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In
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If you're not
seasick right now, then you must not have been watching the markets over
the last few weeks - and the last few days in particular. Where's
the volatility coming from, and more importantly, where's it taking
the market next? We've got some thoughts and milestones below.
After that,
we'll take a quick look at sectors and styles.... some new leaders are
emerging, and some old leaders are now lagging.
Before we get
to any of that though, we'll refer you to Tuesday's blog post "How
Skewed is This Market? TRIN Has a Stunning Answer". We've been bullish
for a while based on the TRIN reading from late last month. Here's a partial
explanation of why it's yet to pan out. (Hint: We're seeing things we've
never seen before.)
In the meantime,
we ran across some related
insight from the creator of the TRIN Index himself.... Richard Arms.
He's
got a slightly different way of looking at, well, his index, though
the underlying principle is the same as ours. More importantly, he's got
some additional thoughts on the stunning move to multi-decade highs
from the Arms Index.
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Stop
the Ride - I Want to Get Off |
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Is
that how you feel right now? You want to get off this crazy ride? If
you're like most investors, probably so. Here's some perspective
that will help you navigate through what is hopefully the last part
of a volatile period (for better or worse).
First and foremost,
know that a meltdown isn't a forgone conclusions. Many pundits are
sounding the death drum right now, but they're always sounding the
death drum - they just get more attention when stocks stumble. The reality
is, the market (let's use the S&P 500 as a proxy) is still holding
above the point of no return.
 The
nearby chart of the S&P 500 illustrates this idea in a couple of different
ways, Primarily though, it suggests hope via the way the support line at
1063 has yet to yield. Perhaps the market just needed to fall back to that
line one more time for a last-minute 'cleanup' before proceeding higher;
it's the line in the sand now, regardless of the reason.
And, though
you can't see it on the chart, Tuesday's accumulation (buying volume) was
much
stronger than Monday's distribution (selling volume). Perhaps buyers were
just waiting for the window of opportunity to present itself one last time....
which it did with Tuesday's low.
The bears have
their good arguments too though - namely, the fact that the 200-day
moving average line (green) is still looming above, and has already acted
as a resistance line a couple of times in the last three weeks. Until it's
cleared (currently it's at 1107.2, and rising), any rally effort is going
to be legitimately questioned.
In the meantime,
stocks are simply caught in no-man's land, forcing us to wait for clarity.
We're not necessarily at the beginning of an implosion though. From the
high close on Aril 23rd to the low close on June 7th, we're only looking
at about a 14% correction. That's (and we've all been spoiled on this
front) a pretty typical correction.
And if you want
a bullish case - or at least an interesting read - again we'll encourage
you to go back and read not only our TRIN blog post, but the commentary
straight from Richard Arms about how oversold the market is at this point.
He's got even more historical context than we do.
That being said,
we're still leaning bullishly.
We haven't talked
about it in a while, mainly because there was no need to. Things
are changing now though, at the onset of what we hope/think will be the
next leg (and less aggressive span) of the bull market. With this new wave
though, it looks like we'll see some new leaders.
 Not
that all the votes are in, but from the data we have so far, telecom,
utilities, consumer staples, and perhaps energy are going to lead the market
out of this rut. Not only did those sectors fall the least since the
May 23rd top, they've also moved ahead the other sectors since the beginning
of the month. Indeed, they are the only sectors to actually make
net gains since then - the rest are still in the red.
As we said,
it's a tad too soon to dive into the pool blind-folded..... maybe you wade
in slowly while we continue to gather data. It's a plausible and logical
group of leaders though. They're safe and reliable, which is what investors
want in the shadow of May's stunning meltdown.
We'll update
this chart in the blog every few days until we start to get some clear
leadership trends.
 As
for style and market cap trends, we're not seeing the same degree of distinction.
We can see that
large caps (growth as well as value) held up better and recovered better
over the last month and a half. That's probably something worth keeping
in mind as decisions are made going forward. We can also see small cap
value and micro caps have been struggling since the top, and have found
no relief over the last few days..... even though the rest of the market
has. That too is something that should register as you make decisions
in the foreseeable future. Everything else is a case-by-case basis.
As was the case
with the sector comparison, this isn't enough data to come to any firm
conclusions. So, we'll update the style/cap performance chart in the blog
every few days until we get more clarity.
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Updated: 8:15 pm PDT (03:15 GMT), November 2, 2010
