Tag Archives: Stock Market

Waiting and patience…

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What’s new in the markets? Nothing much – not yet at least. European mess and US budget problems not addressed do not provide any direction to markets. These two issues seem to have the major impact at the moment.

Because resolutions to any of them are not predictable, thus I can’t assign any probability to any direction from here.

Under these circumstances I have to continue to wait and practice my patience and continue to focus on shorter time smaller movements and tedious trading.

Possibility of a bounce from here is rising just because the market is becoming “oversold”. Is it enough to trade bigger? No, not for me. Market may stay oversold for long.

A small bounce may be followed by “drifting” to the downside in a slow fashion. That kind of a tired bleeding market would be the worst. I would prefer a big drop and panic and reversal to enter a bigger trade. Am I going to be ready emotionally for that decision?

I am sure I would enter such a trade. The difficulty for me would be to define the “safe” size of such a trade. Not in a logical way – the emotional comfort is still a factor…

The VIX is not giving me any assurance of a longer lasting bounce either.

The weekly VIX chart looks like it’s ready to retest 45 value:

$VIX Weekly Chart

The monthly chart with just few days left is also ready for an upward move:
$VIX Monthly Chart

Eva

CNBC’s Larry Kudlow’s Pitiful Market Call

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If I had to key in on who I consider to be the biggest wind bag, never get it right “celebrity” on CBNC, it would have to be Larry Kudlow. He’s one of those guys you have to stop and scratch your head and ask what did he do to claim such a highly visible spot on the biggest financial network in the world? I mean, really. I stopped listening to Kudlow years ago, but since I still visit the CNBC site from time to time, I had to chuckle at his great call yesterday that the Stock Correction is Over.

Actually, his specific quote from yesterday was as follows:

Actually, Tuesday’s 123 point Dow gain to get back over 12,000 is a key sign that the stock correction may be over.

Now, I realize that one day’s action does not determine where the market is headed, but as I was writing this article, the Dow was down 200 points, so it gave back everything+ exactly one day after Kudlow made his pronouncement. What’s shocking is that he has such a large stage to make such idiotic proclamations.

The stock market getting back over 12,000 has absolutely nothing to do with where we could be headed. There’s nothing technical about that number that would give me or any other stock market technician cause to declare a correction over. Instead, I would direct him to the plunging yield in treasuries, with the 10 year bond now yielding just 2.97%, a sure sign of flight to safety. In fact, we’re not far from the October 10 low of 2.33 on the ten year. And, the fact that oil has also pulled back substantially today is one sign that there’s concern the economy is weakening (just look at today’s Empire State Manufacturing numbers; expected reading of +7.0; actual reading of -7.8; ouch!)

I know Kudlow is paid to be a talking head and to try to be entertaining, but to me, I would rather watch paint dry. If he gave us something useful to think about, that would be a different story. But, just throwing out proclamations for the sake of spewing out crap, that’s a bit too much for me.

Osama Bin Laden and the market

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After Sunday night’s announcement that Al Qaeda leader Osama Bin Laden was killed, US futures jumped, in anticipation of a market rally. True to form, the market did get a bump early on, but it wasn’t long before the warm and fuzzy feelings evaporated, with the market struggling to keep its early gains.

So, what happened? Why not the big rally everyone has always expected to hear that the leader of such a deadly terrorist group had been dispensed with?

Perhaps we can get some insight by looking at an ongoing poll that CNBC is conducting. In this poll that showed just over 7500 people responding as of 2:00 PM eastern the day after Bin Laden was killed, almost 75% answered no to the question, “Do you feel safer now that U.S. forces have killed Osama Bin Laden.

So, while there was always speculation that the world would be better off with Bin Laden out of the picture, you can see that there’s also plenty of skeptics who believe that his demise won’t do much to make things safer.

In some ways, this reminds me of how the market operates; buy the rumor, sell the news. In other words, the market had already figured out that Bin Laden’s time on this earth was short term at best. Thus, we got the early market bump on the rumor, and then by the time the news had been absorbed, the market was already in the “give me something new” mode.

In fact, we’re in a market that has run a lot lately and is showing signs of being very overbought. So, the events that transpired overnight weren’t enough to outweigh the reality that the market needs to settle down here. Virtually all of the fear indicators are flashing huge overbought signals, from stochasitics, to RSI’s, to the VIX to the Rydex Bull Bear Ratio. Thus, it’s very tough for the market to gain much traction, Bin Laden news notwithstanding.

So, the fact is, the world is now rid of one very bad man, someone who many like minded people around the world looked up to. And, based upon that poll referred to above, there’s likely fear that there will be some type of retaliation for Bin Laden’s death. In the meantime, we’ll have to let our indicators and charts tell us whether or not the market is ready to go higher or lower, regardless of what is going on around us.

Time to invest in the stock market or bail?

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The stock market has enjoyed a very nice run since its low in March, 2009. Since that time, the S&P has more than doubled, a grand slam by any investment measure. So, is now the time to jump in full speed ahead? Apparently so, at least according to an article by AP, titled, “Two years After Market Low, the Little Guy is Back.”

That headline alone might be enough for me to come to the conclusion that we could be in store for a pullback here.

According to the article, investors have poured almost $25 billion into mutual funds since the beginning of the year. This compares to withdrawals of almost $97 billion in 2010, so a huge swing. The article points to an individual who had converted his 401k into cash after the financial meltdown in 2008. Now he’s got about 85% of his money in mutual funds. Now THAT’s what I call a mood change.

There were a few examples in the article indicating the move to stocks was due primarily to such low returns in other investment vehicles like bonds and CD’s. This makes some sense, but what makes me nervous is many individuals missed the lions share of the run from 2009 and is somewhat reminiscent of the tech bubble bursting in 2000 when the greatest number of individuals in history were involved in the market at the time.

In thinking about this major influx of funds into the market, it does help to explain the extreme optimism we saw the past few months, with the VIX in the low 14′s and the Rydex Bull Bear ratio in the 11′s; both showing virtually no fear. Those types of readings don’t come along too often, and ultimately there’s a price to pay for being too bullish.

Right now the market is trying to find its footing, with oil back in the spotlight, and we’re at least seeing some spike in the fear meters. Now I wonder if having so many individual investors back on the scene will end up being the biggest clue of all that we’re in store for some type of major pullback.

World unrest to help or hurt market?

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We are witnessing an amazing set of events as world leaders are under pressure to step aside as citizens in many oppressed countries show their displeasure. We saw Egypt’s Mubarak tossed out and now Libya is on the verge of civil war.

A question that comes up is will these events be the undoing of the steady rise in the US stock market, or will it embolden democratic countries like ours, who may be able to capitalize on these new developments?

On the one hand, we’re already seeing oil prices spiking, so at least in the near term, that must be seen as a negative, especially if the the supply of oil dries up. On the other hand, could these unprecedented events force the US to continue to seek alternative energy sources, lest we continue to be at the mercy of those countries we so rely on?

Also for consideration; will any new regimes be more or less friendly towards the US? Obviously, that depends on who takes control once the dust settles. But, some might see great opportunities that could be of benefit to us if the flight to democracy trend continues to spread.

When the market opens for business on Tuesday, we should at least get a decent idea what traders are thinking. The market is so overbought here that this could be the exact set of circumstances the bears have been waiting for to shave off some points. But, I wouldn’t bet against the market, at least not quite yet. Instead, we might see that any initial selling will be seen as a fresh buying opportunity, depending on how deep that selling might be. If instead we see a nice move to the upside out of the gate, that just might tell us that what we are seeing unfold before our very eyes might well indeed be seen as benefiting the US and its economy in the long run.

Identifying an Overbought Market

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Sometimes a market gets ahead of itself, making it more difficult to pull the trigger on long positions. We’ve see this happening recently, where momentum is very strong, but the underlying technical indicators and oscillators are flashing warning signals. This can be quite frustrating to those individuals who sit by patiently while the market goes up every day.

If we examine today’s market, we can point to a few indicators that are telling us to be careful:

1-Too much optimism

When a market is full of traders who are overly optimistic, it is ripe for a correction. We see a number of indicators pointing to current optimism, including a VIX in the mid 16′s, a Rydex Bull Bear ratio in the .12 – .13 range and a lot of call buying. To put things in perspective, the VIX was at 9.39 at the end of 2006 prior to the market peaking. Then, towards the end of 2008, when the market was crashing, the VIX hit an all time high just below 90. So, you can see how much closer to the low the VIX is today than the high, certainly worth watching.

The Rydex Bull Bear ratio is an indicator my good friend and on-air associate Ed Handley likes to refer to. In simple terms, the higher the ratio, the more bullish, and the lower the ratio, the more bearish. In Ed’s words, when the Rydex BB ratio gets to .25, it’s time to “sell everything twice”. Since it’s trading at half that level, it could be more like “get the hell out!”

2-Overbought oscillators

We commonly look at the stochastics and relative strength indicators (RSI) on the major indexes to give us an idea of whether a market is overbought or oversold. As a rule of thumb, if you have stochastics over 80, you are in the overbought category. If you have a reading below 20, you are getting in oversold territory. On the RSI, a reading near or above 70 indicates overbought conditions where a reading near or below 30 indicates oversold conditions.

Lately, we’ve seen readings on all the major indexes near or above 90 on the stochastics and near or above 70 on the respective RSI’s. So, when combined with other important indicators, this is telling us that a pullback could be imminent.

3-The Bowley Trend

We have an indicator at Invested Central available to our members that is called the Bowley Trend. Its author is Tom Bowley, our chief market strategist, who has studied the history of the S&P, NASDAQ and Russell 2000, and has identified specific periods during the year that are decidedly bullish or bearish. Based upon the Bowley Trend, we are about to enter a bearish period on all three indexes.

For whatever reason, the market seems to have its head down now, meaning traders are ignoring bad news and focusing on good news, with a strong feeling that the economy is in recovery mode. Since investors always look down the road, they are apparently seeing positive developments. I’m not arguing that things aren’t improving out there, but based upon what I am seeing right now, I do believe we’re going to need some type of decent correction sometime soon and before we can make much more progress to the upside here.