Market Outlook-March 2008

May you live in interesting times.
--Chinese Curse

Just when I feel like I'm finally in sync with the markets, the last 2 days of February happen. The process of making a bottom was a rather long and tortured affair and perhaps I'm mistaken to refer to it in past tense. By my count and as measured by the S&P, we experienced 3 distinct selling stampedes after reaching an all-time high on 07.13.07; first from 07.20.07 to 08.16.07, second from 10.15.07 to 11.26.07 and lastly from 12.14.07 to 01.22.08. The penultimate and the ultimate days of February where, respectively, market internals were >2:1 and >6:1 decliners to advancers and down volume to up volume could signal the beginning of a new 17 to 27 trading session selling stampede.

Thus far it appears the S&P closing low of 1310 on 01.22.08 has potentially all the makings of a significant intermediate-term low. I have to say "potentially" because up until the last 2 days of February the S&P seemed to have begun the constructive sequence of higher bottoms with the closing low of 1310 on 01.22.08 and a higher closing low of 1331 on 02.08.08. The work that remained was to put in a higher closing high that exceeded the 1395 level reached on 02.01.08. The close on 02.29.08 at 1330 ostensibly puts the market back at square 1. So, which will we see first; a higher high with a close above 1395, a retest of 1310 on a closing basis or a new low with a close below 1310?

On a longer-term basis, both the NYSE and OTC Bullish Percentages (my preferred risk barometers) remain in a column of X's signaling that demand is in control. Thus, while I and undoubtedly many others are getting stressed out by the seemingly endless volatility, buying power must be given the benefit of the doubt until we see a reversal to a column of O's signaling that supply has retaken control. And the reversals to O's are still pretty far away. What with the NYSE Bullish Percentage at 39.3 as of the last day of February and a reading of 34 required for a reversal and the OTC Bullish Percentage at 27.5 as of the last day of February and a reading of 22 required for a reversal. Thus, approximately 110 net new pnf sell signals on NYSE stocks and approximately 180 net new pnf sell signals on OTC stocks are required for a reversal signaling that selling pressure has retaken control of the general environment.

One of my favorite secondary indicators is showing the fear factor in the market again approaching the level we saw at the mid-January low (bottom?). As of the last day of February the Fed Model, in my opinion very good for signaling extreme levels of greed and fear, is at -47.4 (ie, the S&P is 47.4% below fair value in relation to the 10-yr T-Note). This is for all intents and purposes the same as the -47.5 reading which coincided with the mid-January S&P low and is the lowest level I've ever recorded since beginning to track the Fed Model (my data goes back to 1983 on a monthly basis and back to 2003 on a weekly basis).

Another of my favorite secondary indicators is the Investors Intelligence Bull/Bear survey. Generally speaking, the market is considered too frothy when more than 55% of newsletter editors are bullish, or when less than 20% are bearish (expecting a market decline of 20% or more). And the market may be near a bottom when less than 35% are bullish or when more than 50% are bearish. The bullish reading reached a nadir of 36.7% the week of 02.13.08, very close to the important 35% level before recovering the last 2 weeks of February. Meanwhile the bearish percentage has steadily advanced since hitting a nadir in mid-December 2007 and is at a 5-month high with a current reading of 36.4%.

Interesting times, indeed.