Trader’s Narrative

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.

Remember the Top?
Today is the 8th year anniversary of the tech bubble. Yaaa…aay! Don’t feel like celebrating? I don’t blame you.

Believe it or not it has been eight years since Nasdaq temporarily peeked over 5000. Back then I had a friend who almost threw a “Nasdaq 5000 Party”. How’s that for a contrarian indicator?

Here we are after eight years sitting more than 50% below the high. Alright, put away the party hats.

10/10 Breadth
I’ve been watching the percentage of stocks above their 10 day moving average to see if it can breach 10%. Although this is a short term indicator, it has had a great track record of finding major inflection points. You can read about Lowry’s in depth research on this indicator here.

The above chart is as of Friday’s close. With today’s horrible market action, I wouldn’t be surprised if the percentage goes below 5%. For the NYSE, the number was 9.12% at last week’s close and most likely lower after today.

UPDATE:
On Monday there were only 3% of S&P 500 components closing above their short term moving average (10 day). The last time we had this many stocks oversold was in the beginning of March 2007. If you pull up a chart of that time, you can see it was a significant low.

This should be good news for the bulls but after a deluge of extreme oversold readings that didn’t amount to anything, it is tough to get excited about one more.

V or W or…?
We are now approaching the lows of the mid January spike. The very same that gave us a short respite. In a manner of speaking, the bulls are being pushed inch by inch closer to the edge of the precipice. What I’d like to see is sheer panic… desperate, uncontrollable, illogical despair. Unless I’m not looking at the right spot, I don’t see that.

Some thought we would have a “V” bottom. Some watched for a “W” or double bottom formation. While some still are convinced that we are going lower, much lower.

Bear Market
One of the characteristics of a bear market is that oversold readings that would normally ignite a ferocious rally simply don’t. They putter about or cascade into even more extreme oversold readings. I’ve been, admittedly, tenacious in holding on to the bull thesis - not as some might suggest, because I’m a “permabull”, but because until proven otherwise, you go with what has worked.

And until now, buying extreme oversold levels has worked. Over and over and over again. So at some point it stops working. If (big IF) you’re using discipline in your investing or trading, you come out with a few scratches and nicks. What I refuse to do is to flip a coin or go with my “gut”. That is just dumb. On any day, I’d rather have my indicators, technical analysis, contrarian sentiment, etc.

So although I continue to find multiple indicators which are pointing to oversold, I wonder if they really mean much. After all, price trumps all and as price continues to slide lower, it is not being accompanied by a proportional increase in bearish sentiment nor of extreme indicators.

I’ll do a quick recap of the indicators and you can judge for yourself.