ES -- DX/CL -- isee -- cboe put/call -- specialist/public short ratio -- trinq -- trin -- aaii bull ratio -- abx -- cmbx -- cdx -- vxo p&f -- SPX volatility curve -- VIX:VXO skew -- commodity screen -- cot -- conference board

Thursday, January 03, 2008


still hanging in

still long the market coming off the holiday season in which i left positions on (and felt pretty good about it) during an absence from december 21 to today, but come back to find some unexpected deterioration in forward prospects painting a mixed picture.

there had been real improvement in participation building from mid-november, particularly in the nasdaq 100, but that seems to be expiring from late december as seen in new monthly and quarterly hi-lo data. this is troubling. the depth of the plunge in november may not have been enough to bring in sustainable interest.

part of me suspects there could be a thin rally to push things further before a reversal lower sets in. for one, it's unusual for the percentage of issues trading over 30dma to fail to get to 80% following a clearout like we saw in november (or august or march or june 2006). there are also some positive divergences in volumes in spite of a few panicky 90% distribution days in the last couple weeks.

option market sentiment averages also don't seem to have gone far enough yet to merit a severe pullback. this chart looks back to 2002, and it can be seen that the 10dma of isee will normally reach up to at least 110% of the 50dma before one can say sentiment is sufficiently exuberant for a local top. but the 5dma has reached up pretty far -- and we don't have data for the 2000 major market top in this indicator, meaning that we're potentially comparing apples to oranges.

in the immediate term, the speed of the selloff in the ten-year is indicating a pop, as noted by dr. brett...

... as is the high trin reading. issues trading over their 10dma has also fallen to oversold, increasing the chances of a bounce. there's also positive spin emerging about the alleviation of the liquidity crisis. this might be good for a week or so, but at that time i should probably be reconsidering.

UPDATE: "mixed picture" didn't keep me from expanding my longs a little today near the close, adding more QLD. the technical picture for the broader markets could be better, to be sure -- but downside leadership in the financials may be waning of late.

this process of improving participation has been extended but mimics the movement of august and march. volumes show some mild bottoming action as well, and fraction of issues over moving averages are at oversold-but-improving-vis-a-vis-price levels. combine that with the aforementioned trin, the ten-year selloff momentum, and some tasty readings in aaii percent bearish which rose to 55%, and it could well be bouncy here.

i tend to think that the downside leadership in this market will remain the financials, and that intermittent periods of strength in this sector will open the door to rebound rallies that (i suspect) will be best played in the better-relative-strength sectors -- basic materials, energy, tech, healthcare, consumer non-cyclicals.


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