The Bull Market of Hope and an Experiment
Market pulse readers know that I've been away on vacation for the past week. There were no internet connections in Mexico, nor thankfully, was there CNBC. I've been blissfully unaware of market shenanigans for the last five trading days. When I got in the wee hours of the morning and fired up the charts, I saw that I had missed virtually nothing. With the exception of last Thursday, the market had refused to break down but they could not get higher either. Consequently, all the technical tools were saying "buy me."
That's the beauty of stepping away. My mind has not been assaulted with the constant drip of bad news, my psyche has not been ripped for getting whipped out of trades or boosted by a quick win. Nope; when you come in from the sunshine, you see things rather clearly though I was not brave enough to think that I was in sync with the market and could just start throwing my dimes and nickels around.
But, lets talk about the day. I really don't have much news. Isn't that great? CNBC who? I'm coming at you from a technical viewpoint tonight. This morning, the Nasdaq futures were down 2% and the S&P 500 futures were down 1.5% but when the casinos opened for gaming, the cash indexes didn't confirm to the downside. They were down only about half of that and quickly righted themselves to the positive side. We traded up for a couple of hours and then the typical sell off ensued.
Despite what my brethren bear commentators say, obviously we do have a different market than the beloved and easy speculative market of a year and a half ago. This isn't the giddy try this at home crowd where all they know to do is to buy something. This one is a trader's market. There are bulls and bears and they pull the gloves off to beat the . . . living tar . . . out of each other.
Cruising around on the net I see that there were rumors that IBM was going to warn, that the CEO of Teradyne, a semiconductor said business is bad and getting worse but the leading indicators were up half a point and thus we can get on with sending this market higher because surely that means THE BOTTOM is already in. Ohhhhhh, how sick it makes me. Nevertheless, something caught my attention. EBAY exploded out of a tight range. Why do I notice this? Well, take a guess. Who listens to Henry Blodget anymore anyway? Here's a guy being hauled into court for fleecing the fleecable and they're buying the 288 PE (ratio) of an internet because he says they're going to make $0.10 a share? Well lawdy lawdy. Wonders never cease. Take a look at a five-minute chart of EBAY to see what momentum traders' love and causes short sellers to panic.
Nevertheless, as I discussed on the Market Pulse today, the market had to test both ends of the range and when the bottom didn't fall out, the market was sent higher. This was not a terribly big surprise. The ten-day average of the Arms Index was registering another big buy signal today. Recall that the Arms Index is advancing issues divided by declining issues and that is divided by advancing volume over declining volume. It yields a number - usually in the one to two range but what is important is to take the ten-day average.
This is a very powerful indicator and traders from all corners are looking at it and using it just waiting for a price confirmation. Historically, as pointed out by the market sage Don Hays, when the ten-day average of the Arms Index reaches 1.5 - which I might add is very rare - it has reflected a beautiful entry for buying stocks. How about I just show you? Don has graciously allowed me to post his chart to show our readership:
You see the other time in recent history that the Arms Index triggered the signal? Yes. It was back in mid March about three days before the March 22nd low. We need to be especially vigilant for a selling climax in here. THAT is where the TICK indicator comes in. I know several of you are still wondering about this one as I is still getting the emails asking about it. The TICK is great for extremes and sometimes trends. I would have rather seen an extreme to the DOWNSIDE today rather than the high ticks we saw to the upside.
What I said I'd be looking for in the Market Pulse today is to get long on any extreme DOWN tick because we already "know" that the market wants to go up based on the Arms and its refusal to sell off on the drip of bad news. Of course, anything can come along and whack our grandiose plan so therefore the requiem plays/caveat emptor applies. Only YOU can manage your trade and cut your losses if it moves against you . . . (still muttering about EBAY).
Don't be thinking that I've spouted horns. I've not. This is a bull market based on hope and an experiment sponsored by Alan Greenspan and company. If she wants to go up, we can play along in that game. Shoot, who says that this year has to be the meltdown to erase all the excesses? History doesn't care if it takes six months or six years. It's going to happen, that I'm certain beyond a shadow of a doubt but that doesn't mean it can't go to new all time highs before it does. Who knows? Not me.
On a side note, I have a book recommendation. It's been out a couple of years but just the same it's really, really good. Roger Lowe stein, a former Wall Street Journal writer wrote "When Genius Failed: The Fall of Long Term Capital Management" Seems dull? Hardly. Better than a John Grisham but the players are real and the game is real. I couldn't put it down on my trip. You want an education about leverage? Lowe stein lays it on you in splendid but entertaining form.
That's all for tonight. See you at the bell. MKE