08/22/11
After Thursday's 420-point bloodbath, stocks could not hold onto an early Friday rebound as the morning rally ran out of steam pretty quickly, and the Dow closed down another 173-points.
For the TSP, the C-fund lost 1.50% on Friday, the S-fund dropped 1.73%, the I-fund fell 1.79%, and the F-fund (bonds) slipped 0.06%. For more on the weekly and monthly returns, please see our TSP Weekly Wrap-Up.
A few months ago we talked about warning signs of a market top and we certainly had our share leading up the current correction. The S&P 500 gave its first warning when the 20-day EMA crossed below the 50-day EMA (#1 below on the chart).
The 2nd warning was when ascending trendline broke (#2) coinciding with a break in the 200-day EMA. Warning #3 was the break of the 2011 lows. #4 was the 50-day EMA crossing below the 200-day EMA. That move made this an "official" bear market for the purposes of some of our indicators.
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
The rally last week ran out of steam before being able to get back above the 20-day EMA (#5). That is another bear market warning sign. All of the old support levels that broke on the way down, will now be tested as resistance on the way up.
Despite being arguably in a bear market, there will be short-term buying opportunities, and of course any time you buy in a bear market you are taking on a lot more risk than if you buy in a bull market. But bear market rallies can be very powerful so they are worth pursuing at times.
The leaders are leading on the downside. The Dow Transportation Index made a lower low on Friday, which is not great sign for the broader market indices.
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
The Nasdaq tested and held the prior lows and may be due for a bounce - possibly even filling the large open gap near 2490, but that may be a little too optimistic for the short-term.
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
The Nasdaq has now been down for 4 consecutive days and since this market peaked in late April / early May, the Nasdaq has not had a 5-day losing streak, so perhaps we will see a day or two of gains.
Taking a look at the daily put/call ratios from both the smart and dumb money shows that the dumb money is not surprisingly very bearish; buying puts (bets the market will go down) at a much higher rate. At the same time, the smart money hit a ratio that shows them buying the least amount of puts compared to calls (bets the market will go up).
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
So, it appears that the smart money is looking for a bounce early this week, but this indicator changes dramatically each day. They could easily be back to buying puts on any kind of short-term rally.
Extremely oversold indicators:
From our friends at sentimenTrader.com:
"Fewer than 6% of all issues on the NYSE managed to rise on Thursday. That's the third time in just over a week that we saw such a historic extreme.
"There are very few precedents for such a cluster, and even when we broaden our time frame to the past three weeks, we're still left with only three comparisons since 1940.
Chart provided courtesy of www.sentimentrader.com
"Each one saw the market rebound in the short-term (the next week). But each also saw at least a slightly lower low at some point during the next 4-6 weeks before the market recovered longer-term."
Friday's ratio was 26% so it wasn't #4.
This sounds in line with what I am anticipating, which is a relief rally early this week, followed by a possible 3rd test of the lows, eventually sometime in September / October, a bottom that will lead to a rally into the end of the year. But I will take it day by day because my longer-term predictions are not worth very much.
Any kind of selling early this week, particularly if it accompanied by a new low, could trigger a capitulation like panic selling frenzy that could produce another strong reversal. That's if we didn't already see it late last week after the 2-day 600-point decline.
The TSP Talk Sentiment Survey moved to the bear market rules after the 50-day EMA fell below the 200-day EMA last week. The survey came in at 27% bulls, 65% bears for a bulls to bears ratio of 0.42 to 1. That is a buy signal in any kind market but the system moved from 100% S-Fund to 100% C-fund for this week, due to the bear market rules.
Thanks for reading! We'll see you back here tomorrow.
Tom Crowley
The legal stuff: This information is for educational purposes only! This is not advice or a recommendation. We do not give investment advice. Do not act on this data. Do not buy, sell or trade the funds mentioned herein based on this information. We may trade these funds differently than discussed above. We use additional methods and strategies to determine fund positions.
After Thursday's 420-point bloodbath, stocks could not hold onto an early Friday rebound as the morning rally ran out of steam pretty quickly, and the Dow closed down another 173-points.
For the TSP, the C-fund lost 1.50% on Friday, the S-fund dropped 1.73%, the I-fund fell 1.79%, and the F-fund (bonds) slipped 0.06%. For more on the weekly and monthly returns, please see our TSP Weekly Wrap-Up.
A few months ago we talked about warning signs of a market top and we certainly had our share leading up the current correction. The S&P 500 gave its first warning when the 20-day EMA crossed below the 50-day EMA (#1 below on the chart).
The 2nd warning was when ascending trendline broke (#2) coinciding with a break in the 200-day EMA. Warning #3 was the break of the 2011 lows. #4 was the 50-day EMA crossing below the 200-day EMA. That move made this an "official" bear market for the purposes of some of our indicators.
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
The rally last week ran out of steam before being able to get back above the 20-day EMA (#5). That is another bear market warning sign. All of the old support levels that broke on the way down, will now be tested as resistance on the way up.
Despite being arguably in a bear market, there will be short-term buying opportunities, and of course any time you buy in a bear market you are taking on a lot more risk than if you buy in a bull market. But bear market rallies can be very powerful so they are worth pursuing at times.
The leaders are leading on the downside. The Dow Transportation Index made a lower low on Friday, which is not great sign for the broader market indices.
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
The Nasdaq tested and held the prior lows and may be due for a bounce - possibly even filling the large open gap near 2490, but that may be a little too optimistic for the short-term.
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
The Nasdaq has now been down for 4 consecutive days and since this market peaked in late April / early May, the Nasdaq has not had a 5-day losing streak, so perhaps we will see a day or two of gains.
Taking a look at the daily put/call ratios from both the smart and dumb money shows that the dumb money is not surprisingly very bearish; buying puts (bets the market will go down) at a much higher rate. At the same time, the smart money hit a ratio that shows them buying the least amount of puts compared to calls (bets the market will go up).
Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk
So, it appears that the smart money is looking for a bounce early this week, but this indicator changes dramatically each day. They could easily be back to buying puts on any kind of short-term rally.
Extremely oversold indicators:
From our friends at sentimenTrader.com:
"Fewer than 6% of all issues on the NYSE managed to rise on Thursday. That's the third time in just over a week that we saw such a historic extreme.
"There are very few precedents for such a cluster, and even when we broaden our time frame to the past three weeks, we're still left with only three comparisons since 1940.
Chart provided courtesy of www.sentimentrader.com
"Each one saw the market rebound in the short-term (the next week). But each also saw at least a slightly lower low at some point during the next 4-6 weeks before the market recovered longer-term."
Friday's ratio was 26% so it wasn't #4.
This sounds in line with what I am anticipating, which is a relief rally early this week, followed by a possible 3rd test of the lows, eventually sometime in September / October, a bottom that will lead to a rally into the end of the year. But I will take it day by day because my longer-term predictions are not worth very much.
Any kind of selling early this week, particularly if it accompanied by a new low, could trigger a capitulation like panic selling frenzy that could produce another strong reversal. That's if we didn't already see it late last week after the 2-day 600-point decline.
The TSP Talk Sentiment Survey moved to the bear market rules after the 50-day EMA fell below the 200-day EMA last week. The survey came in at 27% bulls, 65% bears for a bulls to bears ratio of 0.42 to 1. That is a buy signal in any kind market but the system moved from 100% S-Fund to 100% C-fund for this week, due to the bear market rules.
Thanks for reading! We'll see you back here tomorrow.
Tom Crowley
The legal stuff: This information is for educational purposes only! This is not advice or a recommendation. We do not give investment advice. Do not act on this data. Do not buy, sell or trade the funds mentioned herein based on this information. We may trade these funds differently than discussed above. We use additional methods and strategies to determine fund positions.
