Wednesday, August 26, 2009

State of the Market - 8/26/09

A very boring day today on Wall Street, as stocks traded in a very narrow range throughout the day and ended up basically flat for the session, going absolutely nowhere. Volume appears to be lower as well.

Technically, not much happened today - the possibility of a flag pattern being formed on the S&P and Nasdaq certainly exists as we continue to rest and hold above the previous resistance levels that were broken on Friday. As long as those levels (1018 and 2015) continue to hold, you have to respect what the bulls are doing and not get overly bearish. If we get a few more days like today, the bulls will have worked off some overbought conditions and perhaps primed themselves for another move higher. I am not saying it will happen - I am still leaning slightly bearish right now - but you must respect the possibility.

Oil was down a bit today but closed off its lows and certainly didn't see much downside follow-through to yesterday's selling. Financials continue to consolidate much like the indices - I'll be watching there as well for a possible breakdown which may never come.

On the sentiment front, there were some interesting changes today to some important indicators that I follow from time to time. First, the Investors Intelligence Survey came in today with 51.6% bulls and only 19.8% bears (thanks to Bear Mountain Bull for pointing this out). This is the highest level of bullishness and lowest level of bearishness this survey has seen in almost two years. Remember, this is a contrary indicator and lends credence to my gut feeling that this bull run is going to get a bit more difficult in the next few weeks. We also have a lowest short interest level for the S&P in over two and a half years (see article here). On the other hand, we saw a pretty big jump in the put/call ratio today, perhaps because many "pundits" such as Doug Kass (who has been right most of the past year and a half) are coming out with caution flags for this market. Most of the people I read seem to have a slightly bearish stance right here including myself as well. So where does this lead us? Once again, it is hard to tell.

I hear often that the news is worst at the bottom and best at the top, and right now, all you seem to hear is "good news". Housing prices are up, car sales up, blah, blah, blah. The question I guess is are people really believing those headlines? Is there really a reason to be optimistic economically right now? I have my own thoughts on those questions but I realize my opinion doesn't really matter to the market. Another question to ask is that is if all the news is "good" and most people are optimistic, then does it become too obvious to go short here, much like the head and shoulder pattern in June and July turned out to be too obvious to play because everyone saw it and we ended up going in the opposite direction. Is everyone going to get bearish quickly because everyone seems bullish, and then once again, we get a move in a direction counter to what seems sensible?? I am probably rambling here, but the way this market has been this year (the ultimate Costanza market) I am just trying to get my thoughts out. It seems like if you do whatever the opposite of what is logical and sensible you will be successful in this crazy market.

Once again, I did nothing today and although that may seem boring I continue to feel it is the right play. My guess is that the next two days will be slow as well and then when September starts, we will begin to see a few more fireworks and an environment that is more suitable to trading (trading that is for more than a few hours). I head back to my full-time job tomorrow so if you follow me on Twitter, I will not be posting as much as I normally do during the day. Good luck tomorrow and take care.

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