Trader’s Narrative

Once again, the indices are toying with the November 2008 lows and have everyone on tenterhooks about the resolution of this support line: will it hold again? will be broken and cause a cascade down? will it break only to trap the bears?

Yesterday I presented my reasoning why the support wouldn’t hold. Today let’s play devil’s advocate and see why the bulls may just hang on by their fingernails for dear life.

As a reader (Russ) pointed out in the comments section, the very fact that there are now a larger percentage of S&P 500 stocks trading above their 50 day moving may be a positive sign, showing that the components that make up the index are stronger than might seem.

That would imply that the single number that represents the S&P 500 index is hiding the fact that smaller capitalization stocks are doing better than the larger capitalization stocks. Both the mid-cap and small-cap indices are trading well above their November 2008 lows.

As well, take a look at the recent chart showing the number of stocks trading at new lows:

The green arrow points to the spike in new lows that corresponded to the November 2008 low. You’ll also notice that in October 2008 there was a higher number of new lows - that was in early October when the S&P 500 spiked down to 839.80 only to recover and close almost unchanged for the day.

This chart is showing that while the ’stock market’ is once again near its lows, the market of stocks is still holding up surprisingly well.

We can see something similar during the last throes of the last bear market in late 2002:

Once again, the green arrow points to the spike in the number of new lows, corresponding to the low in the S&P 500 index in early October 2002. In July 2008 we saw slightly higher new lows but the market also closed slightly higher. But then, in March 2003, the number of new lows was dramatically lower as the S&P 500 index dove to retest those same lows:

Sentiment Shift
So keeping an open mind, this may very well mean the bulls get a break (finally). At the same time, technical analysis is one layer. The other that I rely on heavily is sentiment. And although in the past few weeks contrarians have little to cheer about, the most recent data from the AAII weekly survey shows a drastic change in the outlook of retail investors.

Whether it is the nerve wracking dance on the edge of the rain slick precipice or the relentless bad news that pounds us all through the mainstream media, the AAII bullishness collapsed from 33% to just 22%. Needless to say this is exactly the sort of extreme sentiment that I’ve been waiting for.