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Who Is ‘Margin’ And Why Does He Keep Calling Me? at Trader’s Narrative





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Remember the Top?
Today is the 8th year anniversary of the tech bubble. Yaaa…aay! Don’t feel like celebrating? I don’t blame you.

Believe it or not it has been eight years since Nasdaq temporarily peeked over 5000. Back then I had a friend who almost threw a “Nasdaq 5000 Party”. How’s that for a contrarian indicator?

Here we are after eight years sitting more than 50% below the high. Alright, put away the party hats.

10/10 Breadth
I’ve been watching the percentage of stocks above their 10 day moving average to see if it can breach 10%. Although this is a short term indicator, it has had a great track record of finding major inflection points. You can read about Lowry’s in depth research on this indicator here.

percent spx above 10 day MA March 2008

The above chart is as of Friday’s close. With today’s horrible market action, I wouldn’t be surprised if the percentage goes below 5%. For the NYSE, the number was 9.12% at last week’s close and most likely lower after today.

UPDATE:
On Monday there were only 3% of S&P 500 components closing above their short term moving average (10 day). The last time we had this many stocks oversold was in the beginning of March 2007. If you pull up a chart of that time, you can see it was a significant low.

This should be good news for the bulls but after a deluge of extreme oversold readings that didn’t amount to anything, it is tough to get excited about one more.

V or W or…?
We are now approaching the lows of the mid January spike. The very same that gave us a short respite. In a manner of speaking, the bulls are being pushed inch by inch closer to the edge of the precipice. What I’d like to see is sheer panic… desperate, uncontrollable, illogical despair. Unless I’m not looking at the right spot, I don’t see that.

Some thought we would have a “V” bottom. Some watched for a “W” or double bottom formation. While some still are convinced that we are going lower, much lower.

Bear Market
One of the characteristics of a bear market is that oversold readings that would normally ignite a ferocious rally simply don’t. They putter about or cascade into even more extreme oversold readings. I’ve been, admittedly, tenacious in holding on to the bull thesis - not as some might suggest, because I’m a “permabull”, but because until proven otherwise, you go with what has worked.

And until now, buying extreme oversold levels has worked. Over and over and over again. So at some point it stops working. If (big IF) you’re using discipline in your investing or trading, you come out with a few scratches and nicks. What I refuse to do is to flip a coin or go with my “gut”. That is just dumb. On any day, I’d rather have my indicators, technical analysis, contrarian sentiment, etc.

So although I continue to find multiple indicators which are pointing to oversold, I wonder if they really mean much. After all, price trumps all and as price continues to slide lower, it is not being accompanied by a proportional increase in bearish sentiment nor of extreme indicators.

I’ll do a quick recap of the indicators and you can judge for yourself.

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2 Responses to “Who Is ‘Margin’ And Why Does He Keep Calling Me?”  

  1. 1 ItsMarginHere

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    As I’m sure you know, P/C ratios don’t necessarily tell us anything as traders find new ways to use them. Quite frankly, if I receive a margin call, maybe I’m going to start selling and loading up on puts as I raise enough capital after starting the selling process….Is that bullish? It’s bearish for equity prices.

    ie, P/C ratios may mean little in this environment.

  1. 1 Sentiment Overview: Week Of April 18th, 2008


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