Monday, August 13, 2007

The Day After

After a promising start, stocks faded to unchanged on Monday as the market nursed a wicked hangover.

Volume started out heavy, but faded dramatically as the day wore on. By the close, NASDAQ trade was off 31%, and leading stocks put in a similar, bleary-eyed performance. The IBD100 edged up 0.2%, but 94 of 100 stocks traded on lower volume. Strong open or not, institutional investors remain cautious.

Volatility has been so wild recently that it may come as a surprise to learn that stocks have actually traded in narrow range for the past 13 sessions. Also, price losses for the broader market are still relatively minor, with the Dow off just 5.6% from its high. The indexes are all consolidating at their 200-day or 50-day, and after experiencing the heaviest trading week in history, stocks still aren't in an official correction yet.

In the face of all of the uncertainties surrounding the credit markets, this sideways action has produced a growing sense of bullishness among some experts. Below is a random sampling of this and other bullish indicators, and there's much more of it out there:

--- Bill Cara is one of many who believe that the liquidity injection will lift stock prices.

--- KingCAMBO makes an interesting Camtasia presentation on the XLF that suggests The Fix is In, and big money is flowing back into financials.

--- Bill Rempel uses a variety of Predictive Models, and his 20-day versions remain positive for stocks. He notes that regression models are offering good odds, and that his fav EMA-based trend is still up.

--- Carl Futia offers a contrarian observation: while stocks have gone nowhere, the media has grown more bearish. Barron's, the New York Times, Chicago Tribune and Business Week Online have all published bearish front page stories.

--- In another contrarian bullish take, Mark Hulbert notes($) that the HSNSI has fallen off a cliff and is now down at a stunning 5.4%. Just four weeks ago, it was at 50.9%! While the Dow fell 5.5%, HSNSI slid 45 percentage points, a move contrarians would suggest is a tad overdone.

--- Goldman is making a bullish move from the belly of the beast, pouring $3 billion back into the deeply wounded Global Equity Opportunities quant fund.

--- There's definitely no signs that the US or global economies are rolling over, and Q2 earnings season both beat expectations and offered decent guidance.

--- Finally, there's a hodgepodge of various technical bottom finders and volatility metrics nearing extremes common at important IT bottoms.

So, are we near a bottom?

It would certainly make things simpler, but very weird clouds remain on the horizon.

--- On Thursday, both the Dow and NDX undercut their previous low, killing the new IBD rally on Day 8. The "Current Outlook" of Investor's Business Daily has returned to "Market in correction".

--- VIX and More notes that the commercials are heavily long VIX calls. This is the "smart money", and it points to continued equity downside ahead.

--- In an interesting twist, one of Bill Luby's readers noticed the purchase of 30,000 Aug 25 VIX calls on Monday. This is a $7.5 million bet that the VIX will close above 27.5 by Friday -- a big negative for the stock market. Such a large, professional move led Bill and others to wonder if another fund is about to liquidate on a massive scale.

--- Speaking of options, Jim Kingsland notes in his CNBC Options Report that despite Goldman's $3 billion GEO ante, options players aren't bullish on XLF, with puts swamping calls 2.5 to 1 on Monday. Is this another not-so-subtle hint that more fund liquidation is ahead?

--- The current index consolidation at 200-day support looks like a bottom. However, it could easily be a setup for a fresh leg down. Numerous technical indicators give this possibility above-average odds.

--- In a troubling sentiment note, the AAII Sentiment Survey shows that individual investors are surprisingly sanguine about the current pullback. At 46% bullish, this group has a long way down before it reaches historic bottom territory.


Strong arguments for both the bullish and bearish case are being made by experienced professionals. However, this fact alone suggests that the pullback may not be over. Historically, a sentiment extreme needs to be reached before corrective behavior is complete, and this is clearly not the case. Also, despite last week's heavy volume, an exhaustive price extreme was never reached either. Lastly, it seems very unlikely that the financial sector has given up all of the skeletons in its closet.

In the end, a strategy is perhaps most influenced by one's time horizon. With your time frame in mind, adjust risk to taste.

And get ready for another ride 'round the track.

See you tomorrow.




jacksoo said...

Great information David. New to the investment arena especially options - took out a range of Aug puts a few eeeks back conviced the time was generally about right for a correction. No question that so many fundamentals are out of whack especially the huge pricing v income differentials globally (lived in California, UK & Aus) over the last 5 yrs and US sub-prime NOT alone)but this only represents I beleive the massive inbalance within the credit arena - in simple terms I beleive we've huge leverage (greater than 10x) across what are now highly limited assets. Not a conspiracy theorists but I do belive the 'powers that be' are doign a good hot shoe shuffle trying to keep the lid on this one - and of course they might just succeed. Finegrs crossed they don't of course and Wed miught just be the day a few more issues come home to roost.

dk said...

Thanks, Jack. Yes, the market is appears to be trying hard to get out of its jam without heavy casualties.

The most fascinating part of it all is that, for all of the bad fundamental mojo, the technicals look surprisingly in one piece. So far, the indexes look like they're building a base, and not a particularly deep one at that. The rest of the week will provide another important piece of the puzzle.

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