Stock Market Crash or Buying Opportunity?

by: Michael Michaud

Stock Market Crash
After last weeks market turmoil I'm hesitant to issue any new buys or sells this Monday as I usually do, but I'm doing it anyway. No stock picks in specific like I usually do with exact entry, stop-loss, and take profit price targets, but a short list of stocks to look at to consider buying and selling. I'll say right now, I'm more bearish than ever. No matter now much good news I hear now, I'll be skeptical on a recovery in stocks until I actually see on the charts that that's the case. Even more important is that I have posted some market indicators below that foresaw the sell-off.

The Value Investing and Trading Theory

If you need to buy some stock for some reason right now, I highly suggest buying very selective high quality value stocks now, and short selling all the over-priced junk out there, and there's a lot of it. What's the high quality stocks to buy you say? I would say any stock that doesn't go down more than 8% plus from the price you want to buy it at. You'll need to do your homework on the current support and resistance levels to try to figure that out. Start with monthly and weekly price bar charts for that, then narrowing it down to daily bars.

Short Sell Everything Now?

Not so fast. What's a good stock to short sell right now you may ask? A lot of junk and even quality companies I would say in general, but you should wait for the over-sold rebound to end before taking new short positions. Patience is a virtue, and chance favors the prepared mind.

This Week's Stock Picks Listed By Ticker Symbol

Includes some micro-cap penny stocks, so be careful.

This Week's Buy Picks

Analyze these first and don't forget to use stop-loss.

ABXA, ACFC, ATCO, OTC:BKRS, CPE, CRNT, FAC, OTC:FPFC, FRZ, JFBC, KMGB, LPTH, NDN, PDA, PRVT, TNH, UBNK, VRAZ, and my best buy pick for this week: WRLD / World Acceptance Corp.

This Week's Sell Picks

BRP, HF, MEDW, NRCI, and big list much more to list here that already took a big drop last week and look like they have much more to go. Again, wait for a rebound up in the oversold stocks to go short.

I'm Looking at the Market as Deadly Bearish Right Now

I'm looking a A Deadly Bearish Big Picture on my charts right now. With all the recovery hype that was going on this last 52 weeks, I was wondering how far the market was going to climb after the March 2009 lows before it took a correction as we saw last week, and what a massive correction it was. It seems to me that the NYSE forgot to implement the circuit breaker trading halts when the big program automated trading kicked in from the institutions, and or the buyers dried up, and or the Greece debt crisis and riots, and or whatever it was. It looks like now the recovery optimism hype of last year just reversed to panic and fear again this year. Of course, you'll read headlines of optimism hype again to try to help and prop up the market, but beware much more than ever this time of the hype, and have a investing trading plan that keeps your risk low.

Socionomics - Fear and Greed Social Mood

This last week's market action was not a surprise, even though it was volatile and scary if you were in long positions, especially at the end of the week. I as well as others have been calling for a very serious correction and/or return to a bear market. Now we will watch the market action for a rebound and see how the rebound holds. If the rebound doesn't hold, that would be an excellent low-risk high-reward opportunity to short sell in my opinion.

Indicators to Buy and Sell Stock

What indicators are you using to decide what stocks to buy and sell? If you're losing money in the markets I suggest changing your indicators now. I suggest using indicators on sentiment, psychology, social mood, mutual funds cash positions, the CBOE Equity Put/Call Ratio, the VIX measure of volatility, the Investors Intelligence poll of advisors for who's bullish bearish, the Dow’s dividend yield, and the Trading Index (TRIN) which is a measure of how much volume it takes to move rising stocks versus falling stocks on the NYSE.

It is rare to have technical indicators of this kind all lined up on one side of the ledger. They were lined up this way, on the bullish side, in late February and early March of 2009. Today they are just as aligned but on the bearish side.

Consider This Indicator Short List

1. The latest report shows only 3.5% cash on average in mutual funds. This figure matches the all-time low, which occurred in July 2007, the month when the Dow Industrials-plus-Transports combination made its all-time high. But wait. The latest report pertains only through February. In March, the market rose virtually every day, so there is little doubt that the percentage of cash in mutual funds is now at an all-time low, lower than in 2000, lower than in 2007! We will know for sure when the next report comes out in early May. Regardless, the confidence that mutual fund managers and investors express today for a continuation of the uptrend rivals their optimism of 2000 and 2007, times of the two most extreme expressions of stock-market optimism ever.

2. The 10-day moving average of the CBOE Equity Put/Call Ratio has fallen to 0.45, which means that the volume of trading in calls has been more than twice that in puts. So, investors are interested primarily in betting on further rising prices, not falling prices, and that’s bearish. The current reading is less than half the level it was thirteen months ago and its lowest level since the all-time peak of stock market optimism from January 1999 to September 2000, the month that the NYSE Composite Index made its orthodox top. The 30-day average stands at 0.50, the lowest reading since October 2000. It took years of relentless rise following the 1987 crash for investors to get that bullish. This time, it’s taken only 13 months.

3. The VIX, a measure of volatility based on options premiums, has been sitting at its lowest level since May 2008, when wave (2) of ((1)) peaked out and led to a Dow loss of 50% over the next ten months. Low premiums indicate complacency among options writers. The quants who designed the trading systems that blew up in 2008 generally assumed that low volatility meant that the market was safe, so at such times they would advise hedge funds to raise their leverage multiples. But low volatility is actually the opposite, a warning that things are about to change. The fact that the options market gets things backward is a boon to speculators. Whenever options writers are selling options cheap, the market is likely to move in a big way. Combined with the readings on the Equity Put/Call Ratio, puts right now are a bargain.

4. In October 2008 at the bottom of wave 3 of (3) of ((1)), the Investors Intelligence poll of advisors (which has categories of bullish, bearish and neutral), reported that more than half of advisors were bearish. In December 2009, it reported only 15.6% bears. This reading was the lowest percentage since April 1987, 23 years ago! As happens going into every market top, the ratio has moderated a bit, to 18.9% bears. In 1987, the market also rallied four months past the extreme in advisor sentiment. Then it crashed. The bull/bear ratio in October 2008 was 0.4. In the past five months, it has been as high as 3.4.

5. The Daily Sentiment Index, a poll conducted by, reports the percentage of traders who are bullish on the S&P. The reading has been registering highs in the 86-92% range ever since last September. Prior to recent months, the last time the DSI saw even a single day’s reading at 90% was June 2007. At the March 2009 bottom, only 2% of traders were bullish, so today’s readings make quite a contrast in a short period of time.

6. The Dow’s dividend yield is 2.5%. The only market tops of the past century at which this figure was lower are those of 2000 and 2007, when it was 1.4% and 2.1%, respectively. At the 1929 high, it was 2.9%.

7. The price/earnings ratio, using four-quarter trailing real earnings, has improved tremendously, from 122 to 23. But 23 is in the area of the peak levels of P/E throughout the 20th century. Ratios of 6 or 7 occurred at major stock market bottoms during that time. P/E was infinite during the final quarter of 2008, when E was negative. We will see quite a few quarters of infinite P/E from 2010 to 2017.

8. The Trading Index (TRIN) is a measure of how much volume it takes to move rising stocks vs. falling stocks on the NYSE. The 30-day moving average of daily closing TRIN readings has been sitting at 0.90, the lowest level since June 2007. This means that it has taken a lot of volume to make rising stocks go up vs. making falling stocks go down over the past 30-plus trading days. It means that buyers of rising stocks are expending more money to get the same result that sellers of declining stocks are getting. Usually long periods of low TRIN exhaust buying power.

Disclosure: No positions

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