Sunday, March 8, 2009

Weekend Market Summary - 3/8/09

I was planning on doing a video this weekend like I normally do summarizing the market and showing some possible plays for the upcoming week, but the more I looked at my scans and the more I thought about it, the more I realized I had nothing to do a video on. I could have done a video with me just talking, but I can write my thoughts just as easily so that is what I am going to do. If you were waiting for a video, I apologize.

Here are the S&P, Nasdaq, and financials. I am still on the lookout for that heavy-volume severe selloff where we are down 5-7% from which we get a possible rally going.

S&P 500
Nasdaq
XLF

We obviously remain oversold but the VIX has done absolutely nothing during this decline. I have no explanation for this.

VIX

The McClellan oscillator has risen slightly off its lows from a week or so ago while the market has fallen - perhaps this is a positive divergence.

McClellan Oscillator
Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

Still watching to see if my numbers get extreme as they did in November, the last meaningful "bottom" we've put in. Not there yet unfortunately.


I am doing my best to stay in tuned to this market, but it is getting quite difficult. I am just becoming uninterested to be honest. I do feel we are getting closer to a big move to the upside, but that word "closer" is a broad term. It could happen this week or it could happen next month. I basically am looking for two possible outcomes for this market over the next week or two.

#1) We get a traditional capitulation, washout-type move to the downside with very heavy volume, a spike in the VIX and put/call ratio. At this point, institutions come back into the market and we rally for a few months, perhaps in a meaningful way. I would be interested in playing this setup and much prefer it. The problem with it is that I believe a lot of people are looking for this to happen as well and won't commit funds on the long side until it happens. Rarely in the market does something everyone expects to happen actually does happen. I keep thinking that this is one of the reasons we continue to just grind lower - too many people are waiting for that big washout and instead we just get a slow drip just to frustrate the most people.

#2) We continue lower for another few weeks in the same manner we have the past two or three weeks - steady selling with one-day bounces mixed in that eliminate oversold conditions just enough to allow more selling to occur. At some point, things get low enough (every bear market does have moves higher, just like bull markets have pullbacks) where some buyers start to slowly come back into the market and we start moving higher for a while - not in a big noticeable way, but just a slow, steady way, much like this move lower has been but in reverse. I don't think this type of setup will lead to a large move on the indices, and I think it will be decidingly more difficult to play. Because not many people are looking for this, I fear that is what we will get.

Overall, I am just getting a little tired trying to make money on the short side and while I completely realize there may be a lot more money out there to make on this side of the market, I am probably done trying. Things can always change, but that's how I feel now. I am not saying this bear market is about to end, but I think even the worst bear markets have countertrend rallies.

I would rather keep what I have now and have it ready to go in case we do get a really nice countertrend rally going. There also still remains a lot of news-related risk in this market on both sides of the market and that is another reason I don't feel like doing much right now. What if GM files Chapter 11? What if mark-to-market is suspended? News events could cause massive moves in the market and start a rally or higher or a washout lower, but are totally unpredictable. So what I plan on doing is sitting out for the most part but being ready to go in case things start moving higher, hopefully with a capitulation reversal.

Unfortunately, I don't see many stocks that look worthwhile on the long side at all so if we get option #2 of more grind lower, it could be a long, long grind. Here are a few I will watch that have held up fairly well admist the selling. If we would get a capitulation move, I would likely just play the ultra ETFs.

ARST, AIPC, BWLD, MYRG
Charts from Telechart2007, Courtesy of Worden Brothers, Inc.

I don't know if this will help anyone out there, but I just don't have a good feel right now one way or the other. I continue to be so surprised at how steady and smooth and controlled the selling has been over the past few weeks. 2008 was definitely a tough year, but 2009 hasn't been any easier. Good luck this week, and be careful because risk remains high long or short.

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