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Overbought Market Condition Resolved at Trader’s Narrative





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Wow! That was quick.

Just yesterday I cautioned that the stock market was overbought in the short term and then we get a 3% haircut in the major indices.

ism diffusion index change in employmentThe media blamed the market decline on the first public comments from a Fed official Jeffrey Lacker (Richmond Federal Reserve President) mentioning the “R” word.

Or maybe it was the ISM non-manufacturing report released before trading this morning that showed the deepest contraction in American service industries since the last recession.

The diffusion index was 43.9 (anything below 50 is contraction). According to the data since 1997, that predicts a job change of -137,000 for next month.

As I’ve been saying, yes, we are in a recession. I’m pretty sure the market knows this (check out the Google Trends chart!) so I doubt that’s what moved the markets.

Anyway, the market has now given us some new numbers to ponder. For one, the percent of stocks in the S&P 500 Index (SPX) which are trading above their 10 day moving average plummeted from +90% to 35% !!

Next, the percentage of S&P 500 constituents trading above their 50 day moving average was almost cut in half, from 44% to 24% !!

Similarly, the percentage of S&P 500 stocks above their long term 200 day moving average went from 27.5% to 18%!

The TRIN or Arms Index shot up to 2.96 (for the NYSE) and a humongous 3.53 (for Nasdaq). Whenever we’ve seen both indices give us an Arms Index above 2.0, we’ve had a short term snapback. To find a higher reading for the Nasdaq, we’d have to go back to - say it with me now - 2002. The comparisons with the bear market of 2002 are sure piling up.

And finally, today’s market action gave us a CBOE equity only put call ratio of 0.94 - extremely close to the magical 1.0 level:

cboe put call ratio feb 2008

This is the fourth time we’ve been here in a 30 day time period. For those that are counting :-)

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