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Bouncy bouncy


As is usually the case driving in this morning from northern New Jersey this morning, I was grinding about what the future of the markets and life in general hold. The markets are dicey, the fundamental and technical indicators are mixed at best, a national tragedy occurred Saturday and the geo-political front is really going to heat up over coming weeks. As I was grinding about all these issues and how they may be reflected in the market, the answer struck me like a ton of bricks.

You know those annoying commercials on the radio that suggest "...if you follow me and my many years of experience in trading, you too can make MILLIONS as I did using my trend analysis...blah blah blah." There are so many market timing commercials based on trend analysis that the best bet is that there isn't going to be an easily identifiable trend for a looooong time! I just looked at Linda when I heard the commercial and said that I knew exactly what to open the commentary with today.

Back to reality. As I mentioned above, there is any number of reasons to be concerned about the world and the markets right now. The fact is that many of the issues that are currently driving the tape have been there for a while and are rapidly approaching some form of identifiable resolution. The reality trade is in full swing as buyers have basically stepped away and sellers have picked up. The net result is the market's recent decline has created a sufficient enough oversold condition for traders to take note while looking to get long in anticipation of a reflex bounce.

The problem with trading using an oversold condition is that over the past year, buying on the initial oversold has created a small bounce, but has proven to be a better sell signal than a buy signal (Exhibit 1). In addition, no meaningful rally has taken place absent the intermediate-term indicators residing firmly in oversold territory as well (Exhibit 2).

Exhibit 1 - Initial oversold in a bear market has been a sell signal on first bounce.

Exhibit 2 - The intermediate-term picture also urges patience and caution.

Near-term view. The market as measured by the S&P 500 (SPX) is oversold enough to possibly generate a bounce. The problem is that the only reason to be a buyer right now is that the market is oversold. In other words, if a bounce comes or a few sideways days occur, that argument will likely no long be valid. Any upside in addition to Friday's gains could prove to be unsustainable and temporary.

Intermediate-term view. As mentioned in the graphs above, the only significant moves in the market over the past three years has come from an intermediate-term oversold condition. While the market is clearly moving in that direction, the proximity of support and/or sufficient enough oversold levels suggest that a significant low may take more time to generate. The fundamental, technical and geo-political backdrop reinforces the need for patience and avoiding the temptation to buy the first oversold bounce.

God bless the Astronauts and their families.
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