Here is the local take on the S&P500 from Traverse City, Michigan.
The break off in talks over the debt ceiling after the close of trading last week resulted in an expanded level of fear as investors sold off stocks during the week. The S&P500 retreated 3.92% for the week, providing the fourth significant price direction change on the S&P500 since April 15.
What seemed unlikely a week ago happened. The S&P500 not only retested the 1300 level, it broke lower through this level. This drop disproved the earlier report that this level was not likely to be retested, based on past market data research and the resulting theory on this level.
The failure holds little real significance, other than what I found normally happens, didn’t in this case. This is not new either, being the stock market there are usually exceptions to most rules. The breakdown was probably fear related so there will be an asterisk near this failure for my records.
The 2.03% drop on Wednesday was the first 2% move the S&P500 has seen since the June 1, 2011 drop of 2.28%. The volume has remained light through the pullback. The 13 DMA has remained over 2 billion shares per day lower than the levels seen during the run into April and over 20 billion shares per day lower than those seen during the pullback of a year ago.
The drop Wednesday had volume that was over a half billion shares under the 13 DMA. A large drop on low volume shows the drop had little participation from sellers. Recently, the majority of down days had volume levels below the 13 DMA, while the majority of the up days had volumes above the 13 DMA.
To illustrate this further, of the ten days with the largest losses since the low on June 15, 2011 six (including the top three) have finished the day with volumes below the 13 DMA and four with volumes higher. Of the ten days with the highest increases during the same time period, seven finished with volumes above the 13 DMA and only three lower. It seems likely that investors are adding into these runs, and that few are actually selling into these falls, even with the current elevated fear levels.
Friday’s volume levels spiked quite a lot higher; however spikes in volume are often seen on the last day or two of a downturn, this is seen even in market crashes. Of the four days that had higher volume levels during the down days mentioned above, three preceded the day that the market turned higher, the fourth was this past Friday.
This volume spike is often referred to as capitulation. There are only five days with higher volumes than Friday’s this year. The volume levels on March 15 and 16 are two of the five. The market rebounded from lows seen on the 16th beginning March 17 and continued higher from there. January 28 was one of them, as volume spiked during a large quick pullback. This also resulted in a high volume addition into the run on February 1 (also one of the five higher trading day volumes), as the market ran to regain losses seen on January 28 and continued higher from there. The last was on January 18, the high volume on this day holds no significance for capitulation purposes.
Was this volume spike capitulation? It could be, but there is no way to tell for certain prior to the rebound actually happening.
A look at the DJIA, S&P500, NASDAQ, Russell 2000 and NYSE index charts shows only the DJIA reached a higher high before turning lower in the most recent cycle, and all fell lower than the most recent low. This is often seen as a technical breakdown and could send technical traders for the exits.
Technical breakdowns do not always continue lower, but many traders use these levels to limit risk to moves that do continue lower. The breakdown could increase nervousness in investors, so there is some reason to remain cautious.
The index charts are beginning to show other bearish signals. The NYSE and Russell 2000 both had bearish 13 EMA and 50 EMA crossovers. The DJIA and S&P500 are also near 13 EMA and 50 EMA crossovers.
This pullback has reached its fifth day on the S&P500 making a continued fall without a rebound increasingly unlikely. Pullbacks lasting more than six days become extremely rare. All of the indexes and most stocks have reached deeply oversold levels, so a rebound might not be far away.
Despite an overall large drop on the S&P500, a look at the constituent stocks shows several stocks within the index have continued to do very well. Even into the recent pullback, these stocks continued to run to new yearly highs. Although most of the index constituent stocks retreated, not all did, showing a continued staggering development.
Many of the stocks that have taken pullbacks have held within recently established uptrends. Many of these stocks are oversold, and at levels that could provide support. Many fell in sympathy to a sector companies report, and not on their own earnings, which they have yet to report.
Some of the constituents did very well, rebounding in double digit percentages. This would indicate some investors are looking for opportunities within stocks, and not running into the perceived safe havens like T-bonds and gold.
Of course some constituent stocks did very poorly, dropping in double digit percentages. Many of the industrial stocks slipped deeply in the recent pullback. Some of those that fell had significant yet temporary problems with production facilities, some had less than expected earnings associated with onetime costs, some had good earnings but used words of caution in future earnings statements, and some just fell with their peers. Some of the stocks that fell quite deeply did not appear to reach volume levels that would normally provide the types of price drops seem, and could rebound fairly quickly too.
Investors continue to add gold and Treasury Bonds as a hedge against the debt crunch. Gold pushed to new all-time highs and Treasuries fell to the lowest interest rates seen in months this week. Many of the credit rating agencies now warn that the US credit rating is likely to fall regardless of whether or not a bill is passed in time to raise the debt ceiling to overt a credit default. Increasing interest rates are likely to follow the lower credit rating, not only in treasury bonds but also on savings and on loans. Historically, gold generally tops in this scenario, it doesn’t continue higher.
It looks to me that investors continue to run from underpriced equities, into the overpriced “safe” havens, without thinking out what is likely or normally happens to these “safe” havens if the perceived risk they are running from actually happens. Instead of running to safety with these investments, history would indicate they are running directly into the teeth of the danger they are trying to avoid.
The 9 day, 90 E, +2% H and -2% L indicators are currently active. See a more detailed description of these indicators here.
The 9 day indicator that became active on 03/31/2011 will expire on 08/09/2011. The 9 day indicator is a variation of the 90 day trading day indicator, and as it expires it also provides a 90 E indicator. As explained in several other articles, the 9 day indicator exhibits many of the same characteristics that the 90 day indicator has, but often lags the average returns of the normal 90 day indicator. It also has a slightly lower success ratio as a 90 E indicator, although it was correct in providing an indication of a significant market direction change in the last instance it was active.
Although I knew the 9 day indicator was nearing expiration, I hadn’t realized it was so near to expiration last week. As explained in the previous article, another direction change had become unlikely due to the close of the previous 90 E window. Since we had seen yet another significant direction change, I began to look for reasons. I found I had missed the upcoming expiration of this indicator, as it became active this past Tuesday.
This missed expiration date shows I need t
o develop a better means of tracking the timeframes of open indicators, so that I can be timelier in reporting their activity.
For the third time in a row, a 90 E indicator has had a significant direction change that began just prior to the ten day window opening. There have also been several instances in the past, although they seemed to be insignificant on a whole until recently. Given this recent activity, I may need to expand this indicators window a few days, to better encompass the majority of these changes.
The -2% L provided the second correct indication of a single day drop of 2% or greater on Wednesday, as the S&P500 slipped 2.03% since it toggled high prior to the recent retrace. The other correct instance being the 2.28% drop seen on June 1, 2011. The recent drop extends the timeframe this indicator will remain in an active state. It will likely remain active for another 30 days; although certain market conditions could toggle it off sooner.
This is the third drop of 2% or greater in a row without an offsetting 2% run. The other not already mentioned occurred on February 22, 2011 when the S&P500 dropped 2.05%. The third retrace of 2% or greater without an offset makes an offsetting run of 2% or greater very likely. Although there have been several instances of drops of four, five or six times without an offset, these drops usually come very close together, not months apart.
Additional 2% drops before a rebound are not impossible, they have happened in the past. The current climate of fear could escalate, but it still seems fairly likely that a credit default will be averted.
These increased chances that we will see a run of 2% or greater have again set the +2% H indicator into an active state. In this case it will remain active for 30 days, however it may toggle back to a low state if an offsetting run of 2% or greater occurs during this timeframe. The first ten days this indicator is high, have the highest chances of being successful.
This indicator’s chances of being successful are nearly as high as are possible in this instance. It doesn’t mean that it will happen only that it would be one of only a few instances if it should fail to happen. The current conditions of fear could cause this indicator to fail if they increase, or increase the chances of success if they should ease.
The 10 day indicator has again reached a near high state. I had expected this indicator to toggle high on Thursday, and again on Friday, but it did not. The last run of 3% higher, failed to toggle this indicator on.
Current cautions: Last week I had missed that the 9 day indicator was so near expiration, and that a new 90 E indicator would become active on Tuesday. This expiration again increased the likelihood that a market change could occur, offsetting the decrease seen with the prior expiration window closing. During the week there was another 2% move lower, the third without an offsetting run. This pushed the +2% indicator into a high state. These indicators have recently strengthened and show an increased likelihood of volatile market moves. Although the increased volatility or the likelihood of volatile conditions are usually bearish, they are not allows so. The initial rebound from lows is often very volatile, yet also very bullish. Although many of these indicators have very high success ratios, world events, news or investor fears could change the expected outcome of these indicators.
Due to time constraints, I have discontinued the brief weekly update of the S&P500 portion of my article. I hope to include this again in future articles as time allows. I was also unable to finish any additional articles this week.
Have a great day trading,
Disclosure: I am currently about 93% invested in stocks. The increase in my investment level over that in my last article was due to the purchase of three issues, partially offset by the sale of two issues and a week of relatively high dividend payments.
I reduced the number of open buy orders after Thursday to prevent adding further. Several stocks I wanted would have filled at levels I planned to buy them at on Friday, and may have already begun to rebound. I may have missed these stocks, but that would have put my investment level outside the range I plan to maintain. I also sold a stock issue I had bought a few months ago on Friday, to help offset buys I made on Wednesday and Thursday.
The stocks I purchased were near support and likely to rebound, while the stocks I sold were near resistance and could retrace. If the staggering pattern continues to develop, these opportunities will also continue. To invest in this pattern, I need to maintain a cash balance to buy stocks as they retreat after I sell them. Since I do not want to be forced to make sales in stocks that could continue higher to make purchases, this cash cushion is necessary.
Therefore I plan to maintain near my current cash levels. My investment level may fluctuate in either direction somewhat, but I will be looking for opportunities to bring it back into about the current range as it does.
Disclaimer: What I provide in the Quick Market Takes is my perception of the current conditions and what I think is the most probable outcome based on the current conditions, the data I have collected and the extensive research I have done into this data along with other variables. It is intend to provoke thought of the possible market direction in my readers, not foretell the future. I do not claim to know what the market will do. If the market performs as I expect, it only means I am applying the market history to the current conditions correctly. My perception of the data is not always correct.
This article is intended to provoke thought about investment possibilities. Acting on the information provided is at your own risk. You are urged to do your own research, and where appropriate, seek professional investment advice before acting on any information contained in these articles.