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Keeping an eye out.


The near and intermediate-term indicators that I follow continue to suggest that if the market is going to have another leg lower in this bear market decline, it should start soon. The good news is that any decline would likely line up the intermediate-term indicators to the buy side. The bad news is that the last leg of any intermediate-term decline over the last three years was accompanied by a nasty sell off.

At the very end of my column yesterday, I said I would try to find unique ways of expressing a view that hasn't changed much. In that vein, two things caught my attention yesterday:

First, I had a friend sitting in my office at about 3:15pm yesterday afternoon. During most of yesterday, I had a few calls from institutional clients to speak about the morning comment and life in general. Basically, it was a rather boring day. Then as I was speaking to my friend, I got five calls in five minutes from accounts wondering my view given the decline "in that last few minutes." Right after those calls, I got a request for a comment on the market from a radio network. When that happens, the market must be making some kind of emotional extreme from a trading standpoint. My advise to my accounts was to not press the downside.

Second, when I explained the above to one client, they conveyed how the reaction showed everyone is overly pessimistic and the market was sure to rally. My response was that while everyone is talking negative, how are they positioned? I cover some pretty aggressive institutional accounts that usually play either direction in a meaningful way. Right now, all of them are playing light and waiting for some signs of a sustainable move in either direction. That means to me that everyone may be talking negatively but are not positioned that way. Defensive? Yes. Negative? No. In the market, it is important to focus on what traders and investors are saying, but it is even more important to watch what they are doing. If everyone is flat and there is not an aggressive short position, who is going to kick start the rally? Typically, rallies have been jump started by shorts that are trapped and force to cover. The violence of the move causes the longs to thing they are missing something and jump on board and the next thing you know, a rally is at hand. If you don't have big short bets, how is it that violent move that drags in the longs going to get going?

In my view, the flat nature of the aggressive trading community means that absent any new news, any move leading to an intermediate-term low is likely to be sparked by a news event that causes those few who are long to sell and give shorts a reason to get back in and press the downside. Given the heightened sense of fear, that news item may be non-descript so we must remain vigilant in watching for it. As for right now, we have the same news dominating the tape (lower dollar, war fears, oil prices, etc) and a market where the indicators are saying to be defensive because despite how the market feels, it is clearly not oversold and may actually be poised to begin a move back that way. We should know soon.
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Be careful of a market trending lower and bouncing without the near-term indicators being oversold.
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