Trader’s Narrative

While everyone waited for the open of today’s market with bated breath, the word crash was thrown around like confetti. Retail investors crapped their pants (again). Here are a few frontpage stories from digg:

That’s notable because digg occupies itself usually with technology and science news. The stock market and the economy rarely make it to the front page. When they do, it is sensationalist headlines like those above… which makes for great a contrarian indicator.

With so much anticipation, the only prediction that came true was the Fed “surprise” rate cut that had been telegraphed weeks ago. The market certainly did not crash. It quickly recovered after the gap down from overnight trading.

Volatility
The volatility indices finally spiked higher: VIX reached a high of 37.57 and the VXN 40.77 - an almost 5 year high.

I was surprising to find that the number of Nasdaq stocks above their long term (200 day) moving average reached a low not seen since 2002:

This indicator is saying that the market’s internal breadth is as bad as it was in the final days of the bear market. I don’t know what to make of this since we only reached such horrendous levels after a brutal 3 year bear market.

Now, we are nowhere near that kind of market condition. Even so, here we are - as oversold as then.

About two weeks ago I brought up an indicator, the New Highs/New Lows on Nasdaq eventhough it wasn’t really telling us anything interesting back then. It is a ratio measure of stocks within the Nasdaq making 52-week new highs and new lows. It is a percentage so it ranges from 0-100%. When it is low, it means that very few Nasdaq stocks are making new highs while the vast majority are making new lows.

Back then it had fallen to 30%. Low but not really extreme. It was worth watching because of its uncanny ability to find market bottoms.

As I mentioned, for a good solid floor under the market this indicator needs to reach atleast 10%. In the past, this level has coincided with significant market bottoms.

As a result of last Thursday’s heavy downday, this indicator finally breached the 10% line in the sand to hit 9.4%. On Friday, eventhough the market continued to sell off heavily, this indicator surprisingly went up 2.18% percentage points.

Which means that while the indices were getting clobbered Friday, actually less stocks were hitting 52 week bottoms and more were making 52 week highs. This is the sort of divergence that I’d love to see more of.

I didn’t include a chart of the S&P 500 but I’m sure you recognize all of those points in time with the green arrows as major market bottoms.