking at TICK data cumulatively, I prefer to smooth it using a simple short term moving average:

Although it has come down from the extreme in April 2009, it isn’t anywhere close to the range that has historically coincided with market lows (or lasting market bottoms).

Here is this week’s sentiment wrap-up:

Hulbert Newsletter Sentiment
One of the most important aspects of sentiment analysis is that it presents us with a snapshot into the mindset of the general investor at a pivotal moment - like a retest of a bottom. As the S&P 500 heads down towards its November lows once again, the sentiment picture doesn’t bode well for the bulls.

To see why, let’s go back to the last bear market low in 2002-2003. At that time the Hulbert Stock Newsletter Sentiment Index (HSNSI) hit +10% at the low in October 2002. This meant that the average market timing newsletter was suggesting a market exposure long of 10% of a client’s portfolio.

When the S&P 500 (SPX) melted back towards the 800 range the vast majority of people had given up on the market and instead of going long were suggesting shorting the market. That was a demonstrable show of capitulation on the part of die hard bulls and it was one of the reasons that we lifted off to a new bull market:

Now compare that to what we are seeing now. Since the low of 750 for the S&P 500 Index (SPX) the average market timing newsletter as measured by the HSNSI is actually more bullish!

Of course, this not only flashes a bright red caution light for the bulls, it dovetails nicely with all the other sentiment data we’ve been looking at recently.

Sentiment Surveys
According to the ChartCraft Investor’s Intelligence survey, the bulls increased slightly to 43% while the bears remained the same.

In contrast, the AAII sentiment survey showed a large drop in bullishness - from 48.70% to 27.63%. The bearish reading increased but not as much - from 35.06% to 47.37%.

ISEE Sentiment
There was no significant change to report with the ISE sentiment index.

General Sentiment Measures
I’ve outlined a few lesser known measures of general sentiment which are hitting very low or all time lows. If you missed them, they are the Conference Board Consumer Confidence and the State Street Investor Confidence Index.

Market Breadth
The percentage of S&P 500 stocks above their 10-day moving average is once again below 10%. This is usually a rare event but thanks to the tumultuous market of 2008 we have gotten used to seeing this more and more. Within a bull market this is usually a very good indicator of a significant bottom but in this market I wonder if it has the same significance.

Volatility
The CBOE volatility index has regained the 50 level once again (peaking at 55) but there it has met the declining 50 day moving average and the previous technical support line. My hunch is that this is a reaction to the rapid decline and volatility will continue to fall.

Today’s market decline isn’t that surprising when you consider that we walked into the new year with a lot of complacency as shown by option traders’ sentiment. As well, we have the McClellan Oscillators at decade extremes for both the Nasdaq and the NYSE.

Here is another view of the market which points to the same general theme of a market that is feeling toppy in the short term:

This is the percentage of S&P 500 stocks which are trading above their simple 50 day moving average. I use this to measure the state of the market in general. Things have swung yet again to the extreme which we saw at the October 2007 highs. And yet again in May 2008 before the S&P 500 took another tumble.

Within the time frame of the chart, the only time the market didn’t top out when this technical indicator hit extremes was in October 2006. At that time the S&P 500 continued its slow relentless upward pace until late February 2007. But as it kept climbing, there were less and less constituent stocks powering the index higher.

A much more short term view is that of the percentage of S&P 500 stocks above their 10 day moving average:

Right now this is also at an extreme, having swung from zero in October and November 2008 - which by the way has been amazing buy opportunities in the past according to Lowry Research.

But both of these charts provide only a short term view of the market. The percentage of S&P 500 stocks above their 200 day moving average continues to be very low at 3.20%. As it has been since October 2008. Until this number rises, we shouldn’t expect a real rally to be underway.

Last week I suggested that market breadth doesn’t matter, until it does. By which I meant that inspecting every twitch of the cumulative breadth measure for the market isn’t all that useful.

Most of the time, this indicator is brought up because there is a “negative divergence” which then is used to argue that the market is floating on air and will come crashing (or correcting) down because not enough constituents are supporting its rise.

As I mentioned, the problem with this logic is that for the most part, the Nasdaq cumulative breadth has been in perpetual free fall:

The only time this indicator was able to mount a feeble come back was in 2003. And even then, it didn’t last long. While the market continued to rise, the cumulative breadth soon fell and broke through the low set in early 2003.

To see the recent graph of Nasdaq cumulative breadth, check out the link above.

The long term chart of the NYSE cumulative breadth is even more enigmatic. From 1995 to 1998 it rose along with the S&P 500. Then it decoupled and became it’s mirror opposite until the bear market bottom in 2003. And since then it has again, walked in agreement with the market index.

To anyone who proposes the theory of “negative/positive divergence”, I would ask, when should I have bought or sold? and why?

For example, should I have sold in the spring of 1998? and missed the massive run up to 2000? should I have bought in early 2000 because cumulative breadth was turning up and breaking the downtrend? wouldn’t that have resulted in massive losses?

Cumulative breadth simply doesn’t provide any sort of actionable insight. Unless I’m missing something huge. In which case, someone please forgive my elephantine ignorance and rescue me from myself.