With the Dow and the U.S. dollar rallying along with European markets, today King World News is featuring a piece from one of the greats in the business the wild trading in global markets and stocks and the U.S. dollar surge.
“Aw, shucks, Jeff, my strategist is telling me how to ‘put money back to work.’ The only problem is he NEVER told me to raise cash so that I could now put money back to work! Humbly, you are the only guy I know that said in early July the equity markets were going into a period of ‘contraction’ and that we should raise some cash to recommit it near mid/late-August. So what do I do now?!” — A disgruntled financial advisor from another firm
August 25 (King World News) – Certainly a legitimate question, which goes along with this statement from many fundamental analysts, “I am raising my stock rating from sell to hold;” but I have to ask, how can I hold the stock if I have already sold it?! I used to roil at such statements, just like I did yesterday with many pundits saying how to “put money back to work” after never telling folks to raise cash a number of weeks ago. Alas, such is the tradition on the Street of Dreams where “seldom is heard a discouraging word and the skies are not cloudy all day.”
However, over the past three sessions, the skies have been pretty cloudy with the S&P 500 (SPX/1893.21) losing over 2%+ per day for three consecutive sessions. In the past nearly 90 years, that has only happened 17 other times. On each occurrence the SPX has been higher over the next week, as well as higher over the next month. Further, the selling squall has driven the SPX lower for 25 sessions. Such “selling stampedes” tend to last 17 to 25 sessions, with only 1-3 session pauses/rally attempts, before they exhaust themselves on the downside. Today is session 26. While it is true some selling skeins have lasted 27 to 30 sessions, it is RARE to see one go more than 30 sessions. In fact, I can count them one hand!
Action Not Seen Since The 1987 Stock Market Crash
This downside skein has driven the SPX to roughly 5 standard deviations below its 50-day moving average, a level of oversoldness not seen since the bottom with the October 19, 1987 “crash,” which was the “crash” for my generation, and history shows there is only one crash to a generation. Other extremely oversold metrics show the NYSE McClellan Oscillator more oversold than at the March 2009 lows (see chart, green is the oscillator), and the number of stocks above their respective 10/30/50/200-DMAs very low, which is what is seen at major lows.
Moreover, of the 96 industries, not merely the 10 S&P macro sectors, the Home Construction industry and the Utilities are the only industries to be currently not massively oversold. So the set-up for a “Turning Tuesday” bottom, and subsequent “throwback rally,” is at hand. We (Scott Brown, Ph.D., Andrew Adams, CMT and I) actually said so in yesterday’s system-wide strategy call (replay available). Unfortunately, that call came combined with yesterday’s Dow Theory “sell signal,” when the Industrials and Transports both broke below their respective mid-October closing lows of last year. So where does this leave us?
Well, I have only seen such vastly negative readings at previous trading lows, so I would suggest that the energy released to generate yesterday’s Dow Theory “sell signal” has used up all of the equity market’s “internal energy.” Given the aforementioned “oversold condition,” we would look for a near-term trading bottom and subsequent rally. For the record, however, any ensuing rally is suspect with the stock market’s “internal metrics” subject to extreme scrutiny.
Further, the only “false” Dow Theory “sell signal,” according to my interpretation of DT, came on May 6, 2010, which was the last time the Dow lost 1000 points on an intraday basis. That “sell signal” was quickly reversed in June of 2010. Hopefully, that will be the same case here. Certainly, yesterday was indicative of a potential upside reversal with many stocks cratering in the Dow’s early morning 1000-point plus carnage only to close near their highs of the session. As my eagle-eyed friend Doug Kass noted, in his must-read column, “There’s no longer any agent responsible for pricing a customer’s order. Case in point: KKR & Co. (KKR/$18.50). It was near $19.55 a share late Friday, after opening at $17.73 today, sold down to $8, but is now back at around $19.34.”
Ladies and gentlemen, this kind of violent whipsaw-action is what has typically been associated with at least a near-term trading bottom, and maybe more. Still, while we were looking for a bottom today/yesterday, the quality of any ensuing rally will be VERY important to reverse yesterday’s Dow Theory “sell signal.” Hopefully it will be a false “sell signal” like the one of May 2010. But, until it is reversed, I am going to be much more cautious than I have been over the past 6.5 years, even though I think we are going to get a near-term rally off of yesterday’s “lows.” The upside prices for a reversal for yesterday’s Dow Theory “sell signal” are much higher than participants want to anticipate currently. Indeed, they are thousands of points above where we are now.
Yet, it is worth noting that of all the bull market peaks, the only two that have NOT retested the bull market highs have been in 1990 and 1998. And, as Lowry’s points out, “Those ensuing bear markets were brief, at about three months.” I do not think we have entered a secular bear market, despite the Dow Theory “sell signal!” Still, I have a great deal of respect for such “sell signals.” Therefore, while I think a short-term trading bottom is at hand, I am now cautious like I was at the Dow Theory “sell signal” of November 21, 2007, as well as like I was from the Dow Theory “sell signal” of September 1999. This morning, as anticipated, the preopening futures are soaring despite another Chinese Gotcha (-7%). This may be due to easing tensions in Korea.
Whatever the reasons, we are going to get a “throwback rally,” and it is going to be extremely important to dissect the quality of the stock market internals in said rally. Hopefully, yesterday saw a false Dow Theory “sell signal” just like the last time the Dow was off 1000 points intraday. Stay tuned… ***ALSO JUST RELEASED: Worldwide Chaos Continues As China Meltdown Resumes And PPT Intervenes, Plus One Of The Greatest Opportunities In History CLICK HERE.
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