Unhappy Medium

Last week there was a breadth thrust but what few set ups there were skewed from the multiple gaps.  This week there are a plethora of set ups building but breadth is waning.  Signs of frustration are building and the proverbial towels are in hand.  If it weren't for choosing to do something else with my time these past two weeks I would have capitulated myself, but as is I opted to use my energy elsewhere and tinker around with my "Have yet to put thought into action to do list."

Weekend Review 12/09/11

Back in November I wrote an article displaying the SPY chart, in part because all of my other charts were beginning to get a little messy and in part because I wanted to note price action over time without interference on and redrawing boxes and trend lines to suit my fancy of the moment. So today I've decided to draw a trend line extending from the peak of the last box I drew on the chart. It's clear that there hasn't been much progress in either direction and it is also become clearer that another range has formed.

SPY 12/09/11

One of the significant distinctions to note between this range and the previous that began in February is the volatility. The range from February through July was –in comparison –quite orderly, while the current range since August has been quite erratic with very wide range bars and numerous gaps and a lot of emotion. News and Macro events have played a significant part in both ranges, but the bad news during the current phase isn't being shaken off so easily, and if we're to take the stance that markets are forward looking, the current consensus doesn't appear to believe this will be improving any time soon. It hasn't exactly degraded either.

One of the indications that events are being priced in to the up side will be a decreasing in volatility and compression of daily ranges. As of now, 2% down days followed up 2% up days are still consistently the norm. As mentioned in the Zanger article, bear markets slide down the slope of hope and this can be noted by the contempt, frustration and disgust of every 1%+ down day being quickly forgotten through the excessive optimism of the following 2% up day being the one: the one that ends, the cracks the bear market, the one that leads to a life time of riches, the one that makes all the toil worth while –that one.

Looking at what's led this week yet again, I don't believe that yesterdays move, or any of the 2%+ moves as of yet have been the one. Yet again, it's the JOB stocks getting squeezed like oranges leading this week:

Top Gainers Week of 12/09

Further, the inability of the $USHL5 to clip the previous peak of 604 sends a strong signal that there is a lack of leadership in this move. There are definitely some quality stocks holding their own but there aren't enough of them just yet to indicate a difference in the mood of those that have the capital and means to move markets with their buying. I would argue the point that the primary reason this showed any gains at all this week is a lack of new lows due to bottom fishers and a bump in highs due to the dropping off of previous highs.

$USHL5 12/09/11

Currently the market is fleecing both longs and shorts as neither side has been given the green light of conviction to push their positions. Most indexes have neither made a new high since late July nor made a new low since early October. Taking positions in either direction right now is akin to being a Lima been in the mouth of a four year old- a high probability of getting chewed up and spit out.  Right now patience truly is a virtue.

Sentiment During Bear Markets

I was directed to this excellent piece, The Ten Key Differences Between Bull and Bear Rallies on TraderLog and thought point 6: Market sentiment responds differently in bull and bear markets --is especially pertinent.  The key point made is this, "Bear markets on the other hand, slide down the slope of hope and are generally accompanied by extreme highs in sentiment followed by extreme lows (highs in bearish sentiment) which is another reason why volatility is higher during bear markets."  This can easily be put in context with a quick perusal of the AAII sentiment survey results:

AAII Sentiment

There is also a striking difference of opinion as contrasted with the vacillation of the Investors Intelligence survey during this time which in comparison looks quite bullish overall.

Investor Intelligence

Weekend Review 12/02/11

With the announcement this week of further liquidity being pumped into the market, “Don't Fight the Fed” is the name of the game, but what are the rules? It's been noted recently on Bespoke which stocks are currently “en vogue” and this is also echoed on StockBee. This can be quickly verified by sorting the Russell 2000 by price percent change 5 days. The index returned 10% this week but the leaders are for the most part junk and bottom fishing candidates. Perhaps these improbable candidates will indeed be the next wave of leadership.

Russel 2000 5 Day Price Percent Change

This action this week reminded me of a paragraph in Trade Like an O'Neil Disciple:

The year 2009 was what William O'Neil himself called the most challenging year of his career... It was a year led by junk-off-the-bottom(JOB) stocks, while the more quality names often floundered. Many technical indicators that had worked for many years stopped working... 2009 was the year of the Fed “funny money” market manipulations as the Federal Reserve, in concert with central banks around the globe, injected huge amounts of liquidity into the financial system... pg. 237

Coming into the close of 2011, the Russell is down 1.09% from 12/01/10. On a weekly basis there have been wild gyrations, but smooth the perspective through time and the index has barely budged. This has been a central theme through a year in which the index has been bisected with an upper and lower range where fast and large moves to the up and down have been the norm. Although I'm coming into this week cautiously bullish, I'm not exactly eager to begin entering positions as I have the same sensation I get when I'm in a casino where the house always wins.