Tuesday, January 6, 2009

State of the Market - 1/6/09

Quite the volatile day today on Wall Street, as stocks moved all over the place in three four distinct phases. The open was a solid gap for stocks and they did ramp higher for the first half hour of trading, getting even more overbought and extended than they were yesterday. Around 10:00, stocks put in a big reversal that took them all the way down to break the morning gap. Lows were hit around 11:00 and stocks moved slowly higher through lunchtime and really ramped up starting around 2:00. It looked like we were going to have another big move until around 3:00, where stocks reversed once again and fell sharply for about a half hour. They stabilized for the last half hour and closed with modest gains, but definitely off their highs. Volume appears to be heavier, particularly on the Nasdaq.

Technically, the overbought indicators are all even more extended with the gains and at some point I still suspect these will cause a pretty nasty reversal. 920 is still a key number on the S&P and as long as that number holds on a pullback, then bulls should feel OK. 1600 is the number to watch on the Nasdaq.

So far 2009 has not been all that kind to me as you might expect given my bearish stance on things. I tried a few more shorts today - short TGT ($37.19) and SVR ($11.17) and long DUG ($21.58) - but was stopped out of all of them by mid-afternoon. The TGT short was hit at $38.02, giving me a 2.42% loss. SVR was hit at $11.37, giving me a 2% loss. DUG was hit at $21.07, giving me a 2.66% loss. My QLGC short was also stopped out at $13.58, giving me a measly 0.84% gain. Right now, I still have my MR short and that is it. My account is down a little more than 2% for the year, which isn't a big deal but it is frustrating.

So, what am I going to do next? Well, based on what I see, I have to continue to hold my bearish outlook. I won't go through the overbought indicators again - let's just say they are even more extreme than they have ever been to this point. I completely understand the old adage "a overbought market can stay overbought" and I certainly respect that. However, that tends to hold much more true in a strong market, just like an oversold market can stay oversold much more easily in a strong downtrend - think 2008. I can't say this is a strong market - low volume on this overall move, few leaders, lots of beaten down stocks running. I am still expecting a reversal at some point - I just don't know when it will be. Hopefully I won't get myself into too much trouble as I try to figure out when it will happen.

If we pullback on lower volume, hold the 920 area on the S&P, and consolidate these recent gains in a healthy manner, then I will probably change my tune and my outlook. That's what I said last night as well. We certainly didn't do that today however. In my opinion, days like today are actually counterproductive for bulls. I am sure I would be happy if I was invested here on the long side, but I would also want the market to stairstep its way higher, pausing on lighter volume as it moves higher to digest its gains and allowing the move to be longer in duration. That's how healthy markets work. A move like this one, where the market doesn't rest at all, rises on relatively lower volume, and just gets more and more overbought likely will be reversed hard at some point, and when people start wanting to get out, there will be a mad rush to the door and things could get ugly. I just wish I knew when that mad rush was going to start.

If I have time and find anything interesting in my scans, I'll be back later, but I am probably going to sound like a broken record if you have read my recent posts. With the overbought conditions that are in place along with a beaten-down VIX, lots of sudden bullishness from what I see, and still more short setups coming up than longs, I still think it pays to not chase stocks and to get ready for a possible reversal that could (or at least based on history should) take place soon. I could of course be wrong - my timing certainly has been wrong so far this year - but I am just going by what I see. Good luck Wednesday.


Anonymous said...

Were I you, I'd accept the likelihood that we're in a bear rally. That means that we'll be overbought for some time to come, so that's not a good short entry signal for now. Eventually, probably near the end of this month, the bear will probably take over. If that happens, your shorts will really start paying off.

FWIW, your selection of short candidates is a bit too aggressive for me (though maybe your tight stops make up for it somewhat).


Terry Steichen

Mac said...

I do realize we are in a bear market rally, but we've also been in one for about 25% or so by now, so the question you have to ask yourself (or at least I am asking myself) is how far does this rally go? What is there to push this rally further? I am not necessarily expecting a total crash - I just think a pullback is long overdue based on my indicators.

alysomji said...

I'm seeing the same things you are, CSW. A very oversold market. I think it is just tip toeing around a hole that's going one way: down.

Sure, it could go a bit higher, but I'd say 960 is its limit (if it hadn't already reached it today in the mid-940s). Way too risky to go long here, IMO.

Personally, I'm not even going to THINK about going long until we approach or come in the area of the 20-day SMA (currently 894).

I can see us going to around 850-880 pretty quickly in a fairly steep decline, in fact. And, if 850 is later broken...watch out.

alysomji said...

I meant to say "a very overBOUGHT market" in that first sentence...if the error wasn't obvious.

I'm referring to short-term, of course, since intermediate term one could argue this is an oversold market.

CW said...

Fighting the trend....why?...Yep, shorts will work eventually but you are missing a nice run up in the market. There continues to be some nice set ups and they are trending to the upside.....There is always a time to be bearish and this is not the time....

Anonymous said...

The overboughtness is probably nearing an inflection point.

According to The Hedge Fund Edge
By Mark Boucher, when the 5day avg of
up volume to down volume is over 77pct,
its signals a very bullish intermediate term. (You can find the relevant section on google books on page 138)

Using IBD's data for volume, I get 74pct up volume ratio for the past 5 days.

If tomorrow we get mkt avg volume with over 3 to 1 up vol, that would make it to about 77 pct.

Then again, the thanksgiving run-up top was also about 74pct just before the post-thanksgiving drop.

Anyway, great blog, I always respect your opinion.

Nergo said...

Great analysis Mac.

Mac said...

Good thoughts all.

CW - I understand I am missing a move here, and I am completely aware that this move could be like the one I missed to the downside in October/November. Things got so oversold at that time that I kept saying I had to wait for a bounce to get short, but it never came. I think this is the same situation - I have to wait for a pullback to get long - but I don't think the odds of a continued move higher are as high. That's just my opinion. I believe we are still in a bear market. If I miss this move, that's OK too - I will survive and there will be other moves to trade. We'll see what happens over the next few days.