The Novice Bear

It is time to start watching the Market Monitor breadth chart.  (search “Market Monitor” on the blog for more information)

As you can see from the chart below, the market is not stretched enough for a snap back rally.  Despite the spike in the VIX, don’t expect to see a tradable bottom right here.  Look for the MM to get down to the lows of January and July. 

UPDATE:  Barry Ritholtz is calling for a tradable bottom right here.  I would be very careful about getting long here.  Like Barry says, he is usually early and according to the MM breadth chart shown above, the market is not as stretched as it feels.

We seem to be at a turning point in the market so I guess it is time to look at the market breadth. 

Nasdaq 100 slipped into bearish territory on the MM Breadth chart and seems to be leading us down.  And why not?  It led us up. 

With the Nasdaq headed lower, can the SPX and small caps be far behind? 

I would be looking for shorts here people.

I’m back and I’m just in time for all of the fireworks.  I thought I might review some of my favorite breadth indicators and remind myself about why I’m expecting a bounce.  While there are tons of cliches out there about how we should buy when there is blood in the streets, I always turn to the simple fact that the market never goes up forever and it never goes down forever.  Here are a few ways to anticipate the change in trend and get a sense if blood is actually flowing in the streets.   

First is to use some standard measure of a buy or sell signal.  In this case I’m using my Trailer indicator and counting the percentage of S&P 500 stocks that are either on the bullish or bearish side of the line.  Clearly the S&P is in oversold territory and looking back at history we can see that a bounce has occurred soon after reaching these extreme levels.   

Using a similar technique, I can also use the triple exponential moving average cross that was featured in a recent Stocks and Commodities article.  Here you can also see that we are due for a bounce. 

Finally, I’m showing my favorite breadth indicator.  This is a measure of how stretched the market it by displaying the difference in the number of stocks that are 15% below their 35 day high and 15% above their 35 day low.  Again, we are very extended indeed. 

Sentiment is pretty gloomy out there, but so is the market breadth.  Notice that the percentage of stocks 25% below their 65 day high subtracted from the percentage of stocks 25% above their 65 day low has moved into bearish territory.