Thursday, December 4, 2008

Not There Yet!

All The Symptoms Of A Nearing Bottom— But Not There Yet!

From A Usually Reliable Source… | 4 December 2008

Last week I said, "News-driven rallies aren't what investors should be looking for; they should be looking for strong emerging sectors that are rallying from an improving fundamental outlook. Unfortunately, the fundamentals are not changing for the better in the financial world, and they're likely to get much worse." I also talked about the need for the major indices to be able to consistently hold up against bad news.

Last week we rebounded off the lows to put in an impressive 18% rally in the S&P 500. However, as the averages moved up, the volume was lighter each day than that of each preceding day. I realize that it was a holiday week and volume is always lower, but it appeared to me that this rally was just window-dressing by institutions at the end of the month. This same pattern also appeared across the board on many past leading stocks.

As expected, the media were very excited that we went up for five straight days, but as I look over the data from the weekend, there was absolutely no leadership to support the strength. This flaw certainly showed up on Monday of this week as the market sold sharply off, giving back 6% of last week's move by 1 p.m. After a five-day move, the market was obviously overbought and due for a pullback, but a sharp selloff like this is not a positive follow-up.

Let's look at a chart of the S&P 500.

Click Here, or on the image, to see a larger, undistorted image.

I have been telling readers that in order to turn the intermediate-term trend higher, the S&P must get above the 900 level, consolidate and then successfully break above the November high of 1000. When you see low-volume moves on a wedging technical pattern into resistance, it is just a prescription for failure. That leaves me telling the same old boring story: Stay in cash!

Nevertheless, from a longer range technical, sentiment and institutional money flow standpoint, there do appear to be some important changes occurring in the market. I started pointing them out as early as Oct. 10 when I said:

"Depending on how the market closes today [Oct. 10], I may start to look for some long-side opportunities in the indices I have highlighted. The key will be for a big down opening this morning, and then we close higher at the end of the day. ... If that happens, it may be a good time to start small positions in these areas with protective sell stops directly beneath those lows."

That situation happened that very day, and I began to take positions in the index ETFs. What I especially liked was we had a whoosh down in the morning that took out the previous lows and triggered a massive number of sell stops. On the week ending Oct. 10, when the S&P 500 hit an intraday low of 839, the number of stocks hitting new lows on the New York Stock Exchange (NYSE) reached an unprecedented 2801.

I later noted that the sentiment indicators were hitting historic extremes.

We have had sentiment readings such as consumer confidence, which was so severe it fell from 65.2 (1985=100) in March to an all-time low of 38.8 in October (but has since improved moderately to 44.9 in November). The worst decline ever in both speed and magnitude. The Present Situation Index decreased to 42.2 from 43.5 October. The Expectations Index increased to 46.7 from 35.7. Retail has also hit a wall— along with industrial productivity, which is suffering its worst decline since 1974.

Technically the stock market has produced all of the symptoms of trying to form a significant bottom since October 10, and has reasonably succeeded except for that 'poke' below about two weeks ago (November 20-21)— but the number of stocks on the NYSE at fresh 52-week lows dwindled considerably on that move. At this point, the S&P 500 is seemingly making an attempt at an inverse Head & Shoulders (on a slighly downwards slanting base) with the left shoulder around 850, the head around 750 and the right shoulder around 810-15.

If the market is trying to form a significant bottom, the next question is what kind of bottom? Is it to be a major bottom that holds for a number of years [[not likely: normxxx]], an intermediate-term bottom that holds for months to a year [[most likely: normxxx]], or a short-term bottom that holds for just a few weeks [[it's already lasted longer than that: normxxx]]. The first step is to determine whether a bottom has actually been reached.

As the market has managed to defy all the usual rules over the past few months, I am not ruling anything out, but simply looking at my indicators and historical precedents (such as they are). Nevertheless, the situation is looking brighter than it has for some time. I'm sure readers are still asking how I can be more optimistic when the news is so terrible. In fact, the economic news continues to be the worst since at least the 1980-1982 downturn, worst than most expectations, even the more pessimistic ones.

But, if you have been studying the market for any length of time, you know that markets tend to bottom when economic conditions are at their absolute worst, and it's hard to imagine them getting much worse than they are right now. With the government and the Federal Reserve seemingly ready and willing to take whatever measures are necessary to flood the economy with money and support to avoid a major depression (something over $8.5 TRillion is in the pipeline of which $3.2 TRillion has already poured out into the economy), the current situation should continue to improve. The credit markets are beginning, ever so slightly, to loosen(?) and we have support from the oil markets with oil trading below $50 a barrel. That last is not something that is likely to hold for the long term, but it sure helps our current situation.

Part of the nature of the stock market is that it is predictably unpredictable. It stands ready and willing to fool the majority of investors at every opportunity. In the past, I said that my indicators and other research pointed to the 'possibility' of a short-term bottom, and that I was dipping my toe back in the water with a small percentage of index proxy longs. But the problem with the current market environment is that there is no leadership in stocks or sectors, and that is what you need before you can even think that the intermediate— and long-term trends have changed [[ie, for the better: normxxx]].

Still, there has been evidence that some kind of bottom is developing. The major averages have been bouncing around in a pretty wide range, but not much progress has been made and the percentage of shares at new lows has continued to shrink. This tells me that the recent decline is nearing at least a short-term exhaustion phase.

The current bear market, with the S&P 500 having been down 52% at its November low, has already been the worst bear market of the last 77 years. And, just about very time in the last 110 years that the market has declined more than about 35% (and often much less), not only a rally, but a new bull market, has begun.

One bear market of the last 110 years might have been different, and it was by far the worst one ever, that of 1929-32. And in it we see that although the bear market had two more years to go before reaching its final bottom, after its initial decline of 40.6%, it experienced a bear market rally that lasted for five months, (from November 11, 1929 until the following April 25), and which amounted to a 34% rally. Only then did it drop another 87.5% with hardly a pause to its final bottom in July, 1932.

So it can actually be said that the current bear market is the only one in which the market has declined by as much as 52%, and has not yet experienced either a sizable bear market rally, or the beginning of the next bull market. We cannot know what the future will bring in any area of life or business. All we can do is look at the data, the history, and the similarity of conditions, and then act on the odds that a specific set of antecedent circumstances will likely again precede a similar dénouement or outcome as in the past. In the final analysis, we can only play the odds of what worked well in the past— in every endeavor in life— otherwise, we couldn't even cross the street safely.

Again, make sure you have the confirmation of an upside breakout before you greatly increase your enthusiasm. And then, do so only slowly and tentatively— and try to concentrate on the supervalues, with assured sources of revenues and strong dividends, that are likely to wear well, such as XOM, not the rockets; it is quite likely that the market will see lower lows in 2009.

Remember to keep close protective stops on all positions in case today's selling accelerates.



The contents of any third-party letters/reports above do not necessarily reflect the opinions or viewpoint of normxxx. They are provided for informational/educational purposes only.

The content of any message or post by normxxx anywhere on this site is not to be construed as constituting market or investment advice. Such is intended for educational purposes only. Individuals should always consult with their own advisors for specific investment advice.

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