Are We Bear Yet

It's the battle cry of children on road trips. Are we there yet? No. Are we there yet? No. Are we there yet? NO! But... are we bear yet?

Two weeks back I took some time off. The majority of the post on my blog thus far have been about market timing, with a focus upon range bound and topping markets. At the time of my departure the market continued its churn and finding no edge in trading during this period I thought it would be in my best interest to take some time off and head to the mountains for some respite. One of my goals was to enter Yosemite and see a bear, but considering this year has had the largest number of visitors and queues to get into the valley were up to two hours long, I opted to spend time at the river and watering hole instead.

For the first few days of my trip I spent some time in the Bay Area and would open my lap top on occasion and glimpse what the market was doing, but once in the Sierras I refused to be distracted and get caught up in the disillusion that I was surely missing something. I didn't see what I could possible be missing in the mountains that I wasn't witnessing in the city. This was time to simply get away and let everything I've studied and applied during the previous 7 months settle in. Not much appeared to have changed since I was away, but after my return how differently things look indeed.

The range that I thought would surely catch me off guard and break to the upside just as I became most frustrated broke to the down side with a vengeance just as I had become most relaxed. On the surface the drubbing that occurred on 08/04 is obvious- one look at the NASDAQ being down 5.08% is sobering enough, but a deeper look shows some staggering numbers from a breadth perspective:

In the last 20 trading days there has been consistent distribution with 5 out of 20 days showing downside volume upwards of 9-1 culminating with the 91-1 down to up volume on 08/04., the largest since the flash crash in May '10. (Note: Not adjusting the range of the box was intentional as the break of this range would be apparent.)

08/05 SPX

On 08/04, 498 of 5082 stocks in my universe were down 8%+ or $5+, 2002 were down 4% or more reducing the breadth thrust to the lowest number- currently .17- that I have seen since tracking this and using it as an integral part of my market timing and trading strategy.

08/05 Market Monitor

I noted in my last post that as the indexes approached within 2% of new 52 week highs, a distinct divergence could be seen as the number of stocks reaching new 52 weeks highs was nearly half. If there was any question about whether this movement was fuel or fumes, the list of participating stocks making new highs clearly gave clues. With the amount of damage done to charts across the board, a stabilization of this indicator is worth watching.

08/05 $USHL5

Lastly, looking at the $BPNYA it is clearly evident that this indicator has been in a free fall over the past two weeks, undercutting the flash crash low and if scaled further out, the lowest reading since the March '09 pivot of 12.11.

08/05 $BPNYA

So, returning to the question, “Are we bear yet?” It certainly is an ugly looking landscape the likes one sees after clear cutting, yet there doesn't appear to be enough panic yet. On Friday the indexes were down 3% and from 52 week high to this low the SP dropped 17%, the NASDAQ 15%, and the Russel 25% and then buyers stepped in. Across the board, nearly all indicators are at some overbought or extreme level the likes rarely if ever seen, so from this vantage point the story is much the same and one belief is that a bounce is due, perhaps even a retest of the range low and determine if support is now resistance.

In this regard there is confluence so taking this to another level may help further clarify the landscape. Is there still too much bullishness in this market? The Put/Call ratio finished the week at .93 and the recent AAII survey, while showing an 18.4% increase in bearishness still reads under 50% over all. Is there a buzz of bank runs surfacing again? Is the window washer at the cafe giving you advice on gold? Are grizzly sightings increasing on the cover of Barron's or the Economist or in British Colombia?

An eye on sentiment this week will be telling as news of the down grade hits the market. Instead of looking for the doom and gloom assessments on the major media hubs, this would be a good time to take a step back and watch those around and hear if the clerk at the check out engages when seeing the cover of Time and talks about the market or follow up on the AAII numbers and see if they've increased. Avoid the echo chamber of Wall Street and listen to the chatter on a bus going down Main Street for a clue if we're bear yet.