Sunday, October 5, 2008

We Are Extremely Oversold, But That May Not Mean Anything

First of all, I apologize for not posting as much recently. A lot of this really was indeed market related, as I just didn't see a whole lot new that was worth writing about. However, I also have been having headaches for the last few weeks whenever I use my computer - some sort of computer-vision-syndrome situation, or at least that's what I think it is. Perhaps my eyes are just getting older along with the rest of me and I need to get them checked again. Regardless, I have been staying away from my laptop for this reason and hope I can find some sort of fix soon. If any traders or bloggers out there have experienced anything like this (we are certainly on the computer a whole lot as traders) please share any advice you can give me.

With this market continuing to confuse most, I thought I would put up a few observations this weekend about where I think we may be headed. Based on all of my typical measurements, we are very close to a bottom. The T2108 from Telechart is now lower than it was in July and is at its lowest levels since August 1990. The only level below that was in October of 1987. We all know what happened then. So based on this measurement, stocks are at historically high oversold levels.


In addition, my Market Map scans are about as oversold as I have ever seen them. My main ratio still has a bit farther to fall to get to extremes, but the others I use are all extremely oversold. The number of stocks down over 50% in the last month is currently at 53, which is the highest number this year and the highest number I can remember since doing these scans. I also have only 40 stocks that are up 25% in the last month versus a massive 893 stocks that are down over 25% in the last month, which is an extremely high number. I also have an extremely high number of individual stocks (495) with oversold readings via Telechart. So obviously, things are extremely stretched to the downside right now, and I am sure I am not telling you something you don't already know.

I also get the sense (and this is only my guess because I do not have the experience to draw upon in terms of trading other bear markets and panic bottoms) that the fear out there not only in the market but in the entire economic environment is palpable. When you see all of the magazine covers coming out with stock market news and every newscast leading their broadcasts with the closing numbers from Wall Street, traditionally you start thinking a bottom is coming soon. The crowd is always wrong, right? Since I haven't traded similar panic situations, I can only go by what I've read in terms of what to look for sentiment-wise, and sentiment looks just about as bad as you can get right now.

So does all of this mean a bottom will happen this week? It very well could, but the scary part is that such a bottom could happen 20-25% lower than we are currently. Take a quick look at the VIX. Traditionally, levels in the 40's typically signify points where markets typically bottom. However, this isn't a spike to these levels either - right now, the VIX seems to be consolidating for a move higher. That is what is scary about this market right now.

All Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

Certainly Friday's close was not good given the bailout did pass, so the possibility of further selling early this week exists. I also don't know what more the government/Fed/Treasury/PPT can do to try and prop up this market further, save another rate cut. At some point, it has to rise or hold up on its own merits. I think it will be quite an interesting week and possibly a historic week. Perhaps we get a quick gap down on Monday and real buyers come in quickly to help put in a bottom on this market without much more damage. However, isn't that the problem? Where are the real buyers? Shorts aren't looking to cover as much as normal because they have been banned from this market. I think it may take a true capitulation at possibly much lower levels for real buyers to step in and give the market a floor for a while. For all the historic measures that have been taken and the historic failures that have taken place, it would be quite strange for a bottom to be put in quietly here, at least in my opinion.

For me, what this all means is that I will likely be doing the same thing this week that I have done for the past three or four weeks - sitting back, doing nothing but watching history unfold while I am totally in cash, not losing a dime. I continue to think this is the best strategy for this market, at least for my swing-trading style. Shorting still scares me, given the oversold conditions and the governments complete disregard of free-market principles. Even if we do crash and reverse, I will likely wait a few days to see how things play out. I hope I am not arrogant enough to think I will be able to time the exact bottom of any possible panic move we get, and I know things will be wild regardless the first few days afterward. If we can get a capitulation bottom, then there will be opportunities in time to make money on the long side. Remaining patient for those opportunities to present themselves is important however.

We are certainly in scary times. Let's all continue to hope, regardless if you are a bull or a bear, that somehow we can pull through this crisis and end up stronger for it. Let's hope our country, both as citizens and government "leaders" can realize that living outside of your economic means is a recipe for destruction and must stop. Let's hope the ingenuity, integrity, and intense work ethic that made this country so great through its first two centuries can return and help us become what we were not that long ago, that "light on the hill" that other countries look to. Personally, I think for the last week we have seen the very worst of America through the soap opera that took place in Washington, D.C. Hopefully over the next few months, we can see the best of America emerge and help us get through this. Good luck to all next week.

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1 comment:

Ken said...

Well about your comment that fear is palpable.... and also in regards to your statment that the majority can't always be right...

There definitely seem to be lots of coverage of this financial crisis among mainstream media that can signify panic and mainstream belief that things will continue to be much worse.

And there are people who think that is the sign of a bottom.

Well here's what I think.

The stock market is no longer watched by professionals alone. These are times when lots of 20 somethings watch CNBC's fast money or Jim cramer and dream of trading for a living. Even high school kids and their moms pay attention to daily closes of the DOW Jones index.

You hear of the VIX at your local diner and even your barber talks of taking advantage of this "cheap" stock market.

Does that sound like fear?

It doesn't feel as such to me.

Today, EVERYONE pays attention to the stock market and EVERYONE knows not to sell when things get this bad and that they should start bottom picking.

Since the majority is more attentive to the stock market, the media naturally caters to their view and thus you see financial coverage on TIMES magazine or Newsweek or whatnot.

What you say about the crowd being wrong all the time is probably the most useful statement.

The "crowd" as of this point are looking for a bottom, and not panicking.

You wonder how long they've ALL been saying we are in 7th inning of this whole thing?

Well I've been hearing that since January of this year. This is Octoboer now but everyone believes we are in the 7th inning.

NOBODY believes we are in the 5th inning.