Bad Company?

"It's a good sign -- if you are bullish -- to see this strength. The Nazz has been the market's Achilles' heel.

No more. Now weakness will be considered a gift, instead of something to lean against. The whole new pattern must be observed and respected."

Jim Cramer Real Money 8/28/2006 9:03 AM EDT

Hi Bill,

So are you saying go long the NDX ?

Well if Jim Cramer who represents the "public" has now come to the realization that "bad news is good news" - maybe this too has been bought ...

So I will now begin to favour more short selling in my short term trades - especially if the market rallies on a bad GDP number tomorrow.

tradesman

tradesman, recalling your reminder recently about being mindful of the market participants position themselves ahead of significant news, I'm looking at the opposite side of that equation -- buying some calls on today's weakness with the expectation that the same event occurs tomorrow.

I'm weighted short, so I'm looking at this as a nice hedge, too.

FWIW

Rydex Tech assets trough early Aug 15m +/-. Now up to 38.5m.

That is still light vs past highs but relative to the 50 dma of assets it is quite extended.

Buyer Beware

Another industry group over extended vs. SPX to the downside is furniture. Closely tied to homebuilders... but note relative strength when a little good news comes to very oversold group- RSTO (no position in RSTO). With so many weak sisters there is no reason to chase a stock like RSTO, I am noting it here as an example only.

Sentiment- I've seen these stats quoted (bullishly) elsewhere so for a more complete explaination here is Sentimentrader.com take:

"08/29/06 10:25 AM EST

Good Tuesday morning...Back in March, I went over a few things that suggested that the increasing bearish sentiment we were seeing at the time - despite rising prices - was not a "wall of worry" that would lead to ever-higher prices, but rather a negative example of increasing risk aversion (click here for comment).

In spite of the decline we saw in early summer, or perhaps because of it, the rally over the past few week has not pushed many folks back into the bull camp. Once again, we're seeing several indications that traders and investors are becoming more risk averse even though most stocks are hanging in there.

The latest example comes from the lowrisk.com sentiment survey. I went over a stat from this survey last week, and this week the responses were even more remarkable. Only 16% of respondents thought the DJIA would rise over the next 30 days, while 67% felt it would decline. This is the most bearish on the market that sample has been since last September, and the 4-week average is now showing about as much bearish opinion as was seen at most of the major lows over the past 10 years.

From a strictly-numbers point of view, any time the 4-week average of the survey dipped this low, the Dow was higher a month later 71% of the time by an average of +3.1%. The ratio of the maximum average intra-trade gain to maximum loss was rather unimpressive, though, at only 1.4 to 1 (the average max gain was +5.9% compared to an average max loss of -4.2%).

This adds to a very mixed, confusing picture among the guides that we follow. There are several examples of extreme bearishness, but I could also point to several showing the opposite. Among the studies I've looked at, I continue to find a real lack of any consistency among the results when looking out several weeks at least. When we see this kind of situation, the best bet is to look for a wide, extended trading range to form and that's still the gameplan I'm using here.

In the short-term, I noted yesterday that I was betting on a rejection of new highs in the S&P and I'm still leaning that way. I don't think we'll see a sustained breakout to new highs this week, but because of the thin trading (that's going to get thinner as the days progress) and yesterday's surprisingly consistent buying pressure, I am not at all being aggressive on the short side. That may change if the S&P would happen to lose the 1290ish level, but I'm not going to press until then."

I should also make note, that buying the NDX ahead of an expected reaction to an expected event (low GDP spurring buying) is more risky than waiting for those two correlated events to actually occur and then acting in response.

Bonds- sell on the news? I continue to believe the bond market is a KEY to market direction over the next 60 days.

Looking at the daily and weekly charts would you buy or sell the TNX?

Staples look vulnerable RSI Monthly (7) >90?

Like Bill always says, this stuff is not rocket science. It makes sense to me that the big money banks and brokerage houses are going to take this maket higher or sideways until they feel it is the right time offload the inventory before taking it down.

I think what is happening here is that the general public is much more risk averse than when the tech bubble burst in 2000.

People are feeling the pinch via gas and see the housing bubble ready to burst. Therefore, the big money banks and brokerage houses are taking the market higher to lure the crowd that will chase and dump on the crowd that buys value too soon. Same old, same old.

I would be suprised if they can keep taking it higher on deteriorating fundamentals. The short side could have a field day.

Stockman...

I always enjoy reading your posts...

Since I am mostly an ultra short-term trader I don't put much weight on sentiment/fundamentals for my buy/sell decisions - however I like to be aware of sentiment readings for possible trend changes.

What is clear? There is no consensus!
Market participants are confused - they are shell shocked into indecision - no conviction either way.

Because of this I still see this as a "traders" market.

I don't know why anyone would want to position trade this market except to buy on extreme weakness according to Bill's RSI methods.

But hey maybe I'm wrong - it's ok to be wrong.
If the market breaks to new highs on high volume with continued declining interest rates - then I'm in.

Until them I'm just trading.

tradesman

cb:

Meanwhile, all the big bank & brokerage houses have been in a steep downtrend over the past week. What do you make of that? Why aren't they taking their own shares higher along with the rest?

tradesman-

Thanks. Appreciate you sharing as well. Although we all have different time frames / restrictions / risk tolerance I agree that sharing views can give us a more complete picture.

Short term traders like yourself are probably the only ones making money this year! The rest of us are looking for a break one direction or the other and it just doesn't come. Good trading-

stockman

bc:

I had not though about it but it could be they already off loaded their own inventory when they were trading at 52 week highs not too long ago.

My hypothesis is based on the need to off load the big inventory. The big bang volume dumps that will send the markets down. I believe it is coming, I just don't know when (don't we all wish we knew!).

Stockman-I would be a seller of TLT between 88-89-bond move looks extended in the short term. As far as sentiment, I am always leery of polls; too many people talk bearishly and act bullishly. I prefer to look at market action as an indicator of sentiment. Looking at things such as a 5 day moving average of advancing or declining volume tells me if the advance or decline has enough fuel to carry the market further (obviously upside volume is lacking here).
Also the VIX is screaming people are too complacent. As it broke the 12 support level the other day, the 7 period RSI dipped below 20. The MACD on a daily chart is about to cross up on any further strength in the VIX. This does not bode well for the US equity market. Waning momentum and a low risk premium is a toxic concoction and any unforseen event could trigger a severe slide as the 4 year cycle bottoms later this year or early 2007.

optionoracle-

Thanks, IF the TLT gets to 89 (+2% +/-) then the SPX could get to about 1323 (+2%) based on the very high correlation over the past month. That would take us right up to the 2006 highs... maybe we get that during the 'last trading day and 1st trading day'?

Though we may get there the other issues you, I, Bill and others have discussed here suggest the downside may be much greater than 2%... so not something to bet heavily on unless one is very nimble.

I think the bond bulls may be missing something. Whether that is a reverse conundrum or CPI numbers to come I do not know.

JMO

I just stumbled on this article:

http://www.minyanville.com/articles/index.php?a=11091

Short interest is up this month on both the NYSE and Naz. I don't disagree with optionoracle, but just wanted to offer one more data point to consider as we peer into the fog.

Bonds-

Tony Crescenzi Real$ 8/29/2006 12:20 PM EDT

"Data from the International Council of Shopping Centers show a rebound in consumer spending in the week ended Saturday. The year-over-year change in the ICSC's chain-store sales index was the best since the week ended June 24 and is approaching the long-term average of 4.0%. The bond market should worry about figures such as these, given that it is priced for the Fed to cut interest rates relatively soon."

FYI
http://breakingnews.iol.ie/news/story_business_island.asp?j=193762406&p=y93763yyz

Constantly trolling the marketplace searching for new ideas. concepts, innovations. The information pushed by the link above has the potential to be a promising breakthrough.

I have to laugh on the market's reaction to the FOMC minutes and Fischer's comments. It definitely looks like the market is overcrowded with shorts. When in doubt - Cover!

Ya I learned from experience (=losses) to not bother trying to trade around FOMC stuff - the moves are just too bizzare - and even trying to fade the moves intraday can be a disaster.

I'll let the dust settle here... and watch the behaviour of gold and oil overnight/tomorrrow.

tradesman

A noticed a few links to a new article that among other things has a chart comparing the NAHB homebuilders index with a 12 month lag compared to the S&P. It has an 79% correlation for the last 10+ years and the correlation even looks higher than that if you look at the chart.

It pains a very bearish pattern if it continues. I don't know much about the fellow that wrote this but thought I'd pass it along. Hopefully I am not reposting a link someone else already has today. The article is at http://www.safehaven.com/article-5772.htm.

Mike

Short interest is at a record, Citigroup's market sentiment indicator is in the panic section, and fundamentals are not cracking yet... ...on the contrary oil has sold off, interest rates are stil moderate, the fed may do nothing at the next move...

All in all, the market seems to be ready to break up from here...

I agree with you the bad news will come out before the end of the year and the rally if it comes will provide a golden opportunity to sell everything and maybe even more...

On the contrary, while waiting for this with long positions you need to be ready to sell everything at the first sign of change in market sentiment...

Good luck to all.