The BEAR MARKET continues.
On Monday and Tuesday of last week the market staged another Phantom Rally that yielded small gains for the blue chip indexes accompanied by weak Advance-Decline numbers and a large number of new lows. Volume was light on Monday and average on Tuesday. The secondary averages did not participate in the rally and were down on the Phantom Rally days. On Wednesday things started to unravel more. Market internals weakened substantially; the A-D was very negative and new lows expanded to 571 for the day. The blue chip averages gave up their early week gains and then some and the secondary averages accelerated to the down side. Thursday was a stunner! The DOW lost 357 points on very large volume. The A-D was negative by approximately 2500 issues, a very big number, and new lows increased to about 1000, almost a record. Although Friday was not as bad as Thursday it was still a very weak day. The A-D improved a little but continued very negative, volume remained very heavy and new lows were over 800, a big number.
For the week the DOW lost 481.97 points (-5.65%), the S & P 500 lost 4.99%, the NASDAQ lost 8.79%, the S & P Mid Cap lost 8.35%, the Wilshire Small Cap lost 10.19% and the Russell 2000 lost 9.38%. In summary market internals continue to be very weak. The Advance-Decline line continues to deteriorate, new lows are at astronomical levels not seen in recent times, volume has expanded as the market moves down and the small cap averages are leading the decline. Not a pretty picture. As a foot note to internals, the very heavy volume on Friday was a confirmation or follow through to the large Thursday decline on extreme volume.
MARKET SEGMENTS remain dramatically oversold. That is what a BEAR MARKET is all about, it gets to oversold and stays there. Of the 78 Market Segments 7 are positive (rated 1 and 2), 15 are neutral and 55 are negative (rated 4 and 5). This is the sixth week of an extremely oversold condition. The FIRSTCAPITAL OSCILLATOR (FCO) is at 11 compared to 12 last week. The Inflection line is at 13 down from 33 last week. Minor changes in the FCO at these low levels are not significant. The FCO has been relatively flat at a very low value for a time now. This configuration is the opposite of what we have seen in strong up trending markets. The FCO is negative and is indicating a very weak and down trending market.
The Put/Call ratio is at 0.95 and the P/C ratio for the OEX is at 0.93, it was 0.66 on Thursday, a negative. The Option Volatility index is at 40.95 up from 31.91 last week and hit a high at 44.77 around the low on Friday. Up trending but not high enough to indicate a bottom yet, another negative. There were high negative ticks late in the week but no indication of a support level. In summary the short term emotional indicators are negative.
As a statistical measure of the market at the present time, 80% of all stocks on the NYSE are below their 200 day moving average and 88% are below their 40 day moving average. At the bottom in 1987 these numbers were around 100%. Presently 51% of all stocks on the NYSE are two standard deviations below their 200 day moving average and 39% are two standard deviations below their 40 day moving average. At the bottom in 1987 these numbers were 65% and 94% respectively. The market is not yet at statistical extremes, it has a way to go.
The very weak performance of the Stock Market last week sets the theme for this coming week. Although there was a feeble attempt by the blue chip averages to hold the fragile support of the week prior, that support melted away easily and the market headed downward in earnest. This coming week has the potential to be a very substantial downer, perhaps even a waterfall event. I do not see anything in my work that even hints of anything positive for the market right now. Even though the market is very oversold I do not expect a snap back rally. The volume that came in on the downside last week is important and may be the precursor of major fund liquidation. This is not a liquid market. The BOND MARKET was again strong last week and it did not lend support to stocks. I am baffled by the continued insistence of some analysts that lower bond yields will save the market, this is just not the case, it is the opposite. It is my judgement that ultimately this market has a long way to go on the downside. I am not going to guess at a support level for the averages, That is going to depend upon how the public reacts to the pain of losses. If you still own stocks you are going to lose money.
Last week I said that the market was extremely sensitive to events taking place overseas. This still is the case. The Japanese market is in the process of penetrating support just below 14,000 on the NIKKI. When this happens and the Japanese market has a large decline it will be a further negative for our markets. The events taking place in Russia were looked upon as a negative last week by the popular press. If we had a healthy market they would note have caused a ripple, but in a very weak market they are catalysts.
Have you looked at the special report THE MYTH OF LARGE CAP LIQUIDITY. I hope that you find it worthwhile reading.
The long term DOW CHART has been updated as usual. To see the chart just click on the link.
If you are a speculator or trader I think you should only look for opportunities on the short side. My advice to intermediate and long term conservative investors is that the market is still very highly priced and over extended and we are in a BEAR MARKET. What we are seeing is contraction of very high price to earnings multiples. Prudence dictates the sidelines for those concerned with capital preservation and those who are cognizant of risk verses reward. This is a high risk and expensive market. If you are still in the market you would be prudent to consider a hedge position. A little insurance is worth the cost in times of high risk.
The CONSERVATIVE INVESTOR STRATEGIC ASSET ALLOCATION is as follows: BONDS 50%, STOCKS 0%, CASH 50%. Cash means short maturity bonds (under two years). It is worthwhile to note that this asset allocation is now outperforming all of the indices.
firstcap.com
Yikes! Lions and tigers and BEARS, oh my!
Seriously you make a strong case for a continued sell off. I think until people like you and Josef begin to see that there is less risk than reward that you may be right. I hope not because on Monday I will be buying into any continued selling hoping for a rebound soon.
Regards, Jeff
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