Thursday, March 5, 2009

State of the Market - 3/5/09

I am not going to write a big summary for the market today - let's just things were bad. They continue to be bad. I would basically be writing the same thing I have written for the past week - until we get some panic selling and a possible capitulation move, this market will continue to move lower. We still didn't have that today.

What I wanted to focus on in this post is a quick review of what I will be looking for in terms of maybe us getting extreme enough to the downside that a meaningful counter-trend rally can develop, because right now, that is really the only play I see setting up on the horizon. Some of these conditions are close to occuring, some are farther away, but unfortunately none are occurring at this very moment. That means we could still trade lower from here.

#1) Some fear and panic via the VIX and put/call ratios
Not there yet - not really close. VIX still hasn't even put in higher highs for the year. I am not saying the VIX has to get up in the 70's or 80's again like in 2008, but a spike into the 60's might work. The put/call ratio was barely above 1 today and actually lessened as the day progressed. All of these tell me there is very little fear out there and a lot of complacency. That is not good.

#2) Extreme oversold conditions via the oscillators I use (the McClellan and the T2108 to mention a few)
We are pretty close but not yet at levels where a major countertrend rally should occur. One difference is that when they have happened before, it was a straight drop down to the oversold levels and they were so stretched that a bounce occurred. I've been writing this week that these one-day bounces are bad because they relieve the oversold conditions just enough for us to get more selling. If this continues to occur, the oversold measurements won't matter anymore. What we're seeing right now is that we are just moving sideways in an oversold range. We may have to push even lower than the November levels to get the reversal. This is where a big spike down comes into play.

#3) Numbers in my scans similar to November
Not there yet and again, these one-day bounces mess this process up. I will continue to monitor them but we still have some room to move lower on these ratios. We are getting closer though. Another few really bad days and we will probably be at those November levels in terms of selling pressure, individual oversold stocks, stocks down 50% in a month, etc.

#4) A really large percentage move lower.
These 3-4% moves lower we have seen recently certainly do a lot of damage, but it seems to me these type of days have just been systematic selling days, where the selling is steady and non-stop. It's not panicky selling. Back in October and November, we saw some days where we were down 5-7%. I think we need a day like that to get the fear up - a 5-10% move lower. I don't know if it will happen anytime soon. The news continues to be bad and it doesn't seem to matter. Perhaps traders are immune to the bad news now in terms of fear.

The bottom line when I look at these is that it is very possible in the near future that we move much lower than we closed today, as hard as that may be to believe. Just because we're already down a bunch doesn't mean we can't go down a bunch more. This is a historical bear market and as such, we will likely see historical moves lower. I wish I could say something different, but I just can't. We may still get some one-day bounces like we saw yesterday and last Tuesday, but I really believe until we get a washout, that's all we'll get, and they won't amount to anything. I think a lot of people are thinking this way, so maybe it won't happen, but it is also possible that people are waiting to buy until we get it.

I did nothing again today as I don't feel comfortable shorting a market that is down so much, but until the conditions I described above are met, there is also no reason to try and catch a falling knife. There remains more risk than reward on both sides right now in my opinion unless you're day-trading. I still think we are getting closer to a possible trading bottom, but I have no way of knowing when it will occur. We need a washout and until it happens, there isn't much to do. Trade accordingly, or better yet don't trade until risk/reward setups present themselves. Best of luck tomorrow.

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