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Wednesday, January 09, 2008


more deterioration -- nearing a meaningful rally?

this has to be coming to a head now. doesn't it?

there's some interest in the 20-day new lows of the s&p, but the most remarkable feature really is the excessive downside participation across the basket.

it's better contextualized here. going back to 1989, the only previous spikes where an equal or greater percentage of the stocks in the s&p were hitting new 250-day lows (currently 28.6%) are as follows:

  • july 24, 2002
  • september 21, 2001
  • august 31, 1998
  • september 24 and 27, 1990
  • august 21 and 23, 1990

that's seven in the previous 5,000 trading sessions. note that all these points came amid bear market declines and four in five are associated with recessions. the action of the index price may not seem to reflect it entirely, but the underlying stocks have rarely been so desperately sold.

the picture is, a bit surprisingly, little different in the nasdaq 100, where 22 of the 100 are hitting new yearly lows. from such levels, huge rallies frequently ensue -- in excess of 20% for the nasdaq 100 would be normal. here's the subsequent rallies from the aforementioned points in the s&p:

  • july 24, 2002 -- up 20.7% over the following month ending august 22
  • september 21, 2001-- up 21.1% over the following two months ending december 5
  • august 31, 1998 -- up 11.3% over the following three weeks ending september 23 -- a retest of the low then sparked the final rupup to the 2000 top
  • september 24 and 27, 1990 -- a 4.8% one-week pop, then back to slightly lower lows in october to mark the 1990 bottom -- up 9.6% by december 5
  • august 21 and 23, 1990 -- up 5.6% over the following two weeks to september 5 -- then falling back to the september 24 and 27 level aforementioned

a 5% rally from last night's close would get back to s&p 1460 -- so what comes after this decline should be a strong, sharp, relatively durable bear market bounce. maybe the plunge protection team will be hitting the warpath. says the widely-read ambrose evans-pritchard of the telegraph:

It appears to have powers to support the markets in a crisis with a host of instruments, mostly by through buying futures contracts on the stock indexes (DOW, S&P 500, NASDAQ and Russell) and key credit levers. And it has the means to fry "short" traders in the hottest of oils.

UPDATE: on this research, i went longer still into the close, buying QLD and XLP. i'm really at just about my maximum long level now.


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