Couple Of Days, Couple Of Months?

Couple Of Days, Couple Of Months?

By normxxx | 23 January 2008

One of the hallmarks of the decline that began the year is that despite severe price losses, sentiment was pretty blah. By the start of the third week in January, though, the pressure was becoming intense and we were finally starting to see some sentiment extremes crop up.

One of them was in the BKX Index of banking shares, which had dropped nearly 25% below its 200-day moving average. There were only a few previous instances of it suffering such an inglorious fate, and each of them preceded major intermediate-term rallies.

However, at each of those lows the BKX Index enjoyed a one-day 5% jump that kick-started the rally, and prices rose steadily thereafter, gaining an average of +17% over the next several months. I thought I might want to wait for such an overwhelming display of buying interest in the sector before assuming the worst was over. We got that today, with the index gaining well over 5% from yesterday's close.

If the much-despised banks can get it together here, at least for the short-term, then there's little doubt that the broader market will too. It has been the financials leading us down, and they will be the ones everyone will look to to lead us out of this pit. I've gone over a few extremes indicators that have been triggered and are intriguing enough to promote the possibility that perhaps we've seen the bulk of the selling pressure for the time being: yesterday registered a rare instances of more than 30% of all issues on the NYSE hitting a new 52-week low on the same day; the ratio between stocks and bonds reached an historic extreme; and there are any number of sentiment indicators we can point to showing excessive pessimism. Now we've seen huge consecutive-day reversals in the major indices, a rare and previously bullish event.

For many of these developments, there are few precedents, but the ones I do have were generally constructive in the near-term. It has been rare not to see at least another one to three days of upside follow-trough after events like those noted above, and when we consider that they're all hitting at the same time, then the argument is compelling for more strength. I'm still not convinced that we've seen the absolute low for the intermediate-term, but this looks to at least be a start in the right direction.

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Normxxx    
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