VRA Update: Fear of the Unknown, Here We Come Again. VRA System Update. Sentiment at Extreme Fear with Volume Dropping. Hallmarks of a Bottom.
/Good Thursday morning all. Once the break through DJ 24,768 occurred, SkyNet like AI technical selling pressure kicked in. Know this; the selling pressure from the final 30 minutes was purely algo related. This is a structural problem in the markets thats been with us for some time…90% of all trades are now ETF related…few investors today buy individual stocks, making mini-flash crashes possible.
This morning we’re seeing a bounceback of some 200 points. I’ve never been a big fan of buying higher opens. Wisdom from my mentors. However, I did notice a big positive when running VRA System screens this morning. Yesterdays sell-off occurred on 40% lower volumes than the 10/11 sell off in the DJ of 843 points. Reductions in sell side volume are common hallmarks of exhaustion to the downside.
Here’s another hallmark of a near term bottom. Check out both of the sentiment surveys we use at the VRA. AAII and CNN/Money. Both readings are at “extreme fear” levels.
Here’s the updated S&P 1500 new highs to lows. Again, until this reverses, the market lows will not be in place. Most typically we see this indicator bottom 1–3 days before a final low in the market.
And here’s another popular method of watching extremes in the internals. The Mcclellan Summation Index. As the horizontal lines indicate here as well, its a 1–3 day leading indicator of market bottoms.
As of yesterdays close, just 34% of all stocks are above their 200 dma. Just 13% are above their 50 dma. So if the market decline is not tied to economic slowdown/recession, why is it dropping?
Fear of the unknown
We still see NO signs of an impending economic slowdown in the US. Well, we are seeing housing stock prices tank (while actual housing remains strong) and financials are trading awfully. Are these signs of an impending economic slowdown? I don’t think so…here’s why; until the LEI (Leading Economic Indicators) begin to break down, there is NO reason to expect a recession. Until consumer confidence, freight/shipping and employment reverse lower, there is NO reason to expect a recession.
The fear of the unknown. For example….
Yes, in the 5 months leading up to 9/11, the Dow jones had already fallen by 11%.
Today, with pipe bombs and white powder, the fear is that something “major” could be next. That would not surprise me…but no…its not what I expect (meaning nothing major…like 9/11).
Instead, I see this as an overreaction by nervous markets. Here’s some evidence of that; if actual bad news was on the way, gold would be on fire. Today, gold is just slightly higher. Also, the VIX (fear index) is reading at 23.50 today. Elevated, sure…but a 30–40 VIX is the sign of real turmoil. Does not mean we won’t get there…but nowhere near it today.
At the same time, both the TRIN (short term trading index) and put/call ratio remain HIGHLY elevated for the 6th straight day. These work like rubber bands for the market…they stretch just so far and then they snap back….that snapback sends stock prices sharply higher. We’re reaching those levels now.
I DO NOT LIKE the fact that we’re under the 200 dma on each US indexes, and as covered earlier, I DO NOT like the fact that our internals are not improving.
The fear of the unknown almost always leads to great buying opps. I look for that to be the case here as well. We’re in the most seasonally bullish time of the year. MidOctober-May are THE time to be in the market (90%+ all gains occur). And the midterm election year pattern. 18/18 winning years, from 1946 on, with an average gain of 15%.
We may just have to get past the mid-terms first. If some group of idiots set off a bomb…or worse…we’re headed lower. Otherwise, this is very close to THE time to buy.
Until next time, thanks again for reading…
Kip
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