Trader’s Narrative

Yesterday, the market flirted with the lows that we saw back in November 2008. So that’s the question on everyone’s mind. Will support hold, or will we see another waterfall decline?

If you were watching the action, you would already know that it was horrendous. Breadth was extreme: out of all the securities on the NYSE, less than 10% were able to close higher than the previous trading day.

We’ve already touched on many sentiment gauges which show an alarming amount of complacency. But what is truly astounding is that in the face of such horrific performance, small option traders plowed their money into call buying. The ISE sentiment index (equities only) moved up slightly to close at 135, meaning that after everything was said and done, 135 calls were purchased for every 100 puts. That, needless to say, is not despondency that carves out lasting floors in market prices.

And yet, even after yesterday’s carnage, we aren’t really close to a complete washout, from a technical point of view. Take the percentage of stocks trading above their moving average, an indicator which shows where we are in terms of breadth. Yesterday, 21.6% of the S&P 500 index component stocks closed above their 50 day moving average:

That might seem low to you but consider that although 20% is the ‘magical’ demarcation in normal, healthy markets, it isn’t so for bear markets. In fact, just as we saw a few months ago, this indicator can go much lower. That is almost exactly where it fell in late 2002

Looking at the bullish percent index, we find the same thing. For the S&P 500 index, yesterday’s reading was 39.60% but the last time market prices where at these levels - in November 2008 - the bullish percent was just 8.6%.

Everything is possible… who knows, the fabled Plunge Protection Team may decide to show up and rescue the day (remember them?) or we may just get a reprieve by a good old snap back rally. But even so, the market internals and the sentiment do not paint a pretty picture.

While most people’s attention has been focused on the equity market turmoil, something interesting has played out in the gold market that bears to be highlighted.

It is a myth that gold acts as any kind of a safehaven but what we have seen isn’t the normal, run of the mill bull market correction. This one has been caused by the dislocation in the fixed income market.

Just today, gold closed at $658, down almost $22. Since the equity market top, it has fallen from a high of $700.

I’m sure all gold bugs are asking themselves: if gold can’t rally in the face of an equity market meltdown, the US dollar in the dumps, a credit crunch which has people dumping aything risky, and which has brought out a slew of negative headlines… when will it rally? When it is all sunshine and lollipops?

This gold bull market is over. Finished. Kaput. Sayonara. Ciao.

Le Caffe O’Lait
Of course, the folks at Le Metropole will rehash the usual conspiracy theories about central banks, the gold cabal, the plunge protection team, etc.

None of that matters.

By the way, isn’t it amusing that those that vehemently believe in and argue for the existence of this powerful, pervasive conspiracy also bet against it? Wouldn’t it be more congruent to plunk down everything you own in the market?

After all, if you believe that the plunge protection team and the Fed and all the other goblins and gouls out there in the shadows will rescue the market from a meltdown, why would you invest in gold? Why not go for the ride and make hay while the sunshines?

Bounce?
In any case, ironically, right about here I think gold stocks are ripe for an oversold bounce. Nothing fancy, just a tradeable rally.

Within the Gold Bugs Index (HUI) zero gold stocks closed above their 10 day and 50 day moving average. And only 7% closed above their 200 day moving average. Wouldn’t it be hilarious if gold stocks rallied along with the stock market?