Trader’s Narrative

The following charts are from Jason Goepfert, of SentimenTrader.com, showing his proprietary indicator called the “Panic Button”.

This indicator measures stresses in the credit market and is expressed as standard deviations from the norm. So a 2.0 means that the aggregate measures are 2 standard deviations from their usual or normal place. Yesterday it reached 9.5 (intraday) but has since come down to “only” 4.

Notice how it dwarfs all other major crisis in recent history! This is similar to the long term chart of the 3 month Treasury Bill rate I featured yesterday.

Here is the same chart, zoomed in to the latest few years:

It is not only awe inspiring, I’m left wondering what in the world it all means. Have we left reality and entered a bizarro alternate one? of what use is history and precedents when they are so out of proportion with what is happening right now?

Lynching Short Sellers
Then there is the rumor of the SEC moving to ban all short selling or as the FSA across the puddle, short selling related of financial stocks. Need I or anyone else, explain that this is completely moronic? Short sellers, far from being the culprits in this mess, are actually necessary for the proper functioning of price discovery. Furthermore, the effect of short sellers is to actually slow down a crash.

If that sounds counter intuitive to you, consider that every single share sold short is in effect, a future buy order. So as prices come down, it is short sellers who buy, in selfish interest to lock in profits - thereby providing some sort of friction to stall the downside momentum. Simple stuff. Economics/Trading 101.

But the current US administration is so dumb that they couldn’t empty a bucket of water if the instructions were glued to its bottom. While they attempt to forestall the inevitable, hoping against hope to buy time before a collapse before November, they are only damaging the economy of the US and the whole world by extension even further.

Get A Clue
By the way, if you aren’t yet aware of news.tradersnarrative.com you have no idea what you are missing! The rumour of the SEC’s move was on there hours ago and many other must read links get posted regularly. If you have an interesting link that you’d like to share or comment on an existing one, you can now do so.

We’ve recovered around 10% from the darkest days of the market slide in January. Tragically for the bears, the world didn’t end. At least not yet.

While it all looked gloomy and depressing, it is important to remember that this is the stuff that stock market bottoms are made of: panic and fear, predominant bearish sentiment and major technical indicators hitting extremes… all accompanied by bad news.

But the market doesn’t go up (or down) in a straight line. Now we are overbought in the short term. The percentage of S&P 500 components trading above their short term 10 day moving average is slightly above 90%.

Just as an extreme low reading indicates a great buying opportunity, a high reading is an indication of caution. For more information read Lowry’s research.

Here’s a recent chart with the red line indicating the +1 standard deviation and the red line the -1 standard deviation:

Having said that, this matters in the short term. We could easily work off this level of overbought by treading sideways for a week or so. Or we could move down slightly.

A high reading from this indicator doesn’t mean it is automatically time to sell or sell short. Especially if you have a long term time horizon.

A good example of that is what happened in mid September 2007 when the percentage of S&P 500 stocks trading above their 10 day moving average peeked above 90%. The S&P 500 itself meandered for a few days and then went higher (and reached its swing top in October 2007).

The good news is that while this short term breadth indicator is overbought, the percentage of stocks above their 50 day moving average is only 40% and those above their long term 200 day moving average only 25%.

The really scary thing would be if any of these were 75% or higher. But we are still too close to the precipice ( the fall apparently avoided) for that.