DEADShort term sentimentsDEAD

[vin]

New here – mostly swing trading. I’ve been searching for a serious site and believe I have found it here. Mr. To’s commentaries are excellent. Let’s cut to it - I for one am spooked short term (1-3 weeks). Here are my reasons:
First, the current rally just doesn’t seem to have teeth. The move up on June 29 seemed exaggerated. It was just a big ‘Hurrah, the Fed did what we expected.’ Many read a future pause into Bernanke’s statement but who knows? It’s almost as if the market ‘willed’ a rally.
Second, after this delayed follow through day the major indexes responded with a pullback on increased volume (modest in percentage loss).
Third, two days prior (June 27th) all three indices had what I call a ‘heave day.’ They climbed over the previous day’s high only to close lower than the previous day’s low – all on increased volume.
Fourth, there was no doubt some end of the quarter window dressing and short covering.
What has happened since? Some call it consolidation; I call it distribution and selling into bounces. The accumulation volume has been anemic. Although the holiday week clouds things the leading events remain.
Lastly, the most important thing is the gut. Something makes me feel very uneasy (see below). Maybe it was the synthesis of what I mentioned above; maybe I am worried about locking in gains on this recent move up. Nevertheless, I liquidated everything except LEN as I don’t think homebuilders can get beat up much more (gee, wonder where I got that idea?).
North Korea lobbing missiles into the sea doesn’t help. I think there will be one more shakeout before we test old highs again. I don’t know if we’ll sink to (or below) the mid-June lows, but it could be painful. Predictions are pretty much worthless until events transpire. I’m only building an arguable case. The market doesn’t care or need reasons to steamroll every naysayer out there. Let the tape decide.

Side note: I was reading my Bible before the market opened and came across these verses:

“With her enticing speech she caused him to yield, with her flattering lips she seduced him. Immediately he went after her, as an ox goes to the slaughter, or as a fool to the correction of the stocks…” Proverbs 7:21-22

I don’t claim to have divine intervention on my side, and starting my day with this verse might have been what spooked me. Take it for what it’s worth, but the wording in this verse is uncanny in its application to bulls running up a blind (r)alley. The Bible remains the best book on investing ever written (not to mention the invaluable spiritual content). If you don’t have one, get one.

[nodoodahs]

The way I do the math, if financials are 20% of the index and they decline 10% next year, while the remainder of the index gains 10% next year, then two things will happen.

1) the index will rise about 6%

2) at the end of the year, financials will be only 17% of the index.

A 15% rise in the "remainder" will make those numbers 10% gain and 16.4% ending financial weight.
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He was wearing my Harvard tie. Can you believe it? My Harvard tie. Like oh, sure, HE went to Harvard.

[HenryTo]

Yes, it depends on the sector you're trading in, but let's not forget these:

1) As % of market cap, the financials make up more than 20% of the S&P 500. Aside from technology in 2000 and oil in 1980, this represents the biggest percentage that any one sector has held in the S&P 500 over the last 30 years.

2) How prevalent the financial sector is in the economy today vs. materials/energy, etc. in the late 1990s. The oil bust and the deflation we saw in commodity prices in the late 1990s (especially during 1998 to 1999) were bullish for the U.S. stock market, especially from a liquidity standpoint. If anything, the bankruptcy and/or declines of so many mining companies did not have a major impact, either from an employment standpoint or from a "systematic" standpoint. Conversely, the potential bankruptcy of a single hedge fund, LTCM, had a much bigger impact.

3) The lack of ability of the NYSE A/D line to surpass its previous all-time high indicates that liquidity is getting weaker by the day. This occurred in April 1998 as well - nearly two years before the ultimate top - but don't forget that between April 1998 and October 1998, the DJIA declined by nearly 20% before making an all-time high later in early 1999 and finally in January 2000.

If the new lows had occurred in the energy or the materials sector, then I would have called it bullish, but given that it is occuring in the financials sector, this is making it doubly bearish. The U.S. stock market cannot go on and continue to make new highs without the participant of the financials or technology - certainly not in this era. This is because Americans only have an absolute advantage in these two sectors. Foreigners will not buy the S&P 500 or the Russell 3000 without the participation of these two sectors.

[dash]

Decision Point has a great chart of the 10DMA NYSE Common Stock only New High - New Low differential.

We had a series of lower highs in the chart, from 250 (Nov 2004), 210 (July 2005), to 175 (May 2006). Over the same period the NYSE moved from 7000 to 8500.

Personally I've found it's not useful as an indicator for picking tops, but it's been fantastic for picking bottoms. Each time it's got to zero or below (Aug '04, May '05, Oct '05, July '06, and most recently March 07) the market has rallied strongly.

There are many ways to skin a cat, or read a chart. For example I'm at odds with Henry's comment today about the negative implications of Nasdaq New Highs - New Lows. You guys are focusing on negative breadth and divergence, but looking at it on the basis of overbought/oversold tells a very different story. Using the daily data from mid '05 to present, each time this indicator has dropped to 10 (it's currently just below 30) the market has bounced strongly.

This view is expanded on, in the following post with accompanying chart:

http://www.tradersnarrative.com/nasdaq-new-highslows-indicator-near-inflection-point-1162.html

Finally, in terms of Nasdaq breadth, according to http://dkreport.blogspot.com/2007/07/dodging-bullets.html about half of yesterdays new lows were financials, and 13% housing and consumer related. No real surprise this is happening in light of the subprime saga.

[lion hunter]

Im really concerned by the bearish divergences exhibited by the NYSE New Highs New Lows Index. Massive divergences since April this year and today we have a reading of -60. All my theory says that the bulls are losing their grip. Comments appreciated.

[rffrydr]

It is a gap within a "range" so classically it should be an easy fill, that's true. The context however of the DAX is, why it's being bought and the fact that for all the pattern work it still "way up there" makes me take it more seriously.

I'm not gonna bet on it though until the master bets on it.
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Today is the Tomorrow you worried about Yesterday!

[nodoodahs]

Just wanna go on record that this gap down looks like a technical "buy" to me. I'm sticking with my longs and stops, but may look at levering in tomorrow based on how the models and RSI look at the close of today.
_________________
He was wearing my Harvard tie. Can you believe it? My Harvard tie. Like oh, sure, HE went to Harvard.

[rffrydr]

OIL rich DAX never made it out of consolidation before last nights gap down:

http://futuresource.quote.com/charts/charts.jsp?s=AX%20U7-DT
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Today is the Tomorrow you worried about Yesterday!

[rffrydr]

Especially if you've already sold your soul for the house!
_________________
Today is the Tomorrow you worried about Yesterday!

[jchen0119]

Henry and Dash:

This is not that surprising, as the following scenario may illustrate:

Say your doctor performs a test on you and the result means you probably have a terminal illness. You go back home totally depressed and spend the worst night in your life as you ponder how you can possibly live the rest of your life in such hopelessness. (major market bottom)

Then the next day miraculously the doctor calls you and tells you that they looked at the wrong result. In fact, when they looked at the right result, you were perfectly healthy. Imagine the sheer relief and joy that erupt after the dramatic reversal. (extremely bullish sentiment after a major rally off the major market buttom).

Then as time goes on, your perceived health and wealth no longer increase as much, and your joy tapers off. And your life goes back to normal. (bullish sentiment tapers off as rally goes on without much of a drama)

The moral of the story is that to maintain a very high level of bullish sentiment, you will need a lot of dramatic actions to stimulate human excitement. This could be a major reversal, or could be a parabolic blow-off. Anything less than that may just bore the heck out of people and cause them to be less excited and bullish.

Yeah, a slow and steady rise is nice to your portfolios but can bore most people out of the market.

Jing

[HenryTo]

Dash,

Just wanted to respond to your quote from Mark Hulbert on the HSNSI:

[HenryTo]

Hi DK,

I will cover that in this weekend's commentary. Diesel had asked about this as well.

Best regards,

Henry

[dknoester]

Henry, if liquidity tightens and you go short the DOW (as per your Market Commentaries), could you also give your best estimation of which sectors of the market would be most affected, both favorably and adversely? Since there is such a plethora of ETF’s available these days it would be very helpful in planning my trades.

Best Regards
DK

[dash]

Newsletter writers getting more bearish:

[dash]

[rffrydr]

Here's something on the count: