Thursday, May 10, 2007

The Big Dump

Well, it appears that the TOF Ratio is working after all.

Traditionally, whenever the option pit l-e-a-n-s w-a-y o-v-e-r to one side, that side is about to become the wrong one to be on. This was proved true yet again on Thursday when sellers chewed right through six days of trading gains in just 6 1/2 hours. Making matters worse, they did so on an 8% volume surge.

The stats were bad. The Dow notched its first triple-digit loss since the market followed-through on March 15, and all 10 primary stock sectors closed lower -- each by more than 1%. Adding to the fun, all of the indexes closed at their lows, suggesting we'll see more selling at the open.

Market internals turned nasty as well. On the NASDAQ, 8 out of 10 stocks closed lower, and an eye-popping 85 out of every 100 shares traded on Thursday was a sell.

Other than that, how was the play Mrs. Lincoln?

Like a parable, the market speaks in mysterious ways, and Thursday was no exception. Even though the charts look positively dreadful tonight, there was a unusual twist in Thursday's action: the IBD100 held up surprisingly well. Nastar picked up on this mid-day, but the IBD100 closed off just 1.9% -- the same as the RUT. Breadth was actually better than on both the NDX and OEX, and 12 stocks hit record highs.

However, the real surprise was that the selling pressure on the IBD100 was unusually light. Even though 86 of 100 stocks closed lower, just 16 of those printed distribution days. This number was so low that I checked both the NDX and OEX as well. While 90 of 100 NDX stocks closed lower, just 26 were distribution days. The OEX was even more unusual: 92 of 100 stocks closed lower, but only 19(!) printed distribution days.

At this point, there's no way to know the true significance of Thursday's so-so selling pressure. Sometimes big selloffs start slowly before gaining momentum. Like hurricanes, this is certainly the season for selloffs.

That said, the chart below shows that the Composite took a technical hit, but 43 points is a lot of ground to give on just 2.3B shares. The bulls didn't even put up a fight, and that raises questions.

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A walk through the roughly 3 dozen subindexes I track is a very grim scene this evening. In choosing what to look at tonight, the term triage comes to mind.

The Banks got hit hard, harder in fact than the US Technology Index (-1.1%), which is interesting in itself.

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Drugs -- supposedly a safer haven -- got smacked down worse than the riskier Biotechs (-2.0%).

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A lot has been made of the recent Dow Theory confirmation, especially Richard Russell's bullish conversion this week. The Dow, Transports and Utilities all fell on Thursday, but volume was very suspect. On the Dow, volume was flat; on the Transports it rose to just average; and on the Utilities the volume actually fell. With 147 points on 466 million shares, the Dow posted its biggest decline-to-volume ratio in almost two years.

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Perhaps Thursday's biggest surprise -- and irony -- was that the hardest falling sector of them all were the precious metals (XAU -2.7%). Considering that stocks fell on a blast of wicked, inflation-laden economic data, it's a bitter irony that gold bugs had no refuge. Gold pierced its 50-day, while silver is headed towards its 200-day.

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Thursday was nasty, but the bears have a lot of work ahead to reverse the IT course of the market. Until they do, selling offers some of the most valuable clues about what stocks are worth owning. Expect more selling near-term, and adjust your risk profile accordingly.

It'll be interesting to discover if Thursday's weak selling pressure was a just a prelude to heavier selling, or to something different -- like more buying. It may take several days to find out, and be prepared for either outcome.

Until then, have a great evening.




Bill Luby said...

I must say that I looked long and hard at silver today, surprised by how far the precious metals had pulled back. I didn't buy anything, but I'm getting close to owing at least one of the precious metals for the first time in a long time.

Also, for the record, how are you defining "distribution days" here?

Keep up the good work,


dk said...

Thanks, Bill...I'd window shop bling for a while before pulling the trigger. It looks like the shiny stuff may have some more work to do - lol.

I use a quasi-IBD definition of distribution day: a 1%+ down day on volume greater than the prior session.

FYI --your latest link post is very fine bibliography work.

Bill Luby said...

I hear you on the bling, especially when titanium (TIE) and zinc (TCK) are on such a tear.

The distribution day definition makes sense, as it is easy to calculate and can almost be eyeballed. I'm always thinking about fancy software that would implement some sort of definition of distribution day that incorporates an average volume and some sort of volatility measure, perhaps something like:
1) 110+% (120+%?) of the 50 day volume SMA...AND
2) 40% (50%?) of the average true range (ATR)

...but I probably don't want to tangle with the software needed to do this and it is better to keep these things simple whenever possible.

Thanks for the feedback on the links. I'm going to make it a regular feature now that I get about 130 feeds on bloglines.



dk said...

In fact, I do eyeball for distribution and its polar opposite, accumulation (1%+ on volume greater than the previous session), using a calculator as desired/needed.

If you choose to tangle with some clever software, please keep me in the loop. 110% of 50-day volume is a nice screen. On breakouts, 150% is the absolute minimum, more is dk