The Stock Market Continues to Heal

Following the market is starting to become a tedious chore. The back and forth action occurring in the stock market may be fertile grounds for the day trader, but not for the position trader. Long or short, trying to trade in this type of environment is tough. Of course, the million dollar question is “when will it be safe to leave the sidelines and enter the market?” No one can answer that. At this time the only real option is to continue to follow the news and observe the market.

The stimulus bill has finally been approved by both houses. The final act is for the president to sign the bill. While news governing the bill has driven the market in the recent past, it is unclear what affect it may this week or in near future. If the package will indeed improve economic conditions, the market should improve before the actual impact is noticed by the economists and the media. As stated in the past, the market will lead the economy.

Like the rest of the indexes, the S&P 500 continues to clash with its 50 day moving average (dma). For technicians, the 50 dma (or derivations, such as the 50 ema) is quite important. While it does not carry the same significance as the 200 dma, it is nonetheless closely followed. Looking at the chart for SPY, the ETF has tested the 50 dma four times, and failed each time. What is significant about these recent tests is that after failing to break through, the average did not go into freefall. This is a good sign. Moreover, the more tests of the average, the more likely a breakthrough will occur. The range on the S&P 500 also continues to tighten.

The NASDAQ currently leads the indexes. The QQQQ is actually perched above its 50 dma. If a retest of the 50 dma is successful, a NASDAQ-led rally is possible. Again, similar to SPY, the QQQQ has been trading sideways for some time.

Volatility continues to decrease. Historically, the VIX is well above normal levels. However, little by little, volatility is lessening. The downtrend continues as the 50 dma turns down and provides resistance. The 200 dma will likely be tested in the near future.

The sideway action of the market can make one want to throw up his/her hands and quit. Don’t. This part of the stock market’s healing process. Despite all the negative news in recent weeks, the market held its ground. The inability to be pushed lower is a sign that the market has been beaten down as low as it can go. This does not mean that if one trades in this environment, he/she should operate without a safety net, but it is a sign that things might be getting better.

Positions: None.

Comments

[Dave Wrixon:]

I think you should put away your charts and go and talk to some people in the real world.

Feb 15 06:06 PM

[Mr. Ed, Jr.:]

"The inability to be pushed lower is a sign that the market has been beaten down as low as it can go"


These are what are commonly called "famous last words".

Feb 15 07:31 PM

[Jim Hawthorne:]

Kingsley, with the 'bear/bull tug-of-war in full tilt, and with there so much heated debate on the bullish or bearish sentiment driving the future direction of this market, it would seem that no matter who ends up being 'right' in the end, they will only have a brief moment to cheer.

We can look for more fast moves in both directions; 'dips and rips' unless and until we get some serious improvement in market fundamentals.

this report on Bloomberg caught my eye as an indicator that there just might be a slight lessening of risk aversion:
www.bloomberg.com/apps...

It also may counter the argument that things are really getting better if this is interpreted as a sign that some of the companies doing the listing are in very, very deep doo-doo indeed, as these are a desperate vehicle for lowering debt loads.

Cover your butt and watch your back?

Feb 15 08:28 PM

[Moon Kil Woong:]

I agree with the commenters. Things may get better or get a lot worse. Lack of direction in a chart does not always mean building a base for the upside.

Feb 15 11:26 PM

[Steven Hansen:]

with the continuing destruction of forward looking earnings, i personally see no optimism yet for the market. it is overpriced.

Feb 16 01:15 AM

[NutritionFacts:]

A more accurate headline would shurely have been "The Stock Market Continues to Tread Water".

Furthermore, going nowhere after a steep move in either direction fulfils the imporant function of working off overbought or oversold conditions, creating the setup for either a continuation or a reversal, neither of which can be forecast with any great degree of confidence.

Feb 16 08:00 AM

[RSAAKS:]

some have suggested to put away the charts and go talk to some real people. Unfortunately, the real people have almost always been wrong at the tops as well as the bottoms. Charts tell us what people are doing, not what they are saying. Now does the chart assure we have a bottom? of course NOT. But a bottom on the charts will appear long before any real people think we have reached that bottom.

Feb 16 08:21 AM

[mrresponsible:]

oil down
stabilization bill passed
U.S. markets above their 2008 lows and holding
ag commodities up
minerals up
libor spread better
corporate bonds up
foreclosures down
many earnings reports beating expectations
lagging up unemployment figures
china up
russia up
regional banks up
tarp money being repaid by banks
buffet buying
bad news sells ads - markets beating media news

Feb 16 10:16 AM

[Fred Voetsch:]

All of this technical analysis is fun to look at and it is always right...until it is wrong, which is often. There are only a handful of technical analysts I respect and listen to and that's because they combine their analysis with other real world data and historic trends. Louise Yamada is my favorite.

Feb 16 01:05 PM

[Fred Voetsch:]

On Feb 16 10:16 AM mrresponsible wrote:

> oil down
> stabilization bill passed
> U.S. markets above their 2008 lows and holding
> ag commodities up
> minerals up
> libor spread better
> corporate bonds up
> foreclosures down
> many earnings reports beating expectations
> lagging up unemployment figures
> china up
> russia up
> regional banks up
> tarp money being repaid by banks
> buffet buying
> bad news sells ads - markets beating media news
>

Polyanish BS.

Foremost experts, thos ethat have been right so far and that use actual hard data, all say the housing market is a year or two from bottoming. Leading Economic Indicators have yet to turn up. The P/E ratio of the S&P 500 is over 20 as are all major indexes so even with a tepid, recovery the market is significantly overpriced according to historic averages.

The consumer is hunkered down and this is unlikely to change for years while they build their savings and pay off debt.

Demographics are terrible and will get worse for a decade or two while baby boomers age and retire. They will of course pull their money out of the stock market if they have not already done so. They will also be a drain on our economy as they pull money out of SS and medicare.

We still have tens of TRILLIONS of derivatives to be unwound.

Earnings have dropped over 40% year-over-year and have MISSED expectations in a big way. Yes, many beat expectations beat but the dollar amount that missed was much greater. Expecttations were for a 50% gain in earnings yet we had a 40% drop so you are either a liar or are misinformed.

Quoted from www.cnbc.com/id/158391...

"The blended earnings growth rate for the S&P 500 for Q4 2008, combining actual numbers for companies that have reported, and estimates for companies yet to report, fell to -42.1% from -40.6% due in part to lower than expected earnings for Financials such as Loews and Hartford Financial. On July 1st, the estimated growth rate for Q4 was 59.3%, and by October 1st, the estimated growth rate had fallen to 46.7%. (Data provided by Thomson Reuters)"

Need I go on? That's hard data vs hope and hard data wins every time.

This is a secular bear market that has at least another year to go and probably more.

Feb 16 01:17 PM

[Alphameister:]

Although measures of risk aversion are hardly normal these days, no reasonable person would expect them to be normal near a market bottom. There has been dramatic and undeniable improvement since the panic of October/November in virtually all measures of risk aversion ..... with the conspicuous exception of the stock markets. This article provides a useful compendium of evidence tending to support a healing process, and User 55065 has it exactly right with the idea that charts are always ahead of public sentiment.

As for valuations, it may be folly to look at price-earnings ratios of major market indices for guidance today as they are so grossly distorted by huge bank losses. Might be more useful to focus temporarily on ratios of price to book and to sales. Meanwhile, check out the valuations of countless stocks of well-positioned, cash-rich, debt-free tech companies as perhaps a better indication of the opportunities present today.

Feb 16 02:26 PM

[john s. gordon:]

technical analysis works best when confirmed by fundamentals. there has been so much nontransparency during the last 8 yrs that fundamentals cannot be discerned with any conviction. markets blunder onward.....
> jack

Feb 16 06:08 PM

[Charts&Stars:]

watch out for black VIX swans!

Feb 17 01:33 AM

[Carl Spackler:]

Turn out the lights, the party's over! Yet another "bottom call" is found to be in error - futures point to 3% decline at open. When will anyone ever learn - never bet against the trend (even when it is oversold). Only time to buy in this market is when you have seen 9 months sideways action. If you did that upon every large correction in the last 100 years, you would have caught at least 80% of the next up move without all the losses from guessing early and being wrong.

Feb 17 09:32 AM

[Dave Wrixon:]

Close run thing today. But it looks like breakout will be to the downside.

Feb 17 12:19 PM

[Dave Wrixon:]

So now it is official.

Your charts suck.

Feb 20 12:56 AM

[Dave Wrixon:]

So now it is official.

Your charts suck.

Feb 20 12:56 AM