It Must be Magic; It happened All By Itself!
Markets took a nosedive toward earth today, but miraculously recovered in the last hour and a half. Bulls jumped for joy, as all but 45 points of today's 420-point loss at the bottom were recovered. Shoot! Another great opportunity to reach an absolute bottom was missed. Drat!
See, I think markets can't bottom until bulls are a forgotten species. Sure, there can be trading rallies like we saw today. But with a dollar that reached parity with the Euro for the first time in two years (very weak, that dollar), P/E ratios still completely out of whack, with bullish/bearish sentiment still registering much bullishness by analysts (see Barron's), with the delusional still thinking this market is bound for the good old days just as soon as the economy turns around, and with traders jumping on the Buy signal when the Dow touched its September 21 low (and CNBC still on the air (big grin)), we are not there yet. Values will still fall. I still build my personal ark, even through this bit of sunshine, in hopes that it produces a nice crop of grain for my journey.
I can already hear many calling me a heretic - "Burn him! He's a witch!" (OK, a warlock). But consider this: these markets have yet to see a single 90% down volume day (the whole day, not just part of it), which has typified substantial bottoms for over 70 plus years. A real, long-term bullish trend (secular) has never been established without first going through a 90% down day.
I also might point out that for the long-term (secular) markets to be pronounced bullish, the index in question must close higher than the previous day. Despite a nearly 400-point recovery, today was still a loss. . .still bearish. More to keep reality in check, the A/D line was 2:1 negative, the Dow Transports were far off from confirming the Dow Industrial's move, and were it not for the semiconductors, NASDAQ would not have been in the green by the close.
Bulls deserve some good news too, which leads us to focus on the cyclical markets. As long as we remember that we're speaking of the short-term when we write "cyclical" - and there CAN be a short term bull within a long-term bear market - today's rally holds a lot of promise for the bulls. Even if the Dow did close 45 points negative, it still managed an incredible recovery from within 7 points (8244 today) of the September 21 closing low of 8235. That's a heapin' lotta bull swingin'. And that it came nearly at the September lows with most oscillators deep in the oversold boundary. Like the title says, "It must be magic!"
When we consider the Dow lost nearly 700 points last week, if we include the minus 440 points today, that's over 1100 lost points in six trading days. Even for Fundamentals Guy, that's too darn bearish and just begging for relief. With oscillators oversold, any touch of support with the slightest hesitancy by the bears to carry it further would surely spark a rally. And rally it did, with volume to boot - 1.93 bln shares on the NYSE and over 2 bln on the NASDAQ (320 mln from WCOME)
Now I can't say if this will last for just 1 day, 1 week, 1 month or longer. Likely we will even see a retest within that same time frame. I remain militantly agnostic on today's action. I don't know and neither does anyone else. But in the words of the outstanding Jim Grant, founder of Grant's investor and sometimes Forbes columnist, "When one's most unconventional thoughts [this is a secular bear market] are repeated all day long as revealed truth on the stock market cable shows, a decision is in order - to think more highly of the TV set or reappraise the ideas."
"We have learned a few things since 1991," Grant concludes, "foremost of which is that markets can do anything. We absolutely do not rule out a fabulous equity trading rally".
That said, all three major indexes are looking pretty much the same, so I won't break them all down individually today. Shall we take a peek?
Dow industrial chart - INDU (weekly/daily/60 min):
NASDAQ chart - COMPX
S&P 500 chart - SPX
For the Dow and the S&P, I love those huge hammers formed on the daily chart with today's action. NASDAQ's was really good and even finished green. With the exception of the Dow, the 50 dma (magenta) and the 200 dma (gray) have a very noticeable separation that cannot go on forever. Since oscillators oscillate, it only makes sense that this should soon begin a reversal if the rally is to have any meaning. Speaking of oscillators, on a broad scale, we saw some nice upturns today, especially on the 60-min charts. It will take a while for the weekly to register and the daily has barely begun to flash bullish. But on the daily, we've seen that before only to see it reverse into a nosedive again too. I won't be counting these chickens before they hatch. But again, those bullish hammers will lend some temporary strength.
The caveat: Just as the bearish move over the last 14 weeks has been severe, as was today's drop from the open, the one hour and twenty minute recovery was equally severe. We all know the drill. Nothing goes up or down in a straight line, and in times of turmoil, the candles can bounce like crazy, as we saw today. So for you bullish traders, prepare for downdrafts and more tests of the September lows in the coming days. For you bears, be exceptionally careful, lest you be gored - and if a bear took the rest of the day off after seeing a 400+ point decline on the Dow, that bear played a very expensive day of hooky.
The point is that this is a very volatile market and both bulls and bears can be whipsawed like crazy. How so? Merely a look at the VIX of 39.29 and a high today nearing 44 ought to convince anyone that prices are anticipated to be anything but stable. Lots of fear and lots of optimism. Bulls are emboldened now and bears need to think defensive. Yet there remain angry bears and bulls have yet to regain supreme confidence. Where the two meet is turmoil, aka volatile markets. Traders should love the teeth and horns.
One other thing - there are new signs that the economy is again beginning to weaken. Note that business inventories rose unexpectedly when announced today, and car sales were weak when announced last week. That doesn't spell recovery. Yet the markets overlooked that out of sentiment. There is mounting evidence that the economy and the stock market are independent mechanisms where markets can rise drastically in the face of bad economic news. Likewise, markets can fall even if the economy appears to be improving, as was touted for the last 14 or so weeks. Stock market leads the economy? "I don't think so, Tim." Beware that fallacy about to be touted again if we see more gains in coming days. It just aint so any more.
See you at the bell.