The Indexes Grind Higher

Well, yesterday I suggested that the odds favored a break lower but I also indicated the developing divergences in the MCO and 10% Index. The MCO and 10% turned up sharply from yesterdays lows and the markets opened higher and held a positive tone for most of the day. In spite of an astoundingly negative Consumer Confidence number of 38, the worst since 1967, the markets managed to hold their gains rallying into the close. Also it snowed in New Jersey. Closing prices on the day.

Dow 9,065.12 + 889.35 (10.88%)
Nasdaq 1,649.47 + 143.57 (9.53%)
S&P 500 940.51 + 91.59 (10.79%

Since the markets obviously didn't break lower, this part of the decline is finished and I would expect the major indexes to move back up inside of the 15% envelope on the 200 day moving average. Since at the lows the indexes were 35% below the 200 day, the rally now occurring should provide some excitement for those still holding short positions. See the chart below for a general idea of the initial price targets.

The SPX daily chart with 15% Bands on the 200 Day MAVG
Click to Enlarge

The SPX 65 minute chart with positive divergences on the MACD and RSI
Click to Enlarge

Monday 10-27-08

The McClellan Oscillator for Monday 10-27-2008
Click to enlarge

SPX Intraday cycles

Well, the MCO blew up, taking a two day zig to the downside. Here's the 65 minute chart with the cycles which seem to be working and the symmetrical triangle which is forming. It looks to me like we zig zag lower into the election.

SPX 65min. cycles

A high TRIN occurs near a low it's an indication of panic, wholesale selling. Todays numbers were very skewed to the sell side, the up/down volume ratio was in double digits (depending on the data source) -- all of this makes me think we should get a bounce tomorrow.

NYSE ARMS Index (TRIN)

The market remains dangerously vulnerable to the downside.

Historical DJIA 2008 vs 1970

Advisor sentiment hit similar lows during these periods. The disconcerting difference in 2008 is how far the DJIA fell below its 40 week (approx. 200 day) moving average, at it worst the difference was nearly 35%. As a result a snap back rally could take on the proportions of a bull market, climbing 20% to 25% without ever crossing above the plummeting 40 week average.

Until the DJIA trades and manages to stay above the 40 week moving average it must be considered in bear market territory. Certainly at some point it will move and stay above the long term benchmark and the preceeding rally will have to be considered part of the new bull market. For now that is not the case.

The DJIA 1970 low compared to the 2008 low.
Click to enlarge.

MCO turns positive - short term buy signal

The MCO finished the day at +109, it is now above zero and a short term buy signal. The 10% Index is still negative at -269 the 5% Index is at -378. The 5% and 10% Indexes just moved above -500 today for the first time since the START of October. Please note: It is very possible for a one or two day decline to occur here with the MCO pulling back towards the zero line. It's not a requirement, it can also just continue moving higher. The market will fluctuate.

This is both extremely oversold and huge negative breadth momentum. Since the MCO is calculated like a MACD, it behaves somewhat the same and what we should see is a declining bottoms pattern in the indexes with a rising bottoms pattern in the MCO. This would create the classical positive divergence. So far for the last YEAR this has failed at every low to produce a divergence of any sort.

At the present moment we have NO CONFIRMED bottom established, this will take time, months not days or weeks.

However, the October low readings were so extreme I doubt they will be equaled again in my lifetime. In other words, a rising bottoms pattern, in the MCO and 10% Index, is a lock (well never say never but...) That means we will get some kind of a positive divergence signal at the next major low.

Looking at the pattern over the last year, the retests have been about 3 months apart which puts us in January. It's as good a guess as any but I think the best way to gauge it is by using the other price based indicators on the indexes. Also the 50 and 200 day MAVGs will be major resistance. I seriously doubt the indexes will get above the 200 day on the first try.

It is very likely that certain issues made absolute lows recently and that they will not be exceeded on the downside. At the same time, everything will zig zag with the indexes and we all have to decide whether or not to try and hold through the valleys. There may be more risk to doing this than before, it's a hard call because so much will depend on what the financial wizards do to try and fix the markets. Exiting when the SPX nears its 200 day moving average is probably a good strategy until it becomes clearer what the longer term outlook may be.

The MCO for 10/20/08, Click to enlarge

The following weekly chart of the SPX is a little messy but what I've draw in here are two channels using fixed slopes 1 point per day (blue) and 2 points per day (orange). Several other timing cycles point to the spring of 2009 for what I would consider the first real chance of forming some sort of bottom. This market remains in a steep downtrend and it is very likely all rallies will fail below the 200 day moving average (roughly 40 weeks, not shown)

SPX Weekly, Click to enlarge

Obama for President

Without hesitation I'm endorsing Barack Obama for president.

The last eight years have been a political and economic disaster for this country I can see no reason why we should not expect more of the same under another Republican administration. How can I trust the judgment of Senator McCain if his best choice for vice president lacks any qualification for the job?

During the bush adminstration we experienced a zig-zag market with two downlegs wiping out 33% (1/00 - 9/02) and 40% (10/07 to the present) and a net loss so far of roughly 25% since he took office. Historically this fits the pattern, that markets underperform under Republican administrations when compared to Democratic administrations. President George W Bush has shown his party leadership, presiding over decling average returns for Republican administration stock markets. Why any investor would vote Republican is beyond me. What does all this squealing about "lower taxes" mean if your investment returns are cut by 40%? Oh, I get it, that's how a "free market" works? Gulp.

When I was a young boy growing up, we were shown, without choice, the horrors of the Nazi concentration camps, it's stuck with me over the years. America, we were the good guys, fight for justice and equality, the cowboys in the white hats.

Somewhere along the line we lost our way, believing it was our way or the highway. A belief that absolute force and intimidation could be used to sway world events in our favor. The world has grown up, shaken off the destruction of World War II, globalized, and we now find ourselves a member of a new global economy, we are all interlinked economically.

This has been been made forcefully clear by the recent financial crisis which I believe is directly the responsibility of the current administration. It is not as if this problem was hidden, people have been talking about it for over two years but without leadership nothing was done until a fatal crisis put us where we are now.

I am against terrorism and I am against torture. The good guys would have never stood up for torture as government policy. Why are we now?

But wait, don't just read me, here are links to other esteemed newspaper writers which also realize that Barack Obama is the best choice for this country and are publicly endorsing him for president.

Chicago Tribune endorsement: Barack Obama for president
"This endorsement makes some history for the Chicago Tribune. This is the first time the newspaper has endorsed the Democratic Party's nominee for president."

The L.A. Times: Barack Obama for president
"The Times without hesitation endorses Barack Obama for president"

The Washington Post: Barack Obama for President
"The choice is made easy in part by Mr. McCain's disappointing campaign, above all his irresponsible selection of a running mate who is not ready to be president"

The Boston Globe: Obama for president
"...The nation needs a chief executive who has the temperament and the nerves to shepherd Americans through what promises to be a grueling period - and who has the vision to restore this country to its place of leadership in the world.
Such a leader is at hand. With great enthusiasm, the Globe endorses Senator Barack Obama for president."

The Seattle Times Barack Obama for president
"At a time of huge challenge, the candidate with the intelligence, temperament and judgment to lead our nation to a better place is Sen. Barack Obama."

Christopher Buckley, the son of William F. Buckley has decided—shock!—to vote for a Democrat. endorses Obama
"Buckley, the son of famed conservative icon William F. Buckley Jr., this week lost his job as a columnist at the National Review, the magazine his father started, over a blog he posted on the Daily Beast endorsing Barack Obama." [Christian Science Monitor]

Surprisingly, the Huffington Post, the last bastion of conservative liberalism hasn't quite made up its mind and endorsed Obama, at least I couldn't find the editorial:-) They do say nice things about him though.

And finally from FUX News, Hip-Hop-Dancing Colin Powell Fuels Speculation He'll Endorse Obama
Colin Powell showed off his hip-hop moves at an 'Africa Rising' celebration in London Tuesday, fueling speculation that the former secretary of state is about to endorse Barack Obama for president.
Colin Powell will appear this Sunday on "Meet the Press" and since he isn't exactly an economics expert, speculation has it that he might give Obama the nod.

Really Chitty Markets

Starting off with the crash of 1929. The following charts are scaled approximately the same percentages to give a relative sense of the sizes of the declines. I've marked out the crashes. Readers should note that the 1929 crash was only the start of a market which eventually lost 90% of its value in a long extended decline. See the last chart for the whole horror story.

The Crash of 1929

In modern times, the bear market of 1973 to 1975 had two crash phases and just went down and down making a very wide chart.

The Oil Crisis Crashes of 1973-1975

In October of 1987, the markets staged probably the best kick ass crash ever.

The 1987 Crash

And here we are today, the bottom has fallen out of the bucket. In my personal opinion there is a 50-50 chance we could be entering an extended bear market similar to the 1930's or the 1970's. I really don't think anyone really knows one way or the other here. The fundamentals are mixed, with the general economy better than the news makes it look but with the financial sector on the brink of a total meltdown any recovery may take longer than a few months.

The 2008 Crash

And, just for fun, here's the MCO as of last Friday. I can't say any more than I have previously. it is so oversold we should rally, but a hiccup could mean another 600 points on the downside.

The 2008 MCO
Click to enlarge any chart.

Just in case you think the market cannot go lower, think again.

The whole ugly market between 1929 and 1933, one crash after another
Click to enlarge any chart.

Ugly Thursday - Set up for a reversal?

It might take another day or two but the current decline is very extended and will lead to a sharp rebound to correct the excesses on the downside.

The current market is just like 1987 except that the activity is being spread out over 6 days. It should be over in a day or two with a net 6 day, start to finish loss, of about 23%-25% (900-860 SPX ).

Unlike 1987, traders can get quotes and enter orders, everything seems to be functioning in an orderly manner and that is a big plus. Since orders are being taken, traders are taking shots at picking the low and their stops are being taken out fueling the start of each of the smaller legs of the decline.

Now for a second, let's consider the state of the supply and demand balance. On the demand side the market makers, specialists, short term traders and institutions are absorbing the selling.
* Some of the players will attempt to remain market neutral and unload positions on any tiny rally. This is what is keeping the various issues range-bound most of the trading day.
* Some of the traders are just scalping or trading with a tight stop, they provide liquidity and create froth.
* Some of the buyers are smart short sellers who are covering their earlier shorts, either in size or in pieces. Short covering decreases the float, hence it reduces the supply.
* Some of the buyers are mutual funds with a long term horizon, they are effectively removing supply from the market as they intend to hold the stock for more than a few days.

On the sell side:
* Institutions, ETF's, mutual funds, and individuals are liquidating positions and moving into cash. Their selling reduces the supply since most of it goes into strong hands.
* The churn, or all the daily trades caused by stop loss orders, forced margin liquidation scalping and other short term activities. This is primarily noise but adds liquidity.
* Late comers to the short side, especially the effects caused by hedges using ETF's or put options or futures, along with new shorts. The ETF's, short funds and options events are translated into the cash markets as sales. All of these trades represent latent buying power.

As the market declines, panicked sellers are removed from the supply side of the book as in the aggregate, the stock moves from a pessimistic holder into the hands of an optimistic holder.

When the move is extended over several days, each new low flushes out more of the weak holders who decide to throw in the towel and sell. As the market decline reaches fever pitch it becomes front page news, fueling the fear and inflaming the decline. This is about where we are at the moment. `

Now, at some point the world economic powers decide that this is one "free market" too many and that they will need to intervene. Doubters need only realize that, if they want to, the government can print enough money to buy all the stock being offered. In practice this will not be necessary, but it is possible.

Further, we should realize that the people in the government making these decisions are aware of the various methods for determining where a market is in its buy-sell cycle. In extreme conditions like we are experiencing they should know that all the indicators will deviate from the prior normal ranges and make new extremes. They should also be able to sense when the markets selling pressure is exhausting itself. Then when the rubber band is stretched out as far as it will go, they will act. This is exactly what happened in the days following 911.

If there is some sort of buy side ignition, we must remember that the "overhead supply" has been significantly reduced. When the market starts to rally the bargain hunters will jump in along with the shorts covering.

Remember, it was only 900 mostly banking stocks which had short restrictions. Further, there will be a massive unwinding of short side ETF's which will be translated into a market which has no available supply. Prices will skyrocket and unlike previous one day wonders, I believe the rally to come may go straight up with no significant corrections for the first few days. It's not a prediction,. but something to watch out for.

SPX Daily with some arbitrary trendlines.

Moving right along

Just a chart, it should be self explanatory.

Percentage of NYSE Stocks above their 50 and 200 day averages.

Prolonging the Panic

Todays market action is within the parameters I would expect under the current panic conditions. The markets are moving almost entirely on emotion and therefore somewhat unpredictable in their behavior.

While the technical indicators are oversold, they are also well outside of the normal ranges indicating that one should be careful about looking for a bottom too soon. The urge to sell, either just to escape or to scalp, is stopping any attempts to rally and work off the oversold condition.

Eventually the markets will turn higher here but it may take another day or two of behavior like we saw today before this occurs. No need to be a hero.

SPX 65 minute (6 bars per day) Click to enlarge

SPX Daily Click to enlarge

MCO for 10/7/08 Click to enlarge

Grrrrrasch

There was nothing nice about todays market except for the rebound near the close.

All the indicators are oversold enough for a bounce or more crashing. This makes prediction about as good as flipping a coin.

My gut reaction is that Monday Oct 6 was some kind of a significant low and that we could bounce Tuesday.

It is possible that on Tuesday we may start off going a bit lower intraday, but a number of my near term price targets have been met and a bounce could occur if there is no negative news overnight. The charts below are what an unstable market looks like, IRA investors should remain on the sidelines.

Click to enlarge.

Click to enlarge.

New low swamped everything else in what looks more and more like climatic behavior.
Click to enlarge.

Walking in the Woods

Watching out for the bear, for the next few days the markets will be almost exclusively news driven.

The psychology among the players in the financial world is bordering on panic and as a result volatility will remain high. This means the market may make crash-like moves, moves greater than 5%, in either direction, up or down.

The market technicals are oversold and starting to diverge from the price. However, since the primary factors affecting the market at the moment are the lack of liquidity and fear there remains a significant 5% to 10% additional risk to the downside before the current decline stabilizes and tries to reverse.

In this type of market, a delay of 1 or 2 days in the completion of the expected reversal of an indicator can have very negative consequences. For example, the McClellan oscillator is currently at -153, with the 10% index at -545. Normally this would be considered oversold enough to generate bounce but under the current conditions we will probably see the MCO go below -200. The 10% index is again below -500, an indication that regardless of whatever rally occurs in the next month we can expect a retest of the current lows.

SPX Daily - Click to enlarge

Chart oddities. The red down channel was drawn in across the highs. The Cyan down channel is calculated and has a slope equal to 1.382x the slope of the red down channel (marked 1.38 in red to right).

I have a 144-72 TD cycle date for the coming Tuesday.

The white fibonacci intervals to the right are based on the 2003-2008 low to high measure.

NYSE - Issues Below the 200 Day Average

In the two charts below I am examining an indicator which looks at the percentage of issues above or below the 200 day or 50 day moving average of price. When stocks are above their longer term moving average is is indicates that the stock price is in a rising trend, or about to enter a rising trend if the price has recently moved above the average. Conversely, if the price is below these averages it indicates the price is in a declining trend.

When we look at the entire universe of NYSE issues, and generate an aggregate percentage number for the number of issues which are above or below the longer term moving averages (50 day and 200 day) we can draw some conclusions about the behavior of the entire market in the same way. In bullish market behavior, the percentage of stocks above their long term moving averages will be in the upper half of the range (50% to 100%) and conversely in declining markets.

We need to remember that when the price is above its moving average, the value of the moving average increases, at a slower rate but it follows the trend. At high and low extremes, the price behavior flattens out or spikes and reverses. This type of price behavior will slow the rate of change of the moving average causing it to curl over and flatten out. While a few stocks can have long extended trends in one direction or another, is extraordinarily rare for the market as a whole to do this, there are always some stocks which start behaving in a direction counter to the market trend.

Therefore at market extremes we need to be sensitive to occasions when this indicator is also at an extreme. In the two charts I filled in with red the areas below the 50% line.

During the 2002-2003 market bottom, this indicator was below the 50% level at the end of the decline, indicating a time lag between the stocks which initially caused the market averages to decline, and the 'other' stocks which resisted the decline until late in its development.

In the current decline, the price behavior of a much larger number of stocks started to deteriorate much earlier in the correction phase. The large number of issues in negative trends (below the 200 day and 50 day moving averages) started much closer to the index highs than it did in the 2002-2003 period. While this indicator is now starting to reach extremes which are starting to be unsustainable it is also unlikely that the markets will just turn on a dime and move higher.

Not all stocks will bottom at the same time, and over the next two or three months, this indicator can give us a better indication on whether the trend is going to change or not.

The last two years

The 2002-2003 bottom for comparison.

MCO update - potential for a reversal?

The MCO a NYSE market breadth indicator is developing a short term reversal pattern which will lead to a rally relieving the current oversold condition. This rally could be quite sharp on the upside a bear market rally characteristic. I still see no compelling evidence that the NYSE has put in a bottom. Therefore I expect the rally to fail and the markets to retest this months lows again, probably around the end of the year. We are starting to enter the tax loss selling period which will put downward pressure on prices.

The markets remain highly volatile and dangerous, IRA investors should remain on the sidelines for the time being.

The MCO for 10/01/08 an annotated chart. Click to enlarge.