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.

What an inauspicious anniversary. It is a year since the Dow closed at its all time high - it is now trading down about 35% from that level. While I don’t think we are going to go straight up if things do stabilize, there is enough shrill panic out there to make me think that we should be close to a floor. If we aren’t, then all bets are off and I suggest we all flee to the hills. This isn’t based on mere “gut feeling” but on metrics and indicators that have been faithful guides historically.

So here are some observations:

Global Meltdown
There is enough pain for every single market out there. Forget banning short selling, Iceland outright suspended trading altogether. Indonesia halted trading after a 10% plunge. Russia has seen an utter collapse of their market. Same thing with China’s equity bubble. England has taken equity stakes in financial institutions while other European countries struggle to find a solution. There is a blanket of fear and panic covering the world to a degree that we haven’t seen in a very long time.

Credit Squeeze Easing
The first hints that we could finally be seeing a loosening up of the tight credit markets are here. The spread between the rate for the 2 year interest rate swaps and Treasury yields seems to have formed a double top at 167 on September 29th and October 2nd 2008. At its top, the spread was the widest since data has been collected (going back to 1988). This is a signal of easing for the LIBOR rate but the bad news is that LIBOR and TED spread haven’t responded by falling yet. But this may be the first inkling that they are about to.

Sheer Disgust & Panic
Finally, we can say that there is extremely negative sentiment out there. Both from everyday investors and traders, to newsletter editors. The option metrics are still not “cooperating” by showing extreme put buying. Which is something that I’ve mentioned before. It is still very puzzling to me. But the other traditional measures of sentiment show that the vast majority have thrown in the towel and believe that we will see further declines. From a contrarian point of view, this is a good thing. I’ll go into more detail in tomorrow’s sentiment overview.

How Bad Is It?
Things are so bad that, of the 500 stocks in the S&P 500 Index, only 6 closed trading yesterday above their 50 day moving average. And only 4.2% are trading above their long term, 200 day moving average. For the Dow, all 30 stocks are trading below both of the moving averages.
Continue reading ‘If We Aren’t Near A Bottom, Find A Cave & Buy Guns’

Finally! The S&P 500 finished the day at 1530.23 - an all time high. Everybody was watching this level as it had been the line in the sand, drawn more than 7 years ago:

On March 24rd, 2000 the S&P 500 reached an intraday high of 1553 (red circle above). And for the next few months kept trying to go higher but each time it was pushed back.

In hindsight we know this level to be the last bull market top and the blow off of the internet bubble of 2000.

The interesting thing to note is that not only did the S&P 500 put in a very strong performance today, it did so in the face of some seemingly bearish cross-currents from China. Overnight, the Chinese authorities tripled their stamp tax on stock transactions in another attempt to cool the mania surging in their stock market. The Shanghai market dropped almost 7%. The last time China sneezed like that, we caught a cold (February/March 2007).

But now? We seem to have developed an immunity.

I find it still supportive that so many people, even active traders and investors, are in denial of what is right in front of their quote screens. I’ve already covered how the retail “Mom’n'Pop” investors are simply not interested. But I’m seeing much of the same from many experienced, knowledgeable market participants. They simply do not want to believe this is a bull market.

Which is more the reason why it is. And more reason why it has some ways to go.

Finally, we may very well see the market correct from this level and go into a range bound contraction as it digests the resistance. That would only be natural. In the medium to long term though, I think we are headed higher.

As I wrote yesterday, on that time horizon, it is foolish to bet against the house.