Yesterday, the market flirted with the lows that we saw back in November 2008. So that’s the question on everyone’s mind. Will support hold, or will we see another waterfall decline?
If you were watching the action, you would already know that it was horrendous. Breadth was extreme: out of all the securities on the NYSE, less than 10% were able to close higher than the previous trading day.
We’ve already touched on many sentiment gauges which show an alarming amount of complacency. But what is truly astounding is that in the face of such horrific performance, small option traders plowed their money into call buying. The ISE sentiment index (equities only) moved up slightly to close at 135, meaning that after everything was said and done, 135 calls were purchased for every 100 puts. That, needless to say, is not despondency that carves out lasting floors in market prices.
And yet, even after yesterday’s carnage, we aren’t really close to a complete washout, from a technical point of view. Take the percentage of stocks trading above their moving average, an indicator which shows where we are in terms of breadth. Yesterday, 21.6% of the S&P 500 index component stocks closed above their 50 day moving average:
That might seem low to you but consider that although 20% is the ‘magical’ demarcation in normal, healthy markets, it isn’t so for bear markets. In fact, just as we saw a few months ago, this indicator can go much lower. That is almost exactly where it fell in late 2002
Looking at the bullish percent index, we find the same thing. For the S&P 500 index, yesterday’s reading was 39.60% but the last time market prices where at these levels - in November 2008 - the bullish percent was just 8.6%.
Everything is possible… who knows, the fabled Plunge Protection Team may decide to show up and rescue the day (remember them?) or we may just get a reprieve by a good old snap back rally. But even so, the market internals and the sentiment do not paint a pretty picture.
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