Trader’s Narrative

A recent mention of cumulative TICK on Trader Feed blog caught my attention and I looked at this indicator today. Now I know, Dr. Steenbarger’s chart of cumulative TICK is using the NYSE TICK data and it is very short term in contrast to my analysis.

But he does briefly mention that “…the Cumulative NYSE TICK has stayed well above May levels.” And then goes on to extrapolate:

Continued strength in Cumulative TICK would suggest to me that we’re experiencing a correction in a bull market, not the start of a renewed bear.

I’m not so sure we can draw that conclusion. For reasons that I’ve outlined many times before, I prefer to use the internal breadth data from the Nasdaq. So here is a look at a few years worth of cumulative TICK for the Nasdaq:

If a higher high is a sign of a correction within a bull market, then by that account according to cumulative Nasdaq TICK we’ve never even entered a bear market!

Now I know this is the Nasdaq data but the NYSE chart doesn’t look all that different. Which reminds me of the uselessness of cumulative breadth numbers (advance decline) as any type of indicator - NYSE Breadth Is Strong: Why It Doesn’t Matter.

Instead of looking at TICK data cumulatively, I prefer to smooth it using a simple short term moving average:

Although it has come down from the extreme in April 2009, it isn’t anywhere close to the range that has historically coincided with market lows (or lasting market bottoms).

Although the release of a report by Mike Mayo of Calyon Securities (formerly with Deustche Bank) on the health of US banks is being blamed for the weakness of the market today, the truth is that this rally has just about exhausted itself. You can see this by looking under the superficial cover of the index prices. For example, take a look at the short term average of the Nasdaq TICK:

I prefer to use the Nasdaq TICK data because the NYSE’s is influenced by too much noise as a result of the non-operating company listings. Clearly, we are in thin air territory here. A simple moving average of TICK serves as a crude approximation of the cumulative TICK measure made famous by market wizard, Mark D. Cook.

Another way to look at the market internals is the percentage that are trading above their 50 day moving average:

As a reader pointed out when I asked, How Far Will This Rally Take Us?, the 80% line has been a “line in the sand” where prices have either paused or reversed in the past (red arrows):
Continue reading ‘Recent Stock Market Rally Hitting The Wall’

Alright, so we have our change. But what’s after change? what’s comes after hope? Is it safe to venture out to put the pieces together again?

To find out, take a look at this weekend’s reading list from news.tradersnarrative.com:

• Aftermath: Woe is us
• Using TICK to find inflections
• Why Peter Schiff’s stock is rising
• This bear market a pup compared to tech bubble
• What if zero interest rates are too high?
• Short fund up +100% faces redemptions
• Decline in progress
• What lipstick sales tell you…

And remember to check regularly since there are interesting links added regularly throughout the week.

Polish Those Crystal Balls

So was that capitulation? I don’t mean today’s gangbusters market. I mean yesterday’s rollercoaster ride.

Let’s see…

Stop, Hammer Time!
The intraday reversal gave us a beautiful, textbook hammer candlestick. Using the traditional Japanese candlestick theory, after a downtrend this is a portent of the end of selling pressure. Although the low could be tested - especially with Friday’s gap - a hammer is a bull’s friend.

Market Internals
The market was deeply oversold. The NYSE cumulative intraday TICK reached levels only seen right after September 11, 2001 and during the bear market bottom in the summer of 2002.

The New High Lows Index for Nasdaq reached 2.29%. Simply put, almost no highs, and almost all lows. To find a more extreme reading, we’d have to go back to the fall of 1998. Which as you know was a major market bottom.

Only 9.4% of the stocks in the S&P 500 index closed above their 50 day moving average. And only 34% above their 200 day moving average. The NYSE McClellan Summation index got as low as it has been since the bear market bottom.

My Kingdom For T-Bills
During Thursday’s nail biter of a session there was an exodus from anything risky towards the least risky asset. Theoretically risk free Treasury Bills. The run on government paper pushed the yield down to 3.86% for 3 month bills. To make things worse, due to an unexpected rise in tax receipts the government issued less paper. This sudden imbalance is extremely rare. And it only happens during panics (which… say it with me now… form bottoms).

I felt uncomfortable agreeing with Cramer, but I think this is one of the reasons why the Fed acted this morning. Commercial paper was being shunned. They stood up and basically told the market We got your back. For a bit it was touch and go, but my world feels right as rain again.

Margin Bulletin
I got a message from my broker warning me that positions in VIX futures and futures spreads could face an increase in margin from the CFE. I’m thankful for the headsup but I don’t trade these securities. I did notice that margin tweaking is a sign of inflection points. Just something to tuck under the hat.

Retail & Institutional Fund Flows
This is fascinating. According to the estimates from TrimTabs, we just had the highest weekly outflow since right after September 11, 2001. For about two years now the US mutual fund investor has been shunning the US stock market. But this week they pulled $12.8 billion out of US equity mutual funds.

According to TrimTabs, since the beginning of year, mutual fund buyers have been net sellers of stocks resulting in outflows of $35 billion in the last 4 months. The only time we saw similar outflows of this magnitude was during June 2002 and September 2002. You know what that was, right?

Strangely enough, bonds are the most popular asset class along with money market funds. They are even more loved than international markets. Bonds have seen an estimated $92 billion inflow since beginning of year this year.

That’s the retail side. What about the institutional mutual fund asset allocators? I’ll give you one guess.

They’ve been diving into the US market with the same intensity as the retail side has been escaping from it. So the smart money is buying and the emotional, dumb money is selling. Watch the video for more details:

Commitment of Traders
The most recent COT report dovetails with the fund flows data. We are seeing a continuation of the commercials going huge net long and the small speculator going the other way. Whether the futures market or the stock market, the two sides have clearly outlined their positions. There is no doubt where they stand.

What, Me Worry?
Which gives me a possible explanation for the sentiment picture. Perhaps the reason we are not seeing a total all out panic and despair from the retail investors during this downturn is that they simply don’t have any real vested interest in the outcome.

If we go by the COT and fund flows, they have very very few chips on the table. So why would they care? why would they get scared? Most of their money is squirreled away in cash equivalent and bonds and international markets. Unlike the 2000 top, they have very little invested in the US. Why would they even really care if the US market ticks up or down a few percentage points?

I was really surprised to notice that the 5 day moving average of the Nasdaq TICK (TICKQ) reached a statistically significant oversold level last week. I was watching the advance decline numbers and it slipped my mind to check in on the TICK.

Wow! I never suspected that the Nasdaq TICK would be so low. When it occurs after a market decline, it usually marks an inflection point in the market. That is what happened in this most recent example as the market rallied from its lows last week.

But there is a caveat.

This indicator has a short term perspective. So this latest signal has much less meaning now. And even less going forward.

The short term average of TICK is a handy approximation of cumulative TICK, which can be challenging to compile and calculate. It does a good job of flagging market extremes. The disadvantage being that as with all moving averages, the more short term, the more noise mixed in with the signals. And the more long term, the larger the lag between signals and opportunities for action.