I’ve been on the West Coast this last week and have not been posting much. Not much to report as we are still in this range and headed back down to the lows.
Here is the Market Monitor, which is rising due to a consolidation in price.
Market Monitor
I agree with you, the world does look like it is coming to an end. Well it probably is, but lucky for us that end won’t come in the near future. Right now is one of those times when there is blood on the streets! Right now is when we buy!
As you might now from reading previous postings, I am fascinated by the extreme moves of the market. This fascination is probably why I find the Market Monitor breadth indicator so interesting and useful. It is a wonderful way to quantify how stretched a market is at any particular time and helps identify low risk buy or sell opportunities. (See mean reversion). I showed several examples of the recent extreme moves of the last year in my Market Monitor video.
There are several ways to measure extreme price moves and today I stumbled on a surprising property of one of my ATR (average true range) trailing stop indicators. What I did was to plot the ratio of the market price and the trailing stop indicator. Very simple, but as you can see in the plot, the signal oscillates about unity, with above 1 being a bull market and below 1 being a bear market. What I want you to notice are the extreme moves. In the daily chart, you can see that we are further away from the mean right now than we were in the spike down in 2002. For some longer term perspective, I have also included the weekly SPX chart. Before this week, there have only been 4 times were we had a more extreme move away from the mean. All of these lows, excluding 9-11, marketed a significant, long-term low in the market.
While Tom O’Brien flipped to the bullish camp yesterday, I was still somewhat skeptical. It wasn’t until today, and after many hours of work, that I came to the realization that O’Brien is right. We can expect a bumpy road, but I think this is the end of this brutal bear market.
I posted earlier today that the SPY completed a TD Combo buy countdown yesterday. Well the main S&P 500 index completed one today. The S&P 500 also completed a TD Sequential buy countdown on the 15th of September.
I don’t know, but I posted a new video on MarketTurbulence.com.
It introduces how to use the Market Monitor breadth chart.
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.
Yesterday was a pretty good day. First of all, we were able to salvage the condo deal and we closed it last night. Secondly, I pretty much nailed the low yesterday on the S&P 500. Check out the MM breadth charts and see how stretched the indexes are. I had these charts in mind the last few days and couldn’t help but notice the doom and gloom getting to extreme levels. Combining this with the bullishness of Tom O’Brien, I just had to buy.
Finally, I read that Stephen Baldwin has promised to leave the country if Obama wins. I really hope someone holds this moron to his word (which I’m sure is worthless).
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.
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