Tuesday, November 10, 2009

NYSE/DOW Sell Signal Given; Overall Market Very Fractured - Unhealthy


The market remains fractured and the Dow Industrials continue to churn higher like the little engine that could, only that many other important indices and sectors are not following its bull run, like the Transports, Utilities, Russell 2000, and the XLF who are all severely lagging and are unfolding in very corrective looking patterns. Silver also sold off more than 2% intraday, again severely lagging gold and indicating risk aversion is brewing underneath the overall market. It's as if the Dow is "running the wrong way", and everyone knows it but the Dow, as the other indices are just sitting their watching in disbelief of the Dow's charge higher. Okay, now watch the embedded American football video........the player in the clip is my analogy of the Dow, and the other players are the other indices.


It appears the reason for this "fracturing" is that money is shifting around, but it's shifting into only a small amount of securities, mainly in the Dow and gold. This is not healthy, and signals a severe exhaustion of trend; a trend that has lasted since March of 2009.

So to illustrate this fractured nature of the market and to keep your eyes on the overall market, and not just the headline Dow number:

1) I posted the NYSE internals data showing that there was a solid more amount of sellers than buyers today, and about 56% of the volume was to the downside. Hardly a great case for the bulls after such a huge day yesterday.

2) Notice that the NYSE closed down today, yet the Dow closed up. Some of you may remember that this signal in the past has predicted huge selloffs the next day, and that held true when I announced it October 27th (click here for the actual post). The next day the S&P sold off 19 points (click here for the actual post). We'll see if another big selloff occurs tomorrow in light of this NYSE/Dow sell signal.

3) As I mentioned this morning, the Russell 2000, which is a great risk measurer because it has all small caps in it, has appeared to have completed its correction, declined in 5 waves today, and is far far away from making a new daily high with the Dow.

4) The financials, the DJ Transports and Utilities did not come close to making new daily highs either. Nor did any major index make a new daily high for that matter.

5) Silver is also another great "risk barometer". When people start to get scared, or have less of a risk appettite, they sell their higher risk assets, like silver, small cap stocks, technology stocks, etc. Silver's weakness, especially in comparison to gold lately is a warning sign.

Are you picking up the analogy of the Dow and that American football player running the wrong way yet? It seems that everything in the stock market is so bullish, and the Dow is soaring, making headlines bringing euphoria back to the market. But when you dig down deep into the overall stock market, you see that the Dow is alone in this endeavor at the moment.


The other key measure, the dollar, made some mild progress today and last night showed some big strength. It still remains above its lows made against the euro and chf, so the bullish path is still on track.


So the bearish case was severely weakened yesterday, but today it's made some progress, and the fractured nature of the market, along with the Russell's 5 wave decline, and the NYSE/Dow sell signal in place, it's possible that tomorrow will be a big selloff. The mere fact that the Dow Industrials made a new daily high and the other indices did not, with some severely lagging, is very bearish as long as it holds. The only kink in the armor is that it's Veteran's Day tomorrow so volume will probably be light and it may throw a wrench in things. Regardless of the short term action, the market is clearly sending a signal that it is fractured, hobbling, and unhealthy. I remain short term bearish against S&P 1101 and long term bearish against 1576. I made no trades today and my long term puts and small short term call positions remain in place.


adan said...

great video and analogy -

i grew up in houston / galveston, and wrong way corrigan was a legend for having done that exact thing, run the wrong way!

i hadn't posted mentioning this book in awhile, but your article, about so much going into so few concentrated stocks, reminded me of a great historical narrative, one of my favorites :

Rainbow's End: The Crash of 1929 (Pivotal Moments in American History) by Maury Klein

covers the whole 1920's; you'll swear you're reading the last 9 years, 2000 to now -

it gave me chills...

great post todd; best of luck to all of us tomorrow ;-)

Todd S said...

Hi Adan,

"Wrong Way Corrigan", that's hilarious. Poor guy. Well every analyst I follow is essentially bullish in the short term, and some say today's action was "encouraging". I didn't see it as encouraging at all. But it also wasn't extremely bearish either. Today's volume was even lighter than the small number yesterday, and I have a feeling tomorrow will be even lighter, so things could get a big sloppy and messy for the bears here as volume slides tomorrow and perhaps the rest of the week and just a small amount of bulls inflate this market higher.

We'll see, aside from the holiday and low volume screwing things up, the NYSE/Dow sell signal has me encouraged for some bearish action tomorrow.

Thanks for the note!

Anonymous said...

Hello. When you said "long term bearish against 1576", what are you saying?

Todd S said...

Hi, when I said I'm long term bearish against 1576 it means that overall, on the S&P 500, I am bearish as long as it stays beneath 1576, which is the 2007 highs. My purpose in saying that is to clarify that even if I'm wrong in the short term, and 1101 is broken, it does not change my long term outlook that 1576 will not be exceeded for several years at least.

The long term is clear to me, and that is that the March 2009 lows will be broken before 1576 is exceeded. The challenging part has been the timing of the short term.

Hope that answers your question,

Dave427 said...

Todd - What do you make of reports that many banks, scared to loan again, are trading trillions and that they are a factor in the market's strength in the face of so much market-killing moves by the govt?

Todd S said...

Hi Dave,

I heard Bob Prechter mention something similar to this in his newsletter a few months back. He essentially said that banks are hoarding money lent to them from the government, not lending it out like what the economy needs, and are "doubling down" on their trading bets to make up for the 2007-2009 crash losses. When the S&P was around 700, Prechter went on to say that if the S&P manages to rally to 1100, and then fall 50% again, it will be hard for most banks to stay solvent after being so heavily invested on the run up to make up for the prior losses. Essentially, many banks will go bankrupt in the coming wave 3 or C.

But it all lands on a central theme I feel strongly about, and that's that this rally is all smoke and mirrors. However, the market can remain irrational longer than I can stay solvent, so I still have to be wise in how and when I take my positions.

What are your thoughts on this issue?

Thanks for bringing this up,

Dave427 said...

Todd - On 20 Oct, CNNMoney said, "The most severe financial crisis since the 1930s has hit banks large and small. With unemployment rising, consumer spending slack and businesses shuttered, experts say up to 400 more banks could fail in the next couple of years." This will bring the total failed banks to 499, which is only 35 short of the all-time high (1989, 534 banks failed). Then we will have reached 93 % of the worst bank failures ever.

This plus a raft of other anti-business, anit-free enterpise govt moves tells me the big decline is brewing, and I can't imagine why it's not here yet.

Todd S said...

Hi Dave, your last sentence sums up a lot of my own feelings. But I do know that markets can remain irrational for long periods of time. I can't fight it, I just have to position myself the best I can and wait for the market to turn.

What I can say is that I feel the pressure building, from things such as the bank issues you brought up, is stretching back a rubber band tighter and tighter as this market rallies. The tighter the rubber band gets, the more ferocious the snap back will be. One of the many things that gives me confidence in this wave 3 or C crash is the fact that the market has rallied almost straight up, with no significant pullbacks. This the characteristics of a bear market rally, and/or a euphoria filled bubble, not a new healthy bull market. The more it rallies irrationally, the harder it will snap back to a rational state.

I just want to be short when it happens, and that's the hard part.

When you come across info like this in the future, please feel free to share it here. I find it very interesting what's going on internally to the economy.