Sunday, March 22, 2009

Technical Update 10.09

As of last weekend, I wasn't expecting the rally to push much higher in order for the major indices to make a final set of new lows. They did, so I must adapt and therefore adopt a more bullish stance. However, I would note that trading from the long side in a major bear market is always risky. Surprises come to the downside.

I would also note that the minimum condition for a major bear market rally has already been reached (20% from bottom to top). So there is still the risk that it is already over. I will be watching fibonacci retracement levels (750, 734, 718) for signs of a potential upside reversal. But remember that these numbers don't really mean anything on their own. They need to be used in conjunction with something else in order to be considered useful - like any technical analysis tool. Unless I saw a number of indicators showing strength at these levels, I doubt I would venture into the long side. I'd rather risk missing the multi-month rally altogether. Then again, any idea can be a good one if your risk is defined.

Looking at a weekly chart, we see that even this rally wasn't enough to tag the 20wk EMA.

But the main reason I remain so hesitant about this rally is the position of my oft-cited indicators. They are both screaming overbought at levels as extreme or more so than levels commensurate with other major bear market rally peaks. Additionally, the VIX remains stubbornly high.

As I've mentioned over the last few weeks, the dichotomy between the various indicators of sentiment has never been more confusing. I've read many notes from other analysts noting the broad participation of this rally specifically (the others were more or less short covering rallies in financials). They've also noted the many exhaustion signals that correspond with the ends of other major bear markets (like being down 8 of 9 weeks straight).

But then I look at P/E multiples from outer space and dividends being cut everywhere and wonder to myself how anyone would possibly consider buying stocks right now. 1 year trailing earnings (reported) are at 51.2. No, I did not type that dyslexically. Fifty-one point two. The S&P 500 returned a total of $15 in 2008. Even the fantasy-land "operating earnings" are collapsing. 1 year trailing clocks in at about 15.6. See for yourself here.

Even if one thought this was the bottom, why wouldn't they just buy the corporate debt, which yields far more than common equity and is trading at a discount to NAV itself? I cannot think of a good enough reason to buy a basket of stocks now with the intention of holding them. Other than blind optimism, that is.

I also see societal acrimony getting even nastier. This article from Rolling Stone (hat tip reader Fish) shows how the outrage is going mainstream. Slipping a little profanity into a profane situation will probably shake a few from their nihilism. This is a fantastic read, by the way. I've just started to hear rumblings that the second batch of TARP money has been handed out and congress will soon be asked yet again to cough up. When does this spineless bunch finally put their foots down? It could be a long, hot summer...

The Euro looks like it has reached a climax and should head back down to make new lows. A stop could be set above Thursday's high.

That's all for now.

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Ken Stuart said...

I read your excellent article on Hyperinflation, followed it to your blog and was dismayed to find TA.
All of the oversold/overbought concepts are gibberish - because they assume that stocks are bought and sold by computers or Energy Beings from a Higher Plane, rather than by 6 billion Primate Apes.
Here is an example:
Suppose that the Obama administration and the leaders of the House and Senate announced a plan to outlaw gasoline automobile engines within a year.
At that point, the market in new and used automobiles would plummet incredibly drastically. A chart of such prices would show them as being "oversold", but obviously the prices would be going to zero.
Now, suppose that days later, hard evidence came to light that there was no man-made component to global warming, and so the plan to ban gasoline engines was scrapped.
At that point, new and used automobile prices would shoot back up. At the point where it was 60% of the original prices, the chart would say "overbought", but in reality, there is no reason why they would not eventually come back to 100%.
The recent market lows represent the height of human emotions of panic, uncertainty and fear.
To say that the market is "overbought" today is to refuse to see the market as it really is - an aggregate of 6 billion primate apes.

Matt Stiles said...

Hi Ken,

Thanks for the message. I too thought TA was garbage for a while. But then it became apparent that the same patterns were repeating themselves over and over.

The mistake in your logic is that Technical Analysts typically do not use any one indicator to determine whether one should buy or sell (at least not successful ones). They use a multitude of completely different measures.

You're right in one sense. "oversold" can become "more oversold" and vice versa.

But typically, I rely on measures of human psychology. And believe it or not, us 6 billion apes act on the same signals of optimism/pessimism over and over and over...

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