More Bounce to the Percentage

Conventional market wisdom sates, “From failed moves come fast moves.” The lack of an immediate follow through to the selling on Friday indicated that panic had not set in motion capitulation and the action through today carried over the premise of methodical distribution and not the beginning of a rush to the exits. In lieu of today's strong move with the indexes closing up over 2% the present situation should be reevaluated with current information.

Looking forward by looking back, the action of last June is analogous to what is currently transpiring and may give a road map to one possible scenario. Using the 50MA and 200MA as reference points, the NASDAQ undercut the 50MA and bounced only to fail and dip below the 200MA where it found a near term floor and began a strong counter trend rally into mid July. This pattern is possibly repeating now.

NASDAQ 2011

NASDAQ 06/06/12

While the longer term trend continues to be down, strong counter trend rallies are not unexpected under these conditions; after all, many of the largest intraday moves occur in down trending markets. Currently the primary signals I use to indicate a healthy market for me to trade in are still squarely bearish. If this move becomes more significant in magnitude than just a tradeable bounce my indicators will flip early enough to take advantage of the situation, but until then...  

Weekend Review 06/01/12

This week saw the continued flight to quality as return of capital became more significant than return on capital. This is evident with the TLT hitting all-time highs, and the Russel undercutting it's 30-Week moving average and entering Stage 4.

TLT Weekly

Russell Weekly

We're currently in a volatile and highly correlated market and as Stage 4 progresses keying in on the last basket of stocks still holding up well relative to the overall market becomes my focus for two reasons A) Further deterioration of the market will be evident by these stocks getting clipped and B) Looking for bases of those holding up well and signs of accumulation when the market transitions back to Stage 1.  

Panic?

Are we beginning to see signs of panic? The NASDAQ just broke a pivot low that has held for 9 sessions and broke through a key psychological anchor, the 200MA. Additionally we're facing a transition from an orderly pull back into a deeper market correction now that the index has closed down 12% from the March high. Coupled with the magnitude of the move, down 2.8% for the session, a near term bounce would not be out of the question. Additionally, the anticipation of support in this zone and stabilization of price in this vicinity may lead to the belief that a bottom may be forming here, however evidence indicates that this view may be premature.

To hone in on the underlying market psychology and where it registers in terms of panic, one tool available to help gauge this is the Justin Mamis Sentiment Cycle as illustrated here from Wall Street Cheat. 

Market Cycle

Using this and overlaying the conditions upon the NASDAQ, the current location of market psychology as depicted through this model suggest that the initial stages of panic may be on the horizon.

Market Cycle Overlay

Further, when it comes to sentiment indicators there continues to be a divergence between the Pros Vs. Joes with the Investor Intelligence Sentiment currently reading 24.5% bearish with a 1% increase in bullishness over the previous week while the AAII Sentiment currently shows a 42% bearish reading with a 2% decrease in bullishness. There is plenty of indication that retail and hence weak hands have left the market already while those in position to make markets move have held fairly steadfast.  

When addressing what is or is not panic, moves in the indexes can be deceptive. One way to reduce the noise of wild intraday market swings is through assessing the underlying market breadth in relation to these swings and quantifying and modeling what a panic/capitulation scenario looks like. For this, I use the number of stocks that have increased or decreased by 4% or more on increasing volume from the previous day. Using this criteria and reviewing the numbers in 2011 allows for panic to be depicted visually.  What this chart shows is that prior to the flush when there was a rush to the exits the number of stocks decreasing by 4% on increased volume from the previous session hit very high numbers as there was a stampede to exit.

Panic Selling

Comparing this to now there are a few nuances. The most obvious is that there are a number of days that had larger selling and that this selling has been persistent over the past few weeks. At first the selling was not remarkable for there were only 2 days above the 300 threshold, but over time it becomes and added together there was orderly distribution occurring during this period that was significant, but not yet panic. With a 500 day now occurring, this may be the initial stages of exiting at any cost exemplified through deleveraging and margin calls as bids dry up and no buyers are to be found and prices rapidly depreciate and shorts smell blood in the water.

Persistent Distribution Sans Panic

The USHL also depicts what a panic/capitulation scenario looks like as the numbers drop to -3000+. Currently it is at -271 which by no means is an extreme bottom formation reading suggesting that even though there has been orderly exiting a number of stocks have still held up well. As long as these stocks hold up well, the indexes in turn will mask the broader weakness under the surface until they in turn can not longer find bids, selling hits the tape and shorts begin to look for new targets. When markets deteriorate few stones are left unturned so there is plenty of kindling left to add to the fire.

No Panic

Currently the market is not particularly healthy and volatility is on the rise and a number of conditions for a flush are being met so this is one scenario to be anticipate.  Regardless of whether this move ends in panic and capitulation or merely through distribution until there is no one willing to hold up bids remains to be seen.  The importance isn't having this play out exactly as anticipated, but merely being aware of and prepared with contingency plans based upon probable outcomes and scenarios.

Weekend Review 05/25/12

Tao gives birth to one,

One gives birth to two,

Two gives birth to three,

Three gives birth to ten thousand beings. --Tao Te Ching

If there is one unifying force to market structure, it is contraction/expansion. The Tao is an expression of the expansion cycle. A rattle snake that coils then strikes exemplifies the movements of contraction/expansion. Throughout nature this pattern repeats. A cloud releases rain (cloud contracts, rain expands) that in turn can turn to ice (expands) which can then melt (contracts) then turn into steam (expands) and becomes a cloud again.

 

What we can learn from this sequence is that once a cycle begins it has a tendency to carry this momentum forward. Price that slows will continue to do so for some time and price that accelerates will continue to do the same as well. Additionally empirical evidence indicates that these burst of momentum will last from 3 to 5 days and that the directional probability of expansion and momentum burst moves with that of the prevailing trend.   

Three weeks ago there was a narrow range on the weekly chart of the NASDAQ and the hypothesis at the time was to expect an expansion in range and follow through in the direction of the move. The first two events did occur, however there was a lack of follow through as the market paused this week.

NASDAQ Weekly

Scoping in on the daily chart a few more details stand out on this time frame. First, a pivot low has been established as the market paused this week. This will now act as a key inflection point for as long as price holds above this level an assumption can be made that a new range is undergoing formation. Second, this week also saw volume drying up so a pause here with a lack of participants particularly after three down weeks is not unexpected especially when coupled with a holiday weekend. Lastly, the past two sessions have showed range contraction with back to back NR7 days. Sticking with the hypothesis that range expansion occurs after range contraction, on the daily time frame the market is due for a move which can lead to further price erosion if the break is to the down side, or a rally within the larger context of a weekly downtrend if it breaks to the upside.

 

NASDAQ 05/25/12

Currently there is still the issue of Greece and a number of other macro events that are pushing noise into the markets and increasing volatility. Coupled with internal market structure, the psychological tolerance of risk on/risk off can be expressed by the relative strength of sector ETFs to the SP. Taking two data points, the market peak and the first of May, it is clear that the current market is still defense oriented with risk off. Utilities and Consumer Staples have outperformed the general market since March 19 and have barely underperformed over the previous month. Tech, Energy and Financials have underperformed with Telecoms doing the worst on both time frames.

Sector Strength

Further using the XLP and XLY consumer sentiment and optimism/pessimism can be gauged by the performance of discretionary or staples. Looking at the XLP, since the market peak there has been an orderly range forming with price near the highs and a consistent volume pattern.

XLP

Looking at the XLY, the range formed since the market peak has been much more erratic and briefly broke the downside and is now retesting that price point. Additionally the volume pattern has been much more erratic with down days showing spikes and a general increase over the up days.

XLY

General market volatility continues to rise as does the uncertainty with news stories filtering in daily. The consensus ebbs and flows from things being bad to not so bad to tolerable to manageable to meaningless to contained that it's basically a coin flip each say as to which news cycle will be the theme.  The way I see it, these are the times to bunker down and reduce the hiss and look at how the information passed off from the market indicates what type of conditions we are now under: risk on or risk off, and not what the bobble heads are regurgitating from the Lehman/Bears collapse because just as market internals repeat the contraction/expansion cycle, news pundits repeat the head in the sand caterwauling and are clacking their teeth like it's 2008.

Weekend Review 05/18/12

The market has been running on fumes since late February and was in need of a cleanse. The move from late December to January was swift and since then the number of stocks that continued to lead the indexes higher was becoming increasingly narrower by the month. The Russell continued to lag indicating a lack of risk appetite as small caps fell out of favor and money flowed continually into big cap tech.

This week closed out with all major indexes having pulled back at least 10% over the past two months. In addition this week ends with a number of breadth indicators denoting that the market is oversold and a bounce on the near term is highly probable. So based upon general principles it would seem that a tradeable bounce to the upside is on the horizon this week but whether or not this stabilizes a near term market bottom to rebuild constructive bases off of is debatable.

In addition this week ended with all major indexes confirming Stage 4 Markdown by closing below their 30-Week moving average. Using the Russell over the past two years we can see that in 2011 the first close below this average did indeed lead to a bounce that lasted four weeks before rolling over and ultimately breaking the pivot low before eroding much further. Also of note, over the past two years there the Russell ended this week very close to where it closed 2 years ago. While there has been oscillation between this period, essentially the Russell has been in a wide range.

Russell 2-Year Weekly

Two other pieces of information this week that caught my eye were the USHL and the T2107 (the number of stocks above their 200 period MA.) which indicate that the market internals are not confirming market exhaustion. Comparing these numbers to a year ago, internally the market structure is not dissimilar to where it was in early August after the first wave of selling hit in late July. So while a number of breadth metrics indicate the market is oversold on a technical basis and a bounce may be on the horizon, it clearly has not reached exhaustion nor capitulation as a number of stocks are still holding up well enough as of now.

USHL 05/18/12

T2107

Further evidence comes from the Market Monitor Primary reading which has yet to reach the extreme readings from August through October of 2011. This affirms that there are still a number of stocks this correction has yet to ding. Until this breaks down further, the hypothesis is that any bounce will be reflexive and that the market needs to erode further then take time to rebuild bases before a sustainable move to the upside can begin.

MM Primary 05/18/12

  

Overall it is abundantly clear the market is in bad shape and has the potential to erode further.  While a 10% pull back is a sign to become optimistic, there's no reason why things can't continue down another 5% or more.  The persistent selling over the past two weeks has been methodical and while there have been pockets of capitulation in some individual names there hasn't been urgency to unload at any price.  The conditions are there however, just as there are conditions for a bounce so the reaction to either of those scenarios will give further clues as to how this will play out.   

Persistent Selling

4% +/-

10 Day 4% Differential

Selling has been picking up over the past three sessions and the clear negative trend can be seen by the the down days over the past 10 sessions.  Even though selling is picking up, it hasn't been the type of capitulation selling that leads to the exhaustion to the downside.  Looking at the longer term Primary this move is measured and setting up thus far like area A rather than area B.

Primary Trend

As noticeable here, when overwhelming selling hits the tape a spike in the Primarily will be soon to follow.  As of now this has been much more methodical, but one blowout day can quickly change this assessment. 

Pockets of Strength

With the market appearing to be breaking down it's been easy to lose focus on the positive and constructive action over the past few months that resulted from the long range --namely setups.  While much has been weakened there are pockets of strength that are beginning to emerge.  The following is a list of stocks that have made a 25%+ increase from their low over the past 3 months and traded at least $1M in dollar volume today.

52 Pick-Up

AEO

AMZN

AOL

CHSI

EQIX

EXPE

GNC

GPS

LEN

LNKD

MNST

RYL

SWI

TRIP

VSI

From this list some themes begin to emerge and while not all of these will hold up necessarily, it's important to begin building watch list and being prepared for when things finally shake out and the next leg of the journey commences.