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Yesterday I wrote about a shift in the balance of power and how the market was barely holding on to the “box of bullishness”. That is to say, the technical underpinnings for a cyclical bull market. Today, with the 4% declines in equity averages, that was broken to the downside rather decisively.
The percentage of S&P 500 stocks trading above their 150 day moving average declined even more, falling 21.4% points today to reach 37%. The last time it was this low was in April 2009 as the cyclical bull market was just revving up.
The percentage of S&P 500 index stock trading above their 200 day moving average experienced a 16.6% point drop to 50.4%. That is a very large daily move and it goes to show that so many of the S&P 500 components were holding on for dear life to their long term trend. As they fell through the floor, the move wasn’t all that subtle today.
The S&P 500 index is now 2.72% below its long term trend. The last time it was trading here was at the end of May 2009. A far cry from the 21% above the long term average we saw back in October 2009. On that day the S&P 500 was at 1096.56 - about 25 points higher than today’s close.
Another technical indicator of the shift underway is the Nasdaq new 52 week high to low ratio. It is now back to mid-March 2009 levels:
While all of this points to a change in tone for the market which is far more bearish, we have to remind ourselves that the market doesn’t go down in a straight line. In fact, in the short term, we are approaching an area of opportunity for the bulls - if they are agile.
To start, let’s return to the percentage of stocks above their moving averages. Earlier this month I shared a simple way to use the long term and short term in a ratio to find buy points. The key level to watch for this ratio is 0.5 since it corresponds to intermediate lows.
This ratio for the S&P 500 fell below 0.5 on May 6th and then again on May 14th. Right now it is at 0.16 - the lowest it has been since the tumultuous markets of October 2008. This is because the percentage of S&P 500 stocks trading above their 50 day moving average has plunged to merely 6% - a 3 standard deviation move below its medium term trend. The last time it was lower was early March 2009 (at 5%).
If I were forced to pick any single breadth measure for market timing, this would be it. Its track record for spotting important lows is impressive. To further stress the importance of this measure, and to show how pervasive the washout is, consider that for every major sector has less than 10% of its components trading above their 50 day moving average.
For some, there are just charred craters where there once stood whole sectors. The financial sector has just 1% of stocks above their 50 day moving average. Energy (thanks BP!) has zero.
Applying basic support and resistance we find that the market is almost at an important support level. The S&P 500 found support after the February correction at 1060 - some 10 points from where it closed today. The next support level is also close at 1040 (from November’s low).
Extremely Negative Breadth
Breadth was extremely negative today. At the NYSE there were 2983 declining issues and only 160 advancing ones. The Nasdaq had slightly better breadth with 2524 declining issues and 221 advancers.
As well declining volume overruled advancing volume by a massive margin. For the NYSE, volume flowed into declining issues to advancing issues by 73:1. For the Nasdaq, it was slightly less worse at 43:1. Those numbers may be different depending on who which data provider you rely on. But at such an extreme point, the over all picture is clear.
Not surprisingly the Nasdaq McClellan Oscillator (Ratio Adjusted) is once again back to levels we hadn’t seen since October 2008. The message from breadth is that we have a rush to the exits with indiscriminate selling.
Fear Is Your Friend
Fear is the contrarian traders friend. We’re finally starting to see some real concern creep in. For example, the CBOE volatility index (VIX) is now at 46 - the highest it has been since March 2009.
Retail option traders, as measured by the ISE sentiment are finally worried enough to buy some puts (for once!). Today’s ISE sentiment index was 100, the lowest it has been since June 18th 2009 (92). But more important than the daily fluctuation, the 10 day moving average of the equity only ISE is now at 147.50 - slightly below where it was at the bottom of the February correction.
Finally we have an anecdotal sentiment gauge in the recent CNBC Fast Money roundtable where a contributor was apologetic for being bullish!
Famous Last Words
To recap, while I recognize the ominous signs that we are seeing a potential trend change and that this does not look like another regular correction within the cyclical bull market, I have to force myself to not succumb completely to the doom and gloom. Otherwise, I’d risk missing out on a short term opportunity for a bounce from an extremely bleak tape.
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