Thursday, March 12, 2009

State of the Market - 3/12/09

Another great day today on Wall Street....well, sort of a great day. I'll talk about that in a second. Futures were lower to start the day and did open lower, selling off for about fifteen minutes. However, they got support near the lows of yesterday, and from there climbed steadily for about an hour. They consolidated a bit into lunch, began to climb slowly again from there, and took off to the upside around 2:00. At this point, the S&P broke through the important 740 level and stocks accelerated to the upside into the final hour, finishing with large gains for the second time in three days. Volume declined on the S&P and may be slightly higher on the Nasdaq, but was still just average.

So why would I say this is only "sort of" a great day? Well, there was one big problem with today's gains - they came on lower volume, and it's not like we had massive volume yesterday to compare it to. For as big a percentage gain we saw today, we should have seen much higher volume than we did. Today could have qualified as a follow-through day(and IBD may still do that on the Nasdaq), but without volume, what it tells me is that most likely the big boys still aren't very involved with this move. I stated yesterday that Wednesday's action was bullish as it signaled the market may just want to rest for a few days, kind of allowing it to build up steam for a more meaningful move higher. That's how healthy markets act - they are accumulated on heavier volume, rest for a few days on lower volume, and then rise more on heavier volume as they are accumulated further.

Based on what we saw today, I certainly don't think this is a healthy market. Today in the long run could cause another reversal lower just like it did October 14, November 11, January 28, and February 9. Right now, I think the market is getting ahead of itself and that has led to problems in the past. A market getting overbought on massive upside volume is not a big deal in my eyes - that shows strength. A market getting overbought on diminishing volume is a big deal - shows weakness. Maybe it won't matter this time - maybe this time is different. I know I've said that before many times, however, and it has never turned out to be "different". I was really hoping for some rest today but we of course got none of that. Maybe I emphasizing this volume too much, but if we were really seeing the start of a very significant upside move, I would think volume would be just huge.

Technically, the indices broke above some important resistance levels today - 740 on the S&P was taken out and 1385 was easily taken out on the Nasdaq. Next levels to watch for these indices are 802 and 1435 respectively. If we get up that high without some consolidation or pullback, it would probably be the shorting opportunity of a lifetime. The financials (XLF) broke above $7.60 and rose much higher than that, breaking through overhead resistance around $8.07. If it closes over $8.56, it will have put in a higher high which is obviously bullish. The 50 day moving average looms around $9.00, so that is about as far as I can see this going without some sort of rest or pullback. Short-term, we are up in that very overbought area that has led to at least decent sized pullbacks everytime since October. Again, maybe this time will be different. I don't think it will however.

I made no trades today and the only thing I will even think of doing at this point is shorting. There is no way I am chasing this move. I said last night that I was more than willing to go long if we rested a bit, but chasing weak volume moves has been a recipe for disaster. I don't know when I want to get short - those resistance levels of 740 and 1385 are now history so targeting a specific area is harder now. Perhaps it was those levels were too obvious, because I heard everyone discussing them. Maybe we need to get just a bit higher to get rid of weak shorts before heading lower. Based on overbought levels, I will be watching tomorrow for any sign of weakness. In terms of going long, I would still be interested if we pulled back calmly and digested this recent move. So overall, longer-term I am open to anything but short-term, I am certainly more bearish than bullish.

Good luck tomorrow. I also wanted to point out to everyone that Worden Brother's new product, StockFinder, is now available for a free thirty-day trial (no credit card required). I downloaded it a few nights ago and although the learning curve is rather steep, I am finding it interesting and potentially very useful. You can make all sorts of custom indicators that depending on how creative you are could come in very handy. Already I have come up with a few custom indicators that I am anxious to see about in terms of whether they will be effective or not. If they are, I will make sure to share them soon. If you are interested, click on the link below. Take care.


ex_wirehouse said...

Nice wrap up of todays action, I agree, volume is a critical confirming factor selling or at least fading rallies has been the best strategy thus far. Rallies led by comments out of broken financials hardly inspire confidence on my part

Anonymous said...

you might be right thinking about shorting Mac, earlier in cnbc ,their survey shows that the number of bulls is only at 17%. It's impossible for this market to rally while everyone is a bear and so little bulls right? ;)

Mac said...

I agree that sentiment is certainly very bad but in the short-term, there is no way I am buying this thing here. If you are long, congrats. I just don't think we have that much room to the upside to go without at least a little pullback.

bmbull said...

That's been the bizarre thing about these past few weeks. Investors may be saying they're bearish, but they're not acting like it. At least not according to the VIX and the put/call ratios.

Do actions speak louder than words?

Mac said...

I would agree BMBull - all these sentiment readings via put/call, VIX, etc. have been acting really weird. If this is the bottom, it will be the most atypical bottom ever from those traditional measurements of fear. That's one reason I still think this will not amount to much. Hopefully I am wrong, but we've seen this story before.

bmbull said...

That's what I was telling my wife earlier -- I find it pretty difficult to believe that we could have put in an 'important' low without the typical indicators in place.

Not being an expert in the field, I don't know if that has ever been done before, so I can't say it's never happened. And not only are put/call ratios not at highs, they're down near fairly extreme lows. And that tells me that investors are not acting nearly as bearish as everyone is making them out to be.

It looks to me like people were jumping all over themselves to get in the first few days up. Hardly looks like 'total despair' and 'capitulation' from where I'm sitting. said...

hey! long time reader but always too busy to comment sorry!

Love your stuff, but i got a slighty different take on today's action. I liked that we sold off at the open, along wiht yestrday's flat day relieves some overbought-ness from that rally 2 days ago. We got a double bottom with yestrdays low, nice setup for the beauty trend rest of the day. as for the light volume, its ok as we've run big from the 666 S&P bottom. I'd like to buy a pullback, taking this recent run as a bear market trend rally. those managers who've missed this run might get performance anxiety and want to buy teh first dip. i'm looking to buy that with them. thats probably when volume will start coming in. we're still too oversold for me to short more than for a quick scalp.

Mac said...

Jeffrey - you may be right. I'm not saying we can't go higher. What I am saying is I am not going to chase this move. If we pullback quietly and I see more charts setting up on the long side, then I would get bullish. I have no problem doing that. I just keep thinking to myself, "I've seen this story before" and don't want to just blindly think, "oh, this is the bottom". We'll see what happens over the next week. If we continue to spike higher like today, I think there is a much, much higher chance of failure soon.