Thursday, March 6th, 2008
Stock Market
Late last week, $SPX fell after hitting 1390-1400, leaving that
area as solid resistance. It then dropped to the 1320 area and bounced
a few times, but eventually (on Thursday) that level gave way. Heavy
selling developed when it did, and $SPX closed at the lowest price
since it was on its way up in September 2006. From the $SPX peak in
October (yes, Virginia, the all-time high was made in October -- after
the first warning shots about subprime problems had been "fired" in
August) to Thursday's close is a decline of 17%. In short, the $SPX
chart continues to be negative.
The equity-only put-call ratios rolled over to sell signals -- a
condition we warned about in last week's newsletter. The actual
rollover to sell signals came after last Friday's broad market decline.
This is unusual for these intermediate-term indicators to reverse course
so high on their charts, but they were correct to do so. Now, one must
wait for new buy signals to set up, and that won't be easy. About the
only positive thing that one might say about these ratios is that they are
high on their charts, and as such, qualify as being "oversold."
However, as we've often said, "oversold does not mean buy. Some of
the worse declines come when the market is oversold."
Market breadth (advances minus declines) has been quite
negative this week, after generating sell signals at the close of trading
last Thursday (Feb 28th). After today's decline, breadth is in
official oversold territory. Keeping the above caveat in mind about
oversold markets, we will be watching for it to roll over to a buy
signal, for it has been a well-timed indicator in the last few
months. That rollover to a buy signal will only come after advances
lead declines for a couple of days -- something that seems only
remotely possible after watching Thursday's slaughter.
Finally, the volatility indices ($VIX and $VXO) have been rather
subdued. This is another area where one would expect to see
capitulation, but once again it has not been forthcoming. $VIX has
moved up towards 28 and that broke the bullish downtrend that had
been existent in $VIX. However, with the broad stock market selling
off heavily, one would expect to see $VIX well above 28. The two
major capitulations -- last August and last January -- came as $VIX
spiked up to 38, intraday. Something on that order will likely have to
happen again before a true spike peak, intermediate-term buy signal is
generated by $VIX. Lacking that, as long as $VIX continues to crawl
upward, that is bearish for the stock market.
So, here we are again, entering a major oversold condition in a
sharply declining market. The $SPX chart is negative; put-call ratios
remain on sell signals; breadth is still on a sell signal, too; and $VIX
hasn't gotten desperate, as it likely needs to before a bottom is in
place. You know the drill by now: we remain bearish, but expect that
sharp, but short-lived rallies could spring up at any time.
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