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business newsCorrective Low, Trading Bottom Drawing Closer
By
Jeff Saut
Jun 13, 2011 11:50 am
Despite the six-week stock slide, there has been very little technical damage done to the major averages. Moreover, stocks are currently deeply oversold.
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-- Rob Stein, Astor Asset Management
The market kept sinking as Rob and I chatted last Friday about the “state of the state.” I told him I was doing a lot of hand-holding because most participants didn’t follow the advice of raising more cash in portfolios as certain support levels were violated to the downside over the last 30 days. While intuitively I concur with Rob’s thoughts about “riding out market fluctuations when the economy is expanding,” my risk-management discipline forced me to raise more cash again on Friday, even though I believe the stock market is in the process of making a significant “low.” Ideally that “low” should come in the 1230-1250 zone [basis the S&P 500 (SPX/1270.98)]; although the SPX doesn’t really care about where I think the “low” should come. The 1250 area is particularly interesting since it targets the March 16, 2011 intraday reaction “low” (1249.05), as well as the SPX’s 200-DMA (1253.48). It would seem fitting, however, following the end of the eight-month Buying Stampede, for a Selling Stampede to begin.Recall the Dow Jones Industrial Average's Buying Stampede commenced on September 1, 2010, and continued uninterrupted until May 31, 2011, with never anything more than a one- to three-session pause/pullback. Verily, last Monday marked the first time the DJIA (INDU/11951.91) closed lower in four consecutive sessions, thus ending the longest upside stampede chronicled in my notes of over 40 years. If we have spilled over into a Selling Stampede, this is session 9 in what typical should be 17-25 sessions on the downside. That would imply a “low” of some significance is due over the next two weeks in the aforementioned 1230-1250 zone. Still, I am not certain we are in a Selling Stampede; and therefore, am not sure this selling-squall will last the typical 17-25 sessions.
Said sense is reinforced by the fact that, despite last Thursday’s “throwback rally,” the equity markets remain pretty oversold. Indeed, only 15.6% of the SPX stocks are above their respective 50-day moving averages (DMAs), which is down from ~80% a few months ago. Or how about this from our friends at Bespoke, “61.4% of the SPX’s stocks are oversold. The current oversold level is only the 27th time since 1990 that more than 60% of the stocks in the index have been [this] oversold.” Then there are other finger to wallet ratios, like the CBOE Equity Put/Call ratio, which at 0.99 (nearly one “put” traded for every “call” traded) is at the highest ratio (the most bears) of the entire two-year bull move. As for sentiment, hereto the numbers are eschewed too bearishly with the AAII figures showing only 24.4% of individual investors bullish. On this point, I have always been amazed as to why the American public is sooooo quick to embrace the negatives. That negativism was bolstered last week by CNBC’s Bill Griffeth in his interview with Walter Zimmerman. To wit:
Bill Griffeth: “Time for talking numbers and we're looking at this debate that continues to range whether or not the economy is vulnerable to a double dip recession. Our next guest says many of the charts he's looking at are saying the possibility of a double dip recession are alive and well right now, and he says there's evidence also that the stock market could return to the lows that we saw in March of 2009, way back two years ago. Joining us with all that happy news, Walter Zimmerman is the chief technical analyst at United-Icap. Walter, good to see you again, welcome back.”
Walter Zimmerman: “Thank you. Good to be here.”
Griffeth: “We start with the Commodities Research Bureau Index (the CRB) – which you say has a very high predictive value over the last 50 years. What’s it telling you right now?”
Zimmerman: “When you look at the rally from the March '09 lows, it stopped precisely right where a bear market correction should have stopped – the 390 area. And, the shape of the rally from the lows of '09 to the recent highs was a classic bear market correction (a, b, c type, three legged advance). Right into the March 2nd peak in the CRB you had very bearish sentiment and momentum divergent sell signals. This rally from the CRB was impressive. It has everybody concerned about inflation, and that's something to be concerned about. But, the CRB is a leading indicator. And right now it is saying that there is the high risk that inflation has peaked and commodity prices have turned south.”
No positions in stocks mentioned.
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