Tuesday, August 14, 2007

From One Perception to Another

It's a zero sum game, somebody wins, somebody loses. Money itself isn't lost or made, it's simply transferred from one perception to another. ---- Gordon Gekko

Thankfully, investors didn't lose any money on Tuesday. They just saw their stocks transferred from the perception of being higher to that of being lower.

This perception shift appears likely to repeat itself. Every index except the RUT printed fresh, 4-month closing lows on Tuesday. Also, none of the rally attempts have survived, which means that the market is now searching for Day 1 of a new, potential bottom.

Of course, every session has some type of divergence, and Tuesday was no exception. In this case, Tuesday's price slide was accompanied by low volume. Stocks fell a long way under little selling pressure, and during option expiration, this is always curious.

There's no way to prove it, but Tuesday's step-down action looked like a calculated bid pull, designed to help options traders heal wounds. Days like this can then be answered by brief rallies, also contrived to de-fang option trades. This is a weak market, but with a 27-handle VIX, anything's possible. If the market does manage to rally, it will be sold into, so be careful.

Market internals and leading stocks are not offering promising signs for the bulls. Breadth, Buy Volume and New Highs show a market in distress (see charts). The bigger problem is that none of the indicators are at extreme levels of weakness typical of contrarian buy signals. Adding to the problem is that the IBD100 plunged 2.8% as just 13 of 100 stocks moved higher. It's never good when a proxy for stocks with the very best fundamentals does worse than the broader market.

Once the NASDAQ slips below Fib 38 -- around 2480 -- it's in no man's land. A variety of targets become feasible, and institutional investors will have buy programs keyed to all of them. 2450 is a 10% pullback; 15% would be a retracement all the way back to the March low. The mathematical favorite is probably Fib 19 (not pictured) around 2400-ish. However, we're in credit market hell, so who knows?

Image Hosted by ImageShack.us

The chart below shows the synchronized support violation mentioned above. From a TA perspective, this coordinated weakness is bad news.

Image Hosted by ImageShack.us

Below is another look at some IT bottom finders. These all include the 2002 bottom as a reference, and each says the same thing: we're not at a bottom yet.

The High-Low Indexes for both the NASDAQ and NYSE are getting close, but would benefit from more selling.

Image Hosted by ImageShack.us

NASDAQ stocks above their 50- and 200-day are getting close too, but these charts also need a fresh leg down to push the indicators to extremes.

Image Hosted by ImageShack.us

The NASI breadth indicator broke a 5-year trendline off the 2002 low. This suggests that this correction is the real deal, and will be successful in wringing out excess. It also implies that stocks could go lower than many investors suspect.

Image Hosted by ImageShack.us

So far, this correction has a bizarre, unpredictable quality to it that's about de-leveraging, illiquidity and other serious matters. However, there's no evidence that the weakness is about an economy tipping into recession. As a result, it's worth repeating that remarkable opportunities are being created through the mis-pricing of equities. High quality watchlists will come in handy soon enough.

I leave early tomorrow morning for four days on the road. I'll try and post if I can. However, it's another grueling itinerary that gets me back to the hotel late each night.

It should be a wild rest of the week for stocks, and I'll try and catch up on the weekend.




Woodshedder said...

Great post!

Anonymous said...


how much of recent price action is volitility and how much of volitility is noise?

any indicators you know of that adjust price by noise and or vix?