Wednesday, June 06, 2007

More Selling

Stocks got whacked again on Wednesday, but the damage was nowhere near the rate-hike bloodbath Europe saw on the 63rd anniversary of D-Day.

The US market is clearly taking on water, but the selling has curiously lacked that sense of gut-wrenching panic. Selling can start off slowly and gain momentum, so caution is very important moving forward. However -- and I'm certainly no Pollyanna -- Wednesday's action looked like profit-taking again.

Volume lacked intensity, and even closed mixed. While trade picked up 1% on the NYSE, it slid 4% on the NASDAQ. The Dow and SML notched their second straight distribution days, but the broader SPX and WLSH eased on lighter trade. Overall, the NASDAQ held up better than the blue chips. Even the NASDAQ internals were noticeably stronger than on the NYSE.

The IBD100 had the look of profit-taking as well. It fell 1.4%, more than the NASDAQ, but it was near the 1.2% slip on the more cap-relevant MID. Also, breadth had an interesting twist. While just 15 IBD100 stocks moved higher, only 13 NDX stocks and 5(!) OEX stocks posted gains.

But the real asterisk continues to be the lack of selling pressure on leading stocks. Remarkably, against a sea of red ink, just 14 stocks on the IBD100 saw distribution. This follows just 9 stocks that saw heavy selling on Tuesday. This is an atypical stat, and it will be interesting to see if it has any predictive usefulness.

In a final sign of profit-taking, all 10 market sectors closed lower on Wednesday. Institutional investors weren't defensively rotating into "safer" sectors (even the XAU fell). They were sweeping it off the table, and doing so on unconvincing volume.

But that was Wednesday. Thursday and beyond is all that matters now, and the chart below has taken some technical hits. The NASDAQ remains in an IT uptrend, but if it spends much time below 2575 it could get very messy near-term. The growing MACD divergence is not a good sign.

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Option investors have lost a lot of faith in this market and have assembled a pile of puts. This has worn down the TOF Ratio. Though this assessment isn't officially sanctioned by TOF, I've found that the first touch/crossover is more of a warning (orange arrow). Afterwards, the market will often resume moving higher. However, the second touch (red arrow) is less forgiving, and that's the important Sell signal.

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In a new article published Wednesday, Mark Hulbert points out that even after this week's selloff, contrarian analysis insists we aren't anywhere near an IT top. The HSNSI is 6 points lower than it was a month ago, even though the Dow has gained 300 points! As stocks climbed, the pros became more pessimistic. This is consistent with last week's AAII Bull Ratio, which saw retail investors express levels of bearishness not seen since the Feb 27 selloff.

Though investors continue to be described as too complacent, the evidence points to considerable fear in this market. If the put buying, short interest, QID volume and investor sentiment aren't persuasive enough, consider the VIX.

The VIX popped a nut on Wednesday and vaulted above its bands. While the SPX has slipped just 1.5% below last week's all-time high, option volatility shot up 21%! Option traders are unusually skittish, and appear to be fashioning a worst-case scenario. Fear is good, and lots of fear is even better. The chart below may have contrarian bullish implications for stocks near-term.

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As I write, Asian markets are down. Also, Europe is very grumpy about their shiny new rate hike, so don't expect much help from them on Thursday. Treasury rates, inflation, June gloom...all-in-all, there are lots of reasons for more selling near-term.

Stay within your risk envelope, but remember that the odds continue to favor holding positions that aren't experiencing distribution.

Until tomorrow, have a great evening.




Trading Goddess said...

Thank you for your analysis. It is greatly appreciated!


dk said...

Thanks, goddess. Your stuff is a must-read as well. It's always better to hunt in packs.