Discussion in 'Trading' started by coasting, Sep 9, 2005.

  1. coasting


    Allright, here is another view.

    I can't help it but I keep noticing the large number of divergences currently is the US stock market and I keep thinking whether they will eventually be resolved in the direction of the current trend (which is currently UP) or the trend itself is about to change. I personally measure the trend by the rolling 3 month return of the NYSE Composite and this index has just now made a new all time high. If you are a bear you must respect this and hold off the heavy shorting at least until we break below the August highs on the NYSE (my approach). So in summary, the biggest positive for the bulls is the NYSE uptrend and the new all-time high.

    Now to the negatives. To draw a parallel I remember when the Nasdaq composite was climbing fast in 2000 (I was long semiconductors and telecoms) and I got a sick feeling in my stomach similar to the one I have now. I didn't go short the Q's but I sure sold everything I owned. BTW, not everyone was bullish then unlike what has been reported in the press. There were plenty of smart people warning and I particularly remember a character named "Mobius" who basically said on TV that most of the internet stocks will drop 90% based on some interesting valuation arguments he presented. Meanwhile as he was saying this the Nasdaq composite kept going up and breaking into new high ground. But there was something terribly wrong with the price action. The Dow Jones was not confirming the new Nasdaq highs, a situation quite similar to today.

    As we all can see over the last few weeks the NYSE Composite has made new highs, the Nasdaq has been testing its 52 week high (on lower volume I might add) but the Dow is some 200+ points away from its high. So the Dow is NOT confirming the NYSE. The Transports are not confirming either! In a healthy economy the transports must be making new highs. In addition, junk-Treasury credit spreads have not confirmed either and recently they started to widen a little showing some concern amongst investors stretching for yield. Even today as we are making new NYSE highs the number of NYSE stocks at new 52-week highs is running about half the number we had at the August high which is also another non-confirming measure. In addtion the real estate leaders (HGX) have stumbled over the last few weeks and have not reclaimed their highs adding yet another non-confirmation to the mix.

    In summary, YES the trend is still UP but the action is VERY VERY UNHEALTHY. To top things off mutual fund cash levels are at all time lows and the public is redeeming. Yet there are some smart bulls who claim that the compressed price action in a number of major indicies a simply a pause in the trend that will renew and take the indicies to new highs. Suppose they are right. I ask who is going to take the S&P to all time highs? Where is the money going to come from? Certainly not from the mutual funds. Perhaps hedge funds? In my estimation only the government can take the markets to new highs buy buying stock and I sure hope we don't resort to that.

    That's my 2c.

    Disclosure: 25% invested in index put-leaps looking to add on breakdown through the NYSE August highs.

  2. Nice analysis.

    Here are the 3 key reasons why stocks are rallying..

    1. Fed might slow down tightening ( i disagree.. CRB at highs... inflation is running rampant.. stock market abosrbed katrina well.. why should they stop?)

    2. $60bil+ stimilus coming into the economy from capital hill... this is short term positive.. but the key will see how the money trickles down..

    3. Energy pricing easing ... oil market seems to be stablizing.
  3. coasting


    You are right about the short term positives from the Katrina stimulus and the potential stop in fed hikes having everyone excited about the upside. As for energy pricing, well I think everybody is getting used to paying more for gas and I don't believe oil/energy is that big a detractor to speculating in the stock market. People simply have to speculate at something, it's in their nature.

    I still think the TREND being up is the biggest incentive to be and stay long this market. The state of the economy is immaterial and has no impact. For the trend to change you need sellers and they havn't reached critical mass yet for a reversal to occur. Until then the short term traders are buying the up-side breaks with tight stops and the market keeps rising.

    The key is to watch what happens when the buying enthusiasm subsides. I am definitely not participating in this upmove as I expect it to reverse. My short signal is the 6500 level failing on the next downleg in the NYSE weekly. However, if the Dow Jones, Dow Transports, OEX and NDX all make new highs before then I'll abandon my cautious posture and look to join the rest of you guys on the long side.

  5. coasting


    Have a look at this RS chart:


    It looks like 22 months of negative divergence. This is not a healthy market in the longer time frame.

    But I'll turn bullish like Russell the moment this RS line makes a higher high.
  6. Yes I know exactly what you mean about the INDU. It has been lagging the INX for over a year now. And, both have lagged the COMPX since Oct 2002.

    My take is that the INDU is full of low/moderate growing companies, assorted INX and COMPX companies at that. It is not an indicator of the NYSE, like it was for over a hundred years. Thus, it's is no longer the index of choice. However, neither is the INX, in my view, for the same reasons. Thus, my emphasis on the COMPX: a pure index of OTC stocks.

    In spite of all this, I still follow the INDU thoroughly. And, I believe on the next sustainable advance, (don't think this is the one), it will break all time new highs way before the INX. And, the bears will all capitulate.
    Tony...just updated my blog

  7. Most of the major tops are formed when all 3 big indices - DJ, SPX, NDX are moving in sync. That means, they are making new highs at the same time, etc.

    Currently that is not the case.

    So expect some more bull/bear struggle until a clear sync moves that tells the direction :)
  8. I do not necessarily agree: the 2000 top witnessed the INDU top in Jan., the COMPX in early Mar., and the INX in late Mar. That should have set off sirens for technicians.

    However, I undertand your point ... well taken

    Nice CUBE btw.
  9. coasting


    Disagree entirely. Tops are long drawn-out affairs where divergences in price action and market breadth reign supreme. This happens because the money required to power all major indicies higher begins to run out and the money that remains in the market begins to "rotate" from sector-to-sector and industry-to-industry seeking higher returns. Finally when the leaders start getting hit, the red flag is out and the bull on its last legs. Sure, nobody knows how long this will last before it's over but it's prudent to wait for price to confirm before getting too excited about the bearish case yet.

    One thing is for certain the market has never crashed from a new all time high in an index as broad as the NYA. It will give everyone ample warning and I think we are going to get an opportunity to get short at some point in the coming weeks.

    If we don't get that then it's because the divergences have been resolved, the market breadth has broadened and the bearish case is no longer valid. I expect the dust should clear in 2 to 6 weeks and the new trend of the market should establish itself.
  10. I think I can elaborate the idea a bit more -

    The in sync part means you need to see some form of exhaustion in each index before major turn will happen. You need all indices to run out of gas in a direction (be it up or down) before major directional change. That could take just a few days, sometimes a few months to develop.


    #10     Sep 10, 2005