Low-Volume Rally Doesn’t Impress
Volume was down for today’s rally in the SPY, QQQQ, IWM, and XLF compared to the down-days this week. And since “volume follows trend”, we can be assured that the trend is still down.
A good deal of the volume was short-covering too. The evidence for that can be seen at 10am when the Consumer Sentiment number dropped yet again; this time to a 15-year low. Instead of falling, the market sprang upward. A lot of traders actually believed Larry Kudlow’s contention that the economy was strengthening to the point where the Fed could start raising rates. And since the market would not like rate hikes, they went short. When Kudlow’s lunacy was not reflected in the sentiment number, those traders assumed that rate-cuts were off the table, and bought-to-cover in a panic.
Quite a lot of bulls have been dismissing the sentiment numbers, but that is foolish. If these numbers were not important, they would not move the market. A good example can be seen in one of Tony Crescenzi posts at RealMoney.com today titled: “UOM Confidence: Who Cares?“.
That is flat-out denial. It is also a sign that there is more capitulation to come. There are many, many bulls who will be barfing up lots and lots more stock as the bear market proceeds.
The market could rally for another day or two to finish working-off it’s over-sold condition. If it does so, I will deploy the rest of my cash, and some fresh cash from my real job, into my current short positions in SDS, SKF, QID, TWM, SPY puts, and QQQQ puts.
June 14th, 2008 at 1:39 am
Thursdays parabolic third lower lows below the May 19th highs for RLX and XBD, not to mention weaker fall-offs in financials BKX and BIX, plus second lower lows in NYA, SPX and most other broad indices, plus the weakest patterns of all in foreign indices - mean that markets need a 2-3% rally from today’s close on Monday/Tuesday to reverse what otherwise could be the beginning of a serious 4-6% paraboic collapse from the May highs.
A Mon-Tue recovery high to SPX 1375 will only be a second lower low below the May high, with a parabolic continuation pattern target of 1275, down 100 points, minus 7%. That’s a sell, with a 2% stop at 1398.
June 14th, 2008 at 11:28 am
Looking at the McClellan Oscillator, EVERY time it has fallen to an extremely oversold level and then rallied, the low was tested or nearly tested within a short period of time.
http://www.stockcharts.com/charts/indices/McSumNYSE.html
But so far it has always paid to go long on that test.
June 14th, 2008 at 11:52 am
Crimson Ghost,
Yes, like I said, the market can rally for a couple of more days to work off the over-sold condition. However, I think the chances of it moving above the down-trend line are zero. In a bear market, I think it is safer to sell over-bought conditions than to buy over-sold conditions. So instead of buying here, I am preparing to short the next over-bought condition, which by some short-term measures isn’t too far above.
The textbook says that support levels usually hold on the first test. And that is what we have for now, but the market will come back down for another test, and I don’t think that one holds.
Matt
June 14th, 2008 at 12:00 pm
Hi peAkcredit,
Yes, I agree, look out below! I also think it will be years before the S&P 500 sees 1400 again.
Matt
June 14th, 2008 at 12:04 pm
Matt,
Is there a reason you aren’t doing PUT options on specific financial companies?
June 14th, 2008 at 12:15 pm
Hi Crash,
I am most comfortable being an index/ETF trader. I feel like I have a better edge there. I enjoy following macro developments more than individual company developments, so that is where my knowledge develops. I don’t want to get wrapped-up in following a single company like Lehman, for example, because I feel that would narrow my focus.
Also, with the US dollar so weak, our companies are very cheap take-over candidates for companies in countries with strong currencies. I don’t want to live in fear of getting blind-sided by something like that.
Matt