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Market Wrap

Market Wrap

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Just a few trading days ago we were talking about fears of a "Black Monday".  We'll that has quickly faded from our memory and now its time to jump on the "Yeah Baby Thursday" bandwagon. 

We got a bona-fide, everybody stop selling and start buying no matter what country you live in, type of rally today.  After the Chinese water torture sell-offs and fake-outs we've been having for the last few months, this was a nice refresher.

Even better, there's a good reason to believe that this wasn't another one of those one day wonders.  In fact, I'm going on record and calling out the bottom.  Yup, you heard it here first, it is officially time to cut loose your shorting mentality and get ready for another leg up on the market.

While after such a big day today, we might soon be due for a breather in the next trading day or two, but a real trend change is at hand.  I'm recommending a buy here on the INDU, SPX and NDX indices with a stop out on a close below today's low.   Looking for short term retracements back up to the 200 DMA as short term targets, but really, this has the making of a decent rally that could actually last a few months.  Given the past divergence between the S&P 500 and the Nasdaq, we'd also favor the technology weighted QQQQ as the ETF to focus on as the scared money starts to rotate back into sectors that are going to be able to juice their returns. 

Now, let me show you some different sets of data that make this such a compelling case for my long call, including a close look at the current market sentiment by a few different measures.

Let's start with the average investor out there.  This last weekend, after Friday's horrific close to an awful week, the 20 something financial journalists got their panties in a bunch and started screaming louder then a teenage girl meeting her favorite rock star.

Just look at some of the headlines we took in on the weekend:

"Stocks plunge on IBM fears"
"Stock market in freefall as markets close"
"Wall St. suffers worst day in two years"
"Stock Broker Quits, Gets Job Pumping Gas."

Ok, maybe the stock brokers aren't reduced to flipping burgers at McDonalds, but last Friday it sure felt close.

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And this is the culmination of an overwhelming bearish sentiment that had been increasing in volume for several weeks.   The AAII (American Association of Individual Investors) has a weekly poll that gauges bullish and bearish opinion and has reached the lowest level of bullish opinion in 13 years.  This is after only a 5% correction in the S&P 500.  Now if every Tom, Dick and Harry is so convinced that the market has such a bad outlook, who is left to sell?  Secondly, historical data shows that this group has never been right when the sentiment is at such extremes.   No doubt, they will mark yet another low point in the market this time. 

Even so, I like to get some "back up" data to support my thesis, so I'll point you to a few more facts.  First, odd-lot short sales, (these are typically small retail traders who are selling short and are also wrong when they all are behaving the same), recorded an all time high last Friday.

Second, the put/call ratio has made 3 extreme highs, including an intra-day record as far as we know, with major bets being made on the put side, both on individual equities and on the OEX index. 

Third, looking at assets in the Rydex funds (these are leveraged funds that are used by market timers) shows major bets having been made on the short side and an overall withdrawal of assets on 30 out of 33 of their long funds.

The overall conclusion I arrive at is that we've reached an extreme point of view from most all market sentiment measures and combined with a great price action reversal, today is the day to change our intermediate bias from short to long. 

I leave you with the chart of the QQQQ.  Please print it out and come back and look at it 3 months from now.


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