Thursday, August 4, 2011

Some Interesting Numbers to Ponder

As I continue to watch the market flashback to 2008 here (totally in cash by the way), I like many others are looking for some clue as to when we bounce back.   One of the timing tools I use is a ten day breadth ratio that measures the number of 4% breakouts over the past ten sessions versus the number of 4% breakdowns over the same period.   This is a tool developed by Pradeep Bonde over at Stockbee and I have used it for a while now.

Anything under one is considered bearish, and this week (as you might expect) we've seen a steady deterioration in this breadth number since going below one on July 27.   After today's massive selling, that ratio is going to be around 0.17.   This is a historically low number - the second lowest I can find other than October 9, 2008, when it was 0.169.   That basically means the selling we've seen over the past ten days is the worst in over two years.

Since the bear market began in 2008, I can only find four instances where this ratio slipped below 0.30, and three of those only lasted for one day.   The one time it did dip below 0.30 and stayed there was in October 2008, the worst decline of that awful bear market.   We were very oversold on October 6 when the breadth ratio went below 0.30, but we continued to fall from there, putting in two sessions with over 5% losses over the next three days.   A bounce did come, but it only lasted for two days before the market kept selling off in a heavy manner.

Charts from Telechart, Courtesy of Worden Brothers, Inc.

A few days ago I wrote that "doing nothing is sometimes the best thing to be doing".   I do hope you listened.   I actually entered two earnings trades last night but got out immediately this morning and escaped pretty much unharmed.   Trying to catch a falling knife is risky business because, well, you can kill yourself.   Right now, doing the same thing in this market can kill your account.  

Yes, we are at historical levels and we could very well reverse hard tomorrow, especially if we gap down.   However, the market is telling us something on a bigger scale - things are not good out there.   This is not the time to be a hero - sit back, protect yourself, and don't get caught in a selloff that could (based on history) get worse in a few days.   Any bounce we get will likely be a great shorting opportunity, because you typically don't see selling at this grand of a scale simply during a little correction.   It's bear market city until further notice.  


Anonymous said...

I'm not in the business of making compliments but I think the way you played the market during this brutal month was spectacular. I think only the hard bears did better than you but I guess, for them it was just a consolation for the beating they took the last couple of years(for those of them who survived it)

Mac said...

Well, thanks Ivan, but my account has been down this month actually. It's just been so tough to do anything productive. I guess the fact that I didn't lose too much is good - really really tough out there.

Anonymous said...

That's what I meant - the fact that you got away with few small losses is very good for a swing trader in this brutal couple of weeks.
I follow and communicate with quite a few day traders - even they had tough time making money because nothing sticks.
OF course the bears should've made a lot of money but personally I took only few small shorts cause we were oversold most of the time