Trader’s Narrative

This is a tough market to navigate and the cross currents make things extra slippery. Perhaps it would be better to take a step back from the superficial index numbers and levels and look at the internal market structure. With that in mind, here is a chart for the New High New Low index for the Nasdaq:

It is a lesser known indicator but basically it compares the number of stocks going up and down. You can get more background information here, in case you’re unfamiliar with the new high new low index.

It is surprising to see that this indicator has been stuck consistently below 60 for the longest duration of time since the 2002 bear market. As the chart shows, this indicator stays low when we are going through a bear market and high when we are going through a bull market (as in the green box in 2003).

By the way, I’m showing a chart for the Nasdaq as opposed to the NYSE because the ever increasing number of non-common stock securities traded on that exchange has made most internal analysis of it fairly worthless.

In any case the chart above confirms what most of us know on an intuitive level: it feels like a bear market out there. Doesn’t it? Well, even though technically we aren’t in one. That doesn’t seem to matter. The tape is sluggish and the advance decline numbers also bear that out:

Last Friday’s weak market took us down to negative 1788 - extreme low advance decline breadth levels which we last saw in the swing lows of March (green arrow). But even so, it takes more than just one spike like that to wring out the market and set it up for a rally.

And in case you are wondering why I use the raw advance decline data, instead of the cumulative breadth data like most, it is because cumulative breadth is misleading.

For a strong and healthy bull market, either the advance decline must remain above such lows or when it does fall so low, it is preferable for a bouquet of extreme low readings which serves to flush out the weak hands (green boxes).

If you look closely, you can see what I mean about non-common stock securities ruining NYSE advance decline data. If you were only going by NYSE data, in June 2007, you would have mistakenly thought that the market was oversold.

So we seem to be in a bit of a limbo - not quite a bear market, not quite a bull market. Or maybe I’m projecting my own ambivalence onto the charts. What do you think?

On Friday’s 1pm conference all, Bear Stearns (BSC) CFO, Sam Molinaro, said:

These times are pretty significant in the fixed income market. It’s as been as bad as I’ve seen it in 22 years. The fixed income market environment we’ve seen in the last eight weeks has been pretty extreme. So, yes, we would make that comparison to market events [late-90s debt crisis].

Although he meant the call to be reassuring to Bear Stearns investors and to the market in general, his comments pulled the plug on an already weak market and we plunged to close below the “line in the sand” 1460 on the S&P 500.

Worst in 22 Years?
While reading the most recent Economist over the weekend, I caught an article about this whole sub-prime mess and Bear Stearn’s involvement. Sure, there are some stresses and quiet a bit of panic, fear and loathing. But worst in 22 years? According to the graph included in the article (from Bear Stearns no less), it is dubious that we are seeing “the worst bond market in 22 years”.

The chart showed the spread between the Bear Stearns high yield bond index and treasuries. I wish I could show it to you but since the scanner is on the fritz, I’ll have to describe it. Keep in mind that the chart is small and the line thick, so all numbers I mention are eye-balled approximations.

According to the chart, there were these significant spikes in the high yield - treasury spread:

1991 -> 900
1998 -> 700
2000-2002 -> 1000-1200
right now -> 450
recent low ->300

The period between 2000 and 2002 showed several spikes within the 1000-1200 range. Since then, the spread narrowed and reached a recent low of 300ish. Now it has increased to 450ish. So, atleast according to this measure, we are just heading back into more reasonable territory, from a long term perspective.

And today, we learn that a scapegoat has been named: Warren J. Spector, co-president of Bear Stearns (BSC) or should I say, ex-co-president.

Now, all eyes are on Tuesday’s Fed meeting and their statement. I don’t think anyone is seriously expecting a rate cut tomorrow but the likelihood of one sometime between now and the new year just got a shot in the arm.

Finally, it looks like the worst may be over in the financial sector as almost all individual securities there are jumping 2-3% or more. We’re still not out of the woods yet but there is no question that this has been one of the deepest oversold conditions in this sector in a long, long time.