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Market Outlook at Trader’s Narrative

Market Outlook

Things are not going as they should in the market. And by that I mean that the market isn’t going the way I think it should go. Intelligent tells that have worked in the past almost unanimously pointed to an oversold market that is ripe for a snap back rally. And yet the market hasn’t obliged. Yet.

We had the sentiment measures coming in as very bearish, we had put/call ratios showing a very scared retail investor, we saw a rush into the safety of ETFs and out of individual stocks, we saw spikes in volatility, an increase in insider buying, etc… the list goes on.

So what gives?

Are we really in a new cyclical bear market? having never really left the secular bear market that began in 2000? A few, like Lowry’s, have said exactly that. Only time will tell if they were prophetic.

A lot has been made of the weakness in the SOX index relative to the broader market (S&P 500) and to the Nasdaq itself. Looks can be deceiving. For each of the major intermediate rallies in the past few years, initially the SOX lagged both broader proxies. Only after the rallies were truly underway did it join in the fray.

You can’t watch the semis as a leading indicator as they haven’t been for a while now. So the double bottom thesis didn’t work out. But what about the general market?

Looking at the classic measure of market internals, the bullish percent of the Nasdaq 100 is now below the critical 30 level:
BP NDX July 2006.png

This is deep oversold levels. According to traditional bullish percent analysis, if the market can now lift up above 30 by 6 percentage points, we have a new buy signal.

Looking at the percent of stocks in the Nasdaq 100 above their 200 day moving average we see a very similar deep oversold condition:

NDX pc above 200 MA July 2006.png

This metric is now as oversold as it was in the summer of 2004. Will we have another summer rally? or will things continue to meander downwards?

Honestly, I don’t have much conviction either way. I would like to believe that this oversold level will be a launch pad for the next leg up. However, when I look at similar metrics for the other broad measure of the market I find them not nearly as oversold as for the Nasdaq 100.

And yet, an almost infallible (contrarian indicator) is now as pessimistic as I’ve ever seen him:

I’ve got this train-wreck button on my “Mad Money” console — the sound effects board I use during my TV show — and I feel like hitting it a bunch of times right now just to emphasize what this market’s become. It’s 2000 all over again without the snap-back because of the geopolitical stuff.

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