Trader’s Narrative

The world central banks are busy injecting liquidity into the financial markets and the financial markets are busy injecting liquidity into the pants of investors. Today’s market was so bad about the only thing that can redeem it is just how bad it was.

For the third time we are at the precipice - 850 on the S&P 500 Index (SPX). I’m curious how this will influence the retail investors sentiment. If they will continue to be nonchalant or once again turn to historic pessimism.

We had 12 times the number of declining stocks to advancing stocks on the NYSE. For the Nasdaq the ratio was half. Not surprisingly then, well over 90% of the volume flowed from declining stocks.

There divergences popping up all over the place. The CBOE equity only put call ratio, for example, continued to act strangely when it didn’t even rise above 1.0 - in fact, since this waterfall down move began, it has managed to put in lower highs. First in mid September, then in early October and then now. Such a negative divergence would be bad news for the market, except for the fact that the options market has been absolutely crazy lately.

Another divergence that caught my attention was the Bullish Percent Index (of the S&P 500) compared with the S&P 500 Index itself:

Grasping at straws? Maybe. We are sitting at the ledge, peering down to who-knows-where. Paulson has just thrown up his hands, all but admitting that he has no idea what he is doing. Do you really expect the same person who oversaw this crisis in the making and who just a few months ago assured everyone about the soundness of the US financial markets to be the same person that would actually solve the problem?

We may even break down through the 850 “line in the sand” but even if we do, all may not be lost. Looking back through history, it isn’t rare to find lasting bottoms which occurred after a slight penetration of previous support levels. The most recent example would be the 2002-2003 bear market bottom.

As I’ve mentioned in recent weeks over and over again, the market is being driven by news more than anything else and we have not been anywhere near a washout capitulation. I also warned that the market has been not acting as if it is ready to bottom:

…we still have not seen full blown panic selling to completely wash out all the weak hands

In an ironic twist, Wall Street shaved $700 billion off its valuation after realizing that the US government wasn’t about to rescue it with a blank cheque for $700 billion.

I really didn’t predict today’s carnage, but I’m not surprised at all to see the Nasdaq falling -9.14%, the S&P 500 Index down -8.81% and the venerable Dow Jones down -777.68 points.

Almost every single metric known to technical analysts hit the redline. It is still too early to come to a definitive conclusion and I’m still looking at a lot of information but here are some quick facts:

During the day, volume flowing into declining stocks as opposed to advancing stocks on the Nasdaq hit an astonishing 80:1 ratio.

The VIX volatility index reached a high of 48.40% (and closed at 46.72%) to put that in perspective, that is higher than what we saw from this indicator in 1998 (45.74%)during another financial crisis.

The percentage of S&P 500 Index (SPX) components trading above their 50 day moving average fell to 9.60% - below the critical 10% threshold.

On the NYSE advancing stocks were a paltry 53 while declining stocks were 2,842. And on the Nasdaq, advancing stocks were a bit higher at 424 while declining stocks were 2,563. Volume flowing into declining stocks on each stock exchange easily registered as a Lowry’s 90/90 day coming in at 97% for the NYSE and 98% on the Nasdaq.

The only outlier was the options market. The CBOE put call ratio actually fell to 0.79 and the ISEE sentiment which measures retail option traders activity was similarly unimpressive. I have no idea why the options market showed absolutely no concern during a day like this. Very puzzling.

I can’t wait to see what tomorrow’s market brings. I’m still not convinced that we have the worst behind us but at least we can safely say that we are on the road to capitulation.

Unless you’ve been living in a cave, you know that there is total carnage in the stock market, especially within the financial sector. By the way, if you have been living in a cave, congratulations on a very astute real estate investment.

Anyway, bank and investment bank stocks are trading at empty shadows of their glorious past. It almost makes you pine for the dot com bust. Almost. But even amid all this mayhem, are there financial stocks which are left standing, more or less unhurt? or dare I say it, strong?

It turns out, yes, although you have to sift through a lot of muck. And what you do find are small to medium capitalization stocks. The fact that these stocks have held up and are actually going up in some instances while the market as a whole craters is a huge sign.
Continue reading ‘Are There Any Strong Financial Stocks Left Standing?’

Back in May I wrote : Weak Financial Stocks May Not Hold Support Again which turned out to be right on the money.

A bit later in June I wrote that banks where broken:

…I suspect that by the time the Bank Index finds its way down to 65 or thereabouts, the bullish percent index will have commensurately fallen to significant buy areas…

The Philadelphia Banking Index (BKX) did indeed fall to 65 or thereabouts - if you interpret that liberally. In fact, the index broke 50 but when the global financial marketplace is melting before our eyes, why quibble over a few points? And the bullish percent did in fact spike to extreme oversold levels, reaching 5.62% in mid July.

These are the buy points that I’ve repeatedly mentioned and explained in how to use bullish percent to time the market. But to give you an idea of how rare this is, here is a long term chart:

Of course, what happened next is that the US government (along with a few others) decided to poke its finger in the crack of the dam and made it illegal to short sell financial stocks until October 2nd. The result of this blatant government meddling in financial markets was the two day rocket ride higher last week. To see this clearer, here is the same chart as above, zoomed in for the year to date:

Aside from the fact that whenever you get the government involved in the market it throws all technical analysis out of whack, the important thing is that before the financial stocks rallied, they had only fallen to 30% in the bullish percent index. Based on this, I suspect that had the government not banned short selling and placed a temporary, artificial floor below them, the sector would have continued to fall dramatically.

Finally, the consequence is that having meddled, the sector is now at 80% bullish percent! Which makes me queasy to even contemplate taking any new long positions. If anything, this is the sort of thin air levels at which traders start looking around for shorts. But of course, now we can’t. This is a royal mess. We’ve gone from a situation which could be analyzed to one which is totally news driven.

Paulson’s Bailout
Here’s the problem that I and many others have with the proposed bailout plan:

• the firms who are at fault face no consequences and do not give up anything
• in fact, the firms are being rescued by ordinary taxpayers who wouldn’t know a CDO if it hit them in the face
• Paulson has dictatorial power and authority for any decisions he makes
• the management who ran their companies in the ground face no consequences
• alternative plans were not presented nor considered
• there are much much better alternative plans

Raise Your Voice
Democrats have begun to push back against the scheme and I doubt that it will go ahead as presented. You can find a lot more articles about what is going on with the bailout and keep up to date by checking: news.tradersnarrative.com

I’m a Canadian so I can’t call up my representative in congress to give them an earful. But the vast majority of my readers are American so I urge you to educate yourself about what is happening. Once you realize the facts, you will understand why it is imperative that you raise your voice against the proposed bailout plan. This goes beyond partisan politics or the election. This is about the economic health of the US and the world. Do this for yourself and your children.