Market Action: Have We Hit Bottom?

There is a lot of chatter on whether or not the bottom is in. Frankly, I do not know. However, I am inclined to think that we may have seen a near-term bottom, but I am not convinced we have seen the bottom.

First, on the positive side, I keep a running list of a couple hundred stocks that have been in a downtrend over the past year, and that have been great short candidates. (I am restricted from shorting stocks.) At the end of last year, almost all of them looked like they were going lower. However, near-term, this is not the case with most of these stocks.

For example, I am seeing a lot of charts that look like AutoNation (AN).

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Now, the stock may plunge tomorrow - but I just don't know. AutoNation has been under pressure all year, made a low in January, then bounced, and made a higher low in March. It is now working its way up to its highest level this year. It will get a test at the 200-day point, but the stock is no sure bet at the moment.

On the negative side, the bottom of a few weeks ago does not feel like a "real" bottom. First, volume has not been heavy. Volume on the NYSE was over 2 billion after the news of the Bear Stearns (BSC) collapse, but since then, it has not been impressive. On Tuesday, volume topped 1.6 billion on the Big Board, but yesterday, it was less than 1.4 billion.

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When the market was bottoming in 2002 and 2003, volume was very heavy, with numerous 2 billion share days, especially on follow through days.

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So far, this has not been the case.

Second, we have had two other moves of over 3% since this bear market began. The first was in September when the Fed surprised the market with a 50-point basis cut. The market rose over 3% that day then proceeded to rise more than 3% to the ultimate high in October. We then had another day of over 3% gains at the end of November. The market powered higher by over 3% again during the next few weeks before topping out and rolling over.

After Tuesday's move, the market is 3% or so away from the upper band of its downward sloping channel where the previous tops occurred. And, that level is at 1400. It may be that the market is playing out as it has over the past six months.

One positive is that volume, though not heavy, was greater than the other two big days, as volume was around 1.3 billion in September, and 1.5 billion in November.

Anecdotally, yesterday I heard that much of this week's rally has been driven by short-covering. By one measure, the hedge funds were as short as they have ever been. Not only is this your typical short-covering occurring, but the investment banks are de-levering. Since shorts are borrowed, banks are calling in their capital, causing the shorts to cover and driving share prices higher - or so I was told.

However, the market feels different. It may be that the Fed's engineering is releasing liquidity back into the market. True, the big spike up in September was also engineered by the Fed, but this one may have legs.

Based on recent history, one must remain skeptical. However, one must also be aware that, at least in the near-term, the environment may be changing, and the path of least resistance may be up.

Comments

[MattBlackman]

Toro, well done! It's great to read an article by someone who knows how to read the technicals and volume is a big part of the picture. I have also been concerned by the lack of volume on upmoves, especially in the bullish Head & Shoulders Bottom (H&SB) pattern on the Dow Transports that was confirmed Tuesday on the big upmove. However, the pattern should have exhibited much more volume on a break of the neckline to the upside which should cause any trader to question it (see seekingalpha.com/artic... )

By the way, in speaking to the folks at Bespoke, I learned that their research shows that all rallies in the last five years have been driven by short covering which is interesting. I would have thought that short covering was a much bigger factor in bear markets but that is not what they found...

Matt Blackman TradeSystemGuru.com

[300mph]

Let me get this straight. You state that:
1. On whether or not a bottom is in you say "Frankly, I do not know." And And you state that you are inclined to think that we may have seen a near-term bottom, but that you are not convinced we have seen the bottom.

2. Then you state that you have seen a lot of charts that look like AutoNation that "may plunge tomorrow - but I just don't know.", and "no sure bet at the moment."

3. Then you go on to really pin down the message of your article, that one must remain skeptical, however, one must also be aware that the environment may be changing.

For someone who has no real opinion on much of anything you use a lot of words to say it. Do us all a favor, be bold, take a stand or remain silent.