Arik and all,
Key reversal day 8/7/97 - (yes for the nth time. -g-)
Seriously, I was gave the following observations regarding a possible key reversal for the markets on July 17th.
exchange2000.com
The follow-up.
A lot of volume for 3 days ending July 17th (Naz 2.1 bil and NYSE 1.8 bil) indicated a semi climax for the markets. As I have anticipated in that note, the market did set new highs on lower volumes. oever, the surprise factor was nasdaq - new highs on brisk volumes. The party seem to have climaxed on 8/6/97 with a naz volume of almost 800 mil. That day is followed by a last hour sell-off on the following day and a 156 point drop for NYSE (-26 for nasdaq) on the next day. All this happened in the last week as the bonds tumbled. Trading for July 16/17 is similar to that of Aug 6/7. Both 2-day reversals. What does indicate?
1) Did short covering caused the latest rally to new highs.I tink so. Per the latest report (month ending July 15th) the NYSE and Nasdaq short-interest actually declined. At the bull's final gasp it is common to see this trend. The rally from July 21st to August 7th, though I call it weak, could be more due to the ultimate elemination of the bears. Keep in mind that the short-intrest never goes to zero. At any given time there will be some short interest due to new shorts, boxed gains, paired trades. etc. Following the July 18th carnage a new batch of shorts tried to take control. Time will tell if they will be succesful.
2) Latest bearish indicators - KO flirting with 200 DMA. From what I checked, KO never closed below its 200 dma in the last 10 years. A close for KO below the 200 dma will indicate an ultimate sentiment with the "smart" money - loosening base. i.e. people who bought several years ago are selling now. A similar test for GE, P&G, with 100 DMA and WLA with 50 DMA (even in worst of times, 1991-1994 WLA never closed below 50 DMA) will confirm this trend. The trend is that the game is over for the nifty fifty. The leadership may shift to some techs, but I doubt it since the valuations there are so out of wack.
3) Other indicators.
....Equity put/call ratio (last week) = 0.45 = very bearish
....Index put/call ratio (don't know the figure) - more than 1, bullish
....IBD investment advisors bullish = 47% neutral.
....IBD investment advisors bearish = 27% bearish (similar to Feb 14, 1997 low)
....Asset allocation AWAY from bearish (WSJ-8/11/97) is high - bullish.
....Bob Brinker is cautious and this is as bearish as he gets - bearish
....Elaine G is very bullish. Contrary, so bearish?
....Best minds on SI are calling for a major (10%) reversal - bearish.
....NH-NL indicator is deteriorating down significantly from recent high of 600+. Now it is getting closer to 100, a pattern that happened before the 1987 crash.
4)Safe to call this a true reversal? Yes, with a 90/10 probability.
5) Where to, now? I know not anything about the big picture or where the economy is headed. An almost ignored factor, in the face of deteriorating market conditions the new capital gains tax cut will trigger a key emotion - "protect the gains." Will this cause a downward spiral? Possibly not. But, it certainly is good enough to cause a 10% correction. After that watch S&P close carefully - a full week close below 200 dma is what I consider an extremely bearish indicator for the market. This is regardless of the current economic outlook. The supply and demand equation for stocks would have tilted against stocks for this to happen. i.e. a significant portion of the money would have gone out of the market and may not re-enter until a prolonged bear period.
6) A steep fall likely? I think there is a 50/50 chance. I think August 18th (1st trading day after options expiry) or there abouts is a key test to market strength. For all you know, if the big K has to come, it may come on August 18th.
-Mohan
(With borrowed thoughts form Joe G, Arik TG, Mike Burke, Bob Brinker) |
