“Far more money has been lost by investors preparing for corrections or trying to anticipate corrections than has been lost in corrections themselves.” - Peter Lynch, manager of Fidelity Funds Magellan Funds.
“The genius of investing is recognizing the direction of a trend – not catching highs and lows.” John Bogle, founder of The Vanguard Group.
Long-term
As I start writing today, about an hour from the close, the S&P 500 has held trend support despite the day’s turn of events. Since the first week in September 2010, the intermediate trend for the market has been up – scratch that – straight up. The NYSE common-stock-only Advance-Decline line closed last week at all-time highs. The percentage of stocks above the 200-day moving average within the S&P 500 is overbought, but staying above a bullish 80% level with a reading of 88.53% today. The last time this reading dipped below 80% from the +80% zone was on May 6th, the day of the Flash Crash (see chart). All of the stock indices are trading well above their respective 150 and 200-day moving averages. Most of the popular averages hit new highs last week, except for the Nasdaq 100. Even the Dow Jones Transport Index hit a new high last week (which was concerning some technical analysts including this one until then). The darlings on Wall Street such as Netflix, Chipotle Mexican Food, and Apple hit new highs last week. This is all to say, that the long-term trend is healthy and intact.
Intermediate-Term
With the long-term outlook behind us, let’s take a look at the intermediate picture pros and cons. Starting with the pros, all of the popular indices are trading above the 50-day moving average, minus the Dow Jones Transports (which probably didn’t like oil rising today). In addition to the 50 DMA, not one index shows a sell-signal-cross in the 13 and 34-day exponential moving averages. Using a fast moving average, in cahoots with a slower moving average, forces the indicator to make more timely calls. 69.88% of the S&P 500 stocks are trading above their respective intermediate-term 50-day moving average. Interest rates have been rising as risk-adverse Treasury Bond prices have fallen. The main competitor to stock investing has traditionally been bonds, so to see rates rise from ultra low levels AND mutual fund flows out of municipal bonds suggest that there’s more money out there that can enter stocks.
Looking at the cons that are stacking up against the intermediate-term outlook, the Investors Intelligence survey of advisor newsletters is reporting the widest spread of bulls versus bears since the April 2010 high. As a contrarian indicator, this is slightly concerning; however, many novice contrarian investors don’t understand the heart of such an indicator. You may recall from my previous writings on contrary investing that Humphrey Neil, the author of The Art of Contrary Thinking, states the crowd gets the trend right the majority of the time; it is only at tops and bottoms that they get it wrong.
Short-term
Within the very short-term trend, the put-to-call volume ratio on equities has started to climb from bullish extreme levels. As put volume increases the market has become less bullish since January.
The volatility index spiked on today’s sell-off to break out of its declining trend. Whether a new trend higher has began or not, we’ll need more data to decide.
Today was a bearish engulfing trading day that wiped away 10-days worth of gains in the S&P 500. Today was a 90% down day (a broad decline in which more than 90% of stocks on the NYSE participated in the sell-off) on high volume for the NYSE like we saw the same day the markets dealt with Egyptian protests on January 28th.
Remember that the markets shrugged the Egyptian protests the very next Monday, and the markets rallied to new highs just two day post the 1.5% drop in the S&P 500. How the market will deal with Libya tomorrow, I know not, but if I see strong 90% advancing days like we did after Egypt to answer today’s 90% decline, then I will have to say that this market has shrugged off this event too – which is ultra bullish!
Summary
Market technicals suggest that the long-term trend is intact. The intermediate-term trend is also strong as many stocks continue to participate in the market’s growth. The “crowd” is definitely bullish as CNBC commentators, Barron’s, and Wall Street Journal articles all suggest that the retail investor is finally investing in stocks and selling bonds. If there’s going to be a stock market correction, of which Tom Demark and his famous combo and sequential indicator suggested on the closing bell remarks on CNBC, then we have all the makings of a short-term correction with the bearish engulfing pattern and the 90% down day today. All that’s needed is a close below today’s level on the S&P 500 with one or more follow through sell-offs. These can be confirmed by additional 90% down days on the NYSE via the NYSE declining issues and NYSE down volume. Barron’s publishes the common stock-only results in their Market Labs section each week.
The market doesn’t like uncertainty. It also doesn’t like $100+ oil. Whether it is Libya or quantitative easing 2.0, eventually the market is going to have to answer what price are we comfortable paying at the pump. Maybe the market being closed for two days while Egyptian politicians played out their response after the riots was enough to give investors pause from the January 28th selloff. Unfortunately this time around, we aren’t being afforded that luxury. The S&P 500 closed today near intermediate-trend support. Today isn’t as important as to what kind of follow through will investors take over the next few days. The market shrugged off Egypt and oil traded back down into the $80s. Muammar Qaddafi is taking a much more ruthless response to the protests than Mubarak did in Egypt, stating continued protests “will lead to civil war.” I guess the main question is how much control is Qaddafi able to hold over the military? And how fast will he quell this rebellion. The second question that is then provoked is, will the U.N. step in? Today’s events only bring about more questions. Many I don’t have the answer to. However, the trend has been the long investor’s friend since August 2010 and I will remain there until the end.
