Trader’s Narrative

Today’s morning gap down freaked out a lot of longs (myself included). But if we could separate the last few hours into its own trading day, it would have been a knock out.

Contra Hour
The first hour belongs to the amateurs as their previous day’s orders are matched but the last hour of trading, referred to as “contra hour”, belongs to the pros as they take advantage of cheap prices to buy (or rich prices to sell at). Often, the beginning of the trading day and the end are mirror opposites of each other, like today.

Market Internals
Yesterday’s market was notable for giving us a number of new records but probably the most remarkable was more than 30% of all issues trading at a new low. This only happens once in a blue moon and as you can well imagine, a snapback follows.

Today’s market action was a mixed bag since prices struggled for most of the day. Even so, we had an almost 3:1 ratio of advancing to declining stocks on the NYSE. For the Nasdaq it was closer to 2:1. If we indulge in the fantasy that the last few hours were the whole trading day, then we may have even gotten a 90-90 up day. But that’s just imagination… back to reality.

Sentiment Holdout
As I’ve noted, the lone holdout in the sentiment landscape has been the Investor’s Intelligence measure of newsletter writers. Mark Hulbert confirms in this video, through his more quantitative indicator: the Hulbert Stock Newsletter Sentiment Index

But with all due respect to Hulbert, when we find the retail investors gripping the morning paper in a cold sweat as they frantically look up their portfolios, having first remembered to wear Depends undergarments… sentiment is skewed enough to create an inflection point. No matter what the newsletter writers may think.

Also, Hulbert doesn’t mention in the video that the 10 best risk adjusted market timing newsletters are for the most part still bullish. Interestingly enough, the 10 worst newsletters are actually recommending an average equity exposure of 13% short.