Rare Market Indicator Sighting: T2108 Over 90% 30 comments
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As the S&P 500 steadily creeps up toward the next major resistance line of 875 (representing the high from February and minor high from January), it also gets more and more overbought. As we have seen throughout this bear market, technical indicators have had no problem reaching extreme conditions and staying there for prolonged periods.
I like to follow the percentage of stocks over their 40-day moving average (T2108 in Worden's Telechart). It is now sitting right at 89.3%, close enough to 90% to compel me to check the historical statistics. Since 1986, there have only been 7 times that T2108 has crossed above 90%. All seven of these times were during 1991 and 2003. These years were major turn-around years for the stock market as the economy transformed from recession to recovery.
Since I am still leaning to the bearish side right now, I am not one to claim that a third trip above 90% will be a charm. As always, time will tell. Approaching resistance levels in an overbought condition right before earnings seems like an explosive combination - Wells Fargo's (WFC) earnings surprise notwithstanding. We also have the "sell in May" period rapidly approaching, but I am not as concerned about that marker. When I looked at the last 46 years of data, May turned out to be less lethal than the old adage suggests. Several months after May provide ample opportunity to exit the market at the May highs. (2008 was one of those rare years where the May high was never seen again for the remainder of the year!)
Assuming the market soon takes the tiny baby step needed to push T2108 over 90%, this signal will contradict the bearish one showing that the S&P 500 topped out the last two times T2108 stumbled over 80%. I have no way to resolve this conflict except to remain cautious: generally avoid establishing new long positions and sell existing longs into strength.
Also note that we are now on day number seven with T2108 above the overbought threshold of 70%. The average time spent above this level is 9 days and the median is between 4 and 5 days. 75% of the time, the T2108 has dipped back below 70% after 9 days. T2108 has remained over 70% for more than 50 days four times: 1987, 1991, 1997, and 2003. Clearly, we are not likely in an "average" situation here. But if the market were to snap back to historical patterns, it would suggest a large and rapid sell-off within a week. Given the current bullish enthusiasm in the market, I am guessing that traders and investors would happily greet such an event with fresh bids.
I do not expect a retest of the lows until the market awakens to the myth of this year's tales of "second half recovery." Given the bullish enthusiasm in place, this awakening will not happen until the data are staring everyone right in the face...right around September or so. For the few of us who remain stubbornly bearish, we experienced one of those "no kidding" moments when the minutes of the latest Federal Reserve meeting indicated a downward revision in GDP forecasts:
The staff's projections for real GDP in the second half of 2009 and in 2010 were revised down, with real GDP expected to flatten out gradually over the second half of this year and then to expand slowly next year as the stresses in financial markets ease, the effects of fiscal stimulus take hold, inventory adjustments are worked through, and the correction in housing activity comes to an end.
It seems to me that in public statements the Fed often forecasts what it HOPES will happen and not what is likely to happen. I suspect these latest revisions remain over-optimistic. For now, the stock market does not care either way. (See Bill Fleckenstein and Jon Markman for good descriptions of the unrepentant bear case).
Be careful out there!
Full disclosure: long SDS. For other disclaimers click here.
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This article has 30 comments:
Question is, what happens later on, when I have to repay those loans and sell those assets at prices nowhere near the ones I use on my balance sheet? Oh, I forgot, the taxpayers will make up the difference. Never mind.
Things are very much more likely to get worse before they get better. Eventually the stock market will reflect that reality, or the dollar will become worthless from the endless gobs being printed to keep the whole she-bang functioning. Reality has a way of overwhelming the talking-head propaganda pundits' efforts to mold public perceptions.
Lots of cross currents: overbought market, lots of cash on the sidelines and shorts leaning the wrong way, but, signs of a genuine economic turnaround few and far between.
Could the Fed be telling us that the results of the stress test will be held confidential so that all the millionaires in the current administration can get fully invested before results are released.
look at the results that Wells Fargo is producing. They were forced to take the TARP money that they did not want. They are also not being allowed to return the taxpayer money. Who is all in on Wells Fargo?
While I like the opportunities I find in US markets, I am much more enamored of those I find in emerging markets, especially China where I find superior economic growth prospects combined with extraordinary values for a GARP (growth at a reasonable price) investor. The bull market there seems much more secure than that which may be emerging domestically.
Remember the Terminator argument: Sophisticated technology carries an amount of existential risk which should be avoided by slowing or stopping the advance of technology.
There, take that, T2108 statistics!
-osgo
Now we are in uncharted waters (economically speaking) and no different from the first sailors approaching a new coast with no charts.
Add to that, the sunset was not as red as it should have been and was too red and getting redder in the mornings. The winds were not just right, and a feeling of some negative events approaching. Long ago, I was taught by an old Bahamian native sailor, "If you even think, or feel you are approaching danger, or a storm lurking, Shorten sail NOW (take sails down to where all you have up is what you need to make very slow headway.) ( I sold all my stocks )
I feel now, that what our Captains in Washington are below deck, drinking a lot of rum as they spend their (our) treasure, and think of the wonders they will be able to buy when they get to shore, (economic recovery) and all the while the storm is approaching, and warnings from the crows nest go unheeded. Not only are we approaching a horrific reef to tear the bottom out, [think you have seen the lows for the stock markets?] but we have the storm approaching from aft. This storm will probably arrive, just about the time we near the reef, and with the winds behind us and reef in front of us, and with full sail, there will be no correcting. It is coming down to, I think, will our military be able to fend off the jackles that will be feeding on our dead and dying. The only thing that protects 340,000,000 people (Americans) from 7 Billion outsiders is two things, we buy 20% of the worlds production, and have a nice strong defense. Once we weaken our economy and defenses enough, you will find out why there is nothing written in the bible about an "America like country" saving the world anymore.
We have the ability to fix things. Like Rome, we are allowing our borders to be unprotected, and our money debased and inviting the enemy to sit down in our homes.
I feel the only thing I can do, is invest in physical metals, and learn to short the market.
Lastly, I feel that sometime in the next 6 weeks, things will begin to unravel, slowly at first, then as real economic numbers eclipse the circus numbers we are being fed, reality will begin to rise, the storm will be upon us, and it just may be too late.
Simply put, I am making deals as best as I can on Platinum, Gold and silver in that order. I tried to sell my Real Estate, at the perfect time at the top of the bubble, but hit a snag (self inflicted) now I am extremenly concerned how my savings plans have run afoul after more than 40 years of investing properly. I feel my retirement [which was all set] is now in jeopardy.
It is time for some businessmen to replace the politicians. Profit is not a dirty word nor a four letter word. There is a way to solve this.
Good luck. Wish I was smarter and I would take on our politicians in Washington,and make them do what is right for us for a change.
It seems to me that the landmines left in the field notwithstanding the real issue becomes not one of recovery - but WHAT TYPE of recovery. If the recovery is broad based then Mr. Market will respond in accordance with the commitment of capital on a more classic asset allocation basis. If the recovery is more methodical and slow i.e., GDP growth in 2010 is only 1% then stock picking skills will prevail over asset allocation strategies.
It seems to me that identifying those companies that are not drowning in debt, not relying on a balance sheet filled with good will, not holding on to bloated inventories (like tech companies often do), generating sufficient cash flow to handle their current obligations will come out of this well.
GE is an interesting play in this regard. According to an article in Business Week on GE, the stock is being valued on the basis of all of its industrial businesses. GE Capital is valued at next to nothing. On the one hand they have $45 billion in cash. On the other hand 40% of their consumer loans at the Capital division are of sub prime quality.
If the recovery is long and drawn out I cannot see how a classic asset allocation approach is worth the risk. The upside does not seem to balance the downside risk.
You have an indicator, when it flashes a Buy signal are you going to ignore it? The next time it turns Bearish are you going to ignore it as well?
Either it works or it doesn't.
It doesn't pay to second Guess what has worked previously. Just an opinion.
The alteration of FASB 157 changes everything, Bank assets which were carried on the Books with a Zero valuation, will now have value. Earnings and Tangibles will increase dramatically across the board. And if the same adage still holds, "the Financials have to lead". Guess what, they are.
April 9, 2009 EOD
NYSE 2898 out of 3254 above 40DMA = 89.06%
SP500 457 out of 501 above 40DMA = 91.22%
As to captain Brian above "It is time for some businessmen to replace the politicians. Profit is not a dirty word nor a four letter word. There is a way to solve this."
I would point out that GWBush was our MBA businessmen president and Cheney our CEO vice president. They embraced deregulation and let the boys at Wall St. and board rooms take everything this country got and more.
Now I'm no economist but let me tell ya'll something the service sector in Sunny south Fla is absolutely booming. The only thing I can figure is the 50% drop in gas prices probably put extra cash in the pockets of consumers, cause as i said you gotta stand in line and wait to get into the better restaurants. And omg, just try and find a parking spot at the best buy in adventura on a saturday. They did beat the street yes? I guess just more smoke and mirrors..Just cooking the books. Keep on shorting PLEASE
Now everybody knows that when a bank borrows money at less than 1/2 of 1% and than turns around and lends it out at upwards of 12%, surely they will never be able to earn there way out of all those losses. I mean after all only about 90% of all mortgages our current.
Heres my take: The Bears are forced to cover and on the defence.
The Big Boys can't and will not take the risk of being left behind. This is not a rally its a CAMPAIGN. So, keep on shorting the market needs all the fuel it can get.
Wait to see the whites of the eye before pulling the trigger and It will be too late. Risk = Reward.
On Apr 10 12:35 PM conceptwizard wrote:
> Nice article! I would like to add the the earnings promoted by the
> financials recently. Wells Fargo included are a one time recoup of
> losses flowed through AIG of taxpayers money. AIG recorded a record
> loss to honor their exposure to the underwriting of guarantees to
> these companies. I have a hard time rejoicing in the fact that our
> taxpayer dollars are being used to falsely prop up the financial
> system. In my opinion, although this aticle has good reasearch it
> is to early to trust the bull. There are just to many landmines in
> the field right now with no accurate detection system. Due to the
> uncharted territory we find ourselves trying to make quality decisions
> in I would like to see housing numbers including inventory turn consecutively
> more positive, a marked consecutive decline in unemployment numbers,
> an accurate evaluation of the losses in the financials and them relalized
> by washing them out, new regulation protecting the equity holders
> from unabated risk. At this point we will start to have a floor built
> in the new economic world we are entering. This new economic world
> is a gamechanger and in my opinion we are not there yet.
I am by nature an optimist, but it sure seems to me that we are far from the end of the tunnel. We have not seen the light at the end, only stumbled across a few candles on the way.
All these layoffs are going to have ripple effect, and one slight bubble in the housing data is not a turn-around.
I can see it now, all of the "important" analysts will issue Valuation Sells on Market Moving stocks.
What else is new?
want to talk politics, go to another site.
This is not for people who got brainwashed.
Please !!
Prices are low, we all know, and swings can drive volatility to extreme easily.
I am sure in Great Depression this indicator turned over 90 many times. A research like this could be more usefull.
Good analysis but you didn't finished your homework young boy :)
How would you feel if you were forced to sell your house because it had fallen in value, regardless your desire to sell or ability to make the mortgage payments?
On Apr 10 11:23 PM Smarty_Pants wrote:
> If I ran a business that could borrow multi-billions from the FED
> at nearly zero interest, and was suddenly allowed to conveniently
> ignore the true value of my business assets, then I guess I could
> probably generate a couple billion in profits every quarter too.
>
>
> Question is, what happens later on, when I have to repay those loans
> and sell those assets at prices nowhere near the ones I use on my
> balance sheet? Oh, I forgot, the taxpayers will make up the difference.
> Never mind.
>
> Things are very much more likely to get worse before they get better.
> Eventually the stock market will reflect that reality, or the dollar
> will become worthless from the endless gobs being printed to keep
> the whole she-bang functioning. Reality has a way of overwhelming
> the talking-head propaganda pundits' efforts to mold public perceptions.
Ultimately the stock market lives on earnings and the news has not been good for a long time and is not getting better. Take a look at S&P 500 earnings data which is now complete for Q4 of 2008:
www2.standardandpoors....
Even if analyst's estimates are correct (not likely) the market is still overpriced by 2-3x, IMO. SDS looks like a very good buy at this price.
> For the record, you're going to lose on your SDS long regardless
> of where the S&P goes.
Sorry but I am a stickler for the truth and SDS has been a winning proposition if you have purchased it all the way back in 2007.
As with many leveraged ETF's it is not something you simply want to buy and hold as it deteriorates with age and at some point you WILL lose no matter what.
However, SDS has outperformed its objective for short periods of time and has actually been an excellent long-term investment without the usual downside risk of short selling. I can recall holding it during the October and November market crashes and it easily outperformed and made me a lot of money with minimal exposure.
From Oct 1st 2008 to November 20, 2008 SDS went from 70 to 128, which is an 83% gain, while the S&P 500 went from 1161 to 752, a 35% drop. SDS should have only gone up by 70% so it outperformed by 13%.
And consider that you could have purchased SDS at the market high in Oct 2007 at 48 and it is now worth 67; that's a 40% gain, which is much better than almost anything else would have performed in that time. Its objective is 2x the inverse of the S&P 500 so it has underperformed its objective over the long haul but that long haul is pretty long, and no leveraged, short ETF is meant to be held for over a year.
Please understand that not all ETF's are the same so research the one you wish to use for past performance (some such as DUG are horrible) and liquidity. SDS has excellent liquidity, BTW.