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Buzz & Banter



"Kevin, what is going on? You write that your indicators are now all positive and here we are in the middle of the biggest selloff in weeks?"

Good question. Here is the answer. The bullish percent indicators are not timing triggers; they are risk measurement tools. In simple terms, right now the indicators are saying that risk is high but, since they are in Xs, demand is in control. When demand loses its grip and supply takes over, the indicators will by necessity reverse to Os as stocks begin to give sell signals. This will be the warning that the controlling force in the market (demand) has switched (to supply).

There is a very important difference between a pullback toward support, and a pullback that causes sell signals and creates technical damage. The value of the bullish percent indicators is that, by definition, they only report when technical damage occurs. This selloff today is simply a pullback toward support.

First, the weakness and underperformance in the financials has not yet translated into outright sell signals. That's the group I'm keeping the closest eye on for the intermediate picture.

Also, you may be surprised to know that so far today buy signals are overwhelming sell signals and the NYSE, NASDAQ and Optionable Bullish Percents are all three actually up on the day; another example of why the color of your screen, at any given time, can be misleading.

As far as the bigger picture goes, it does appear that the bearish camp is growing less crowded by the day. A plausible scenario I keep kicking around is this: the indicators will reverse down sometime this fall corresponding to a corrective phase in the cyclical bull rally we are seeing. This would temporarily relieve some of the extreme sentiment indicators, allow some bears to capitulate without feeling like they've lost too much face, and set up the final phase of bullishness that reverses the indicators back up, pushes sentiment back to an extreme, and forces the final capitulation of holdout bears. This type of scenario fits well with the historical tendency of the NYSE Bullish Percent. When the indicator has moved above 70% in the past, the first reversal down did not cause much capital loss for those who ignored the signal. The second reversal down is the one that historically resulted in the most devastating losses. Just putting it out there, for what it's worth.

On a lighter note, the weekend is almost upon us, and here in Richmond that means an opportunity, if I choose to accept, to drink beer while I watch other Southerners compete to demonstrate their complete and utter mastery over the left hand turn. That's right, NASCAR is in town. It's kind of like horseracing if the jockeys were all professional wrestlers!

No positions in stocks mentioned.

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