A Few Extremes
Wait a minute...new lows are a GOOD thing?
• The popular McClellan Oscillator, which is the difference between a 19-day and 39-day exponential moving average of advancing issues minus declining issues, hit its second-most oversold reading in 64 years on Monday, behind only 9/20/01 and 9/21/01 (which saw an average 19% gain in the Dow after 90 days). Other readings that came close to Monday's reading occurred on 7/23/02 (16% gain after 90 days), 8/31/98 (28% gain) and 10/27/97 (20% gain).
• The total put/call ratio (including both equity and index options) from the CBOE has been over 1.0 for each of the last four days. Since 1995, this has happened only two other times (3/15/04 and 9/18/02 & 9/19/02). Neither of those instances marked the exact low as they both showed negative returns 5 days later. However, after 30 days, the S&P showed an average return of +4.3%. I prefer to use the equity put/call ratio with QQQ options removed, to get rid of the non-contrary nature of those options. A 3-day average of that ratio is a bit higher than it was in mid-March, and before that we'd have to go back to April 2003 to see a higher average. Still, the 3-day average of that ratio has reached over 1.0 at the major intermediate-term lows in 2001, 2002 and 2003, so we're not seeing the same type of extremes there.
• The lowrisk.com sentiment survey showed 20% bulls and 58% bears in its most recent survey, ended this past Sunday. This is in the bottom 7% of readings of bullishness, finally an indication that bearish opinion is beginning to become widespread. This isn't exactly historically extreme, but this survey has a pretty good correlation to the other "major" sentiment surveys, and gives us a heads-up that when those other surveys report their numbers later this week, we may finally see a decent uptick in bearishness. The II survey, out today, showed a minor decrease in overall bullishness, which is a little disappointing. Those newsletter writers just keep hanging on (as far as their opinions go, anyway).
• Our NYSE cumulative TICK (summing up closing TICK readings over the past 10 days), which unfortunately only goes back to very late 1998, is now the most stretched since 3/31/99 and 9/28/99, which both marked short-term market lows. Our same measure for the Nasdaq has reached this kind of oversold level a few times over the past five years, and again they marked short-term market lows.
• Over the three days ended Monday, declining issues averaged 73% of total issues traded. This is an incredible display of a short burst of indiscriminate selling, which has been exceeded only once before - October 19th, 1987, aka Black Monday. The only other times that even approach this kind of selling over a span of three days were 6/28/65 (an excellent short- and intermediate-term buying opportunity), 8/29/66 (a good short-term opportunity, and an ideal intermediate- and long-term one) and 10/10/79 (a poor short-term buy spot, and decent intermediate- and long-term one).
• New lows on the NYSE reached close to 25% of total issues on Monday. This is an extremely rare occurrence over the past 20 years, each marking excellent intermediate-term buying opportunities. A valid question may be the number of non-operating companies on the new low list, which is backed up by the relatively tame number of new lows on the Nasdaq. Today's number of new lows on that exchange ranks only 42nd over the past four years.
• Ironically, even though breadth has been horrid, the TRIN on the NYSE has been not only tame, but downright low. In fact, on a 3-day or 5-day basis, it is actually overbought. The reason is because volume flowing into the incredible number of down issues has not been able to keep pace. I've noted many times that the TRIN is a poor measure of broad-based selling, due to its construction as a ratio of a ratio. Looking back over the past 65 years, we've NEVER had a time like now, where the a/d line has been so negative while the TRIN has been so low. The only other times that were even remotely comparable led to mixed performance, and personally I wouldn't read much into it.
At the risk of missing the bottom tick, my preference remains to wait and see how the market reacts around these levels. I have been approaching this decline as a test of the supposed intermediate-term low made in March, and am allowing for a slight (and temporary) undercut of those levels. We got the slight undercut on Monday, so the next few days become important to me. We are seeing breadth readings normally seen at washout lows (yes, I am aware of the possible dangers of comparing current breadth readings to those historical), and some of our more pure sentiment measures are getting there, so we certainly have some of the ingredients to make a nice low from somewhere near these levels. I'm not ready to jump in yet with both feet, but the historical precedent is compelling that a tradable low is close at hand, both in terms of time and price.
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