Tuesday Outlook: Washed Out, or Oversold?

Washed-out and undervalued? Or, just oversold? That’s the big question for equity bulls and bears. Some notable veterans (Buffett, Hussman, and Grantham for example) believe the former is the case although they ultimately accept more downside as a possibility (um, who doesn’t?).

Major indexes are down over 40% from their peak, which is typical for bear market declines; indexes are much oversold [VIX, weekly RSIs to name two, are at extreme readings]; investment advisors are overwhelmingly bearish; the commodity market bloodbath is severe; financial giants have been routed, merged or run out of existence; some US automakers may fold; unprecedented global government actions have been controversial but spectacular and most likely inflationary ultimately; there are still major derivative unwinds to take place (LEH derivatives should settle tomorrow); credit is still tight although improving selectively; earnings and economic data continue to decline; a record $65 billion was withdrawn from mutual funds and over $40 billion from hedge funds just this quarter; news headlines remain grim and so forth.

That’s quite a negative litany.

So then, is all the bad news out and stocks washed out?

Sometimes that’s the way it works.

At the very least we should get a rally to relieve oversold conditions. And, that’s what we got Monday on a last half-hour jam job.

If you’re a bearish and sitting in cash like us, this is the kind of action you want, since oversold conditions get worked off, meaning you can reshort with greater confidence later.

But we’re no different than other technician, since we’ll go in the direction our systems indicate rather than our opinions, whether bullish or bearish.

Volume was comparatively light, and shorts were squeezed late. Breadth was as good as you might expect.




Below is a 10 minute chart of SPY. You’ll readily note the volume differences over the past three trading days. Some would argue the heavier volume is options-related, but the daily chart reflects the difference well. From the Thursday low to the high on Friday we moved 12%. And Monday we reached slightly above Friday’s intraday high.











Since I didn’t post  this weekend, let me add something that was missed. Tom DeMark Indicators are widely used by institutional investors. They’re quite complex and I won’t bother you with detailed explanations. But any good indicator is only as good as how it’s integrated with other criteria. Since we use primarily “weekly” charts we tend to focus on using it with those.

This means we rely on his “weekly sequential” interpretations, which seem to work well when using “9” set-up counts. If we were still short, DeMark Indicator counts currently at an “8” with the balance of this week and next need to reach and complete a “9”. This means we could rally all the way to the top of the gap before we exited or a little over $110. This isn’t acceptable. Below is an internal chart of this condition on SPY. I might also add this is the same appearance that exists on most major market indexes in addition to many other popular sectors.





Another big factor Monday was the decline in the TED Spread. This gave traders a sense that credit was starting to loosen. On the other hand, corporate spreads continue to widen as investors still seek Treasury bonds and some believe raising FDIC deposit insurance hurts bond markets competitively.

Go to page 2 - Commodities, Emerging Markets >>

Comments

[Michael Zhuang:]

Pretty dizzying array of charts. I just stick with Warren Buffet's motto:"Be greedy when others are fearful."

2008 Oct 21 07:03 AM

[fg144331:]

That's calling a spade a spade! To bad the national media doesn't headline talk like this. Wonder if congress reads these comments?

2008 Oct 21 10:31 AM

[NOWHEREMAN:]

The Developed world is in deep doodoo. The MidEast and China are not. Even India will act better than the US due to internal growth.

The US exports literally Nothing that any of these Countries need while it needs what they produce.

Fannie and Fredie' troubles and Bailouts can be laid dieectly on Democratic Shoulders. Granted Bush could have shook the tree until Dodd and Franks fell out but otherwise its totally their "Homeownership is an Inalienable right" which fried the Franies. Paulson and GS however did the real screwing afterwards.

Obama will get elected, Both the Senate and House will revert to the Republicans. The only Politicians who have worse ratings than Bush are the Rest of Congress, IE. Democrats. Change, Change, Change Be Careful of what you wish for.

2008 Oct 21 01:57 PM

[NOWHEREMAN:]

laid directly

2008 Oct 21 01:58 PM

[Kunst:]

"investment advisors are overwhelmingly bearish"

And what were they a month ago? Sounds like forecasting in a rear-view mirror.

2008 Oct 22 12:51 AM