Much like what we saw on September 23rd a heavy volume reversal spoiled the bulls plan of this market leaping to new highs. The day started out with a strong move higher hitting new highs with the volume on the NASDAQ higher on the day. NYSE volume trailed on the day suggestioning buying wasn’t being done with confidence. During the lunch hour stocks pulled back, all seemed quite normal as the market appeared to be consolidating the morning move. Trading flattened out as the market waited for the Federal Reserve’s Beige book released. Response to the release was quite tame, but stocks seem to edge higher. It wasn’t until the market received a double whammy from President Obama and Bove’s downgrade of Wells Fargo did the market implode on itself. In the end, the market suffered an outside day of distribution and is signalling danger ahead.
Over the past few days of market commentary we have noted that we had spotted a few things to be cautious about and taking the approach of “stock by stock.” This still holds true, but if you are on margin if today didn’t force you to lighten up then it is time to re-evaluate. Even in 2003 we did see a few bad reversals but the majority of them lead to the overall market moving lower for a few trading sessions. Much like 2003 where it saw it’s fair share of pullbacks to the 50dma we could very well see our market here reach its 50dma again. Whether or not we head to the 50dma or simply reverse higher is unknown, but with today’s action one can’t be a blind bull.
There have been 5 other bear markets of 35% or more and during the uptrends following the bear the market tends to run quite awhile. The uptrends include 1933, 1942, 1970, 1974, 2003 and 2009. Quite interesting the 1970s and the 2000s both sport two bear markets of 35% or greater declines. In 2003 we didn’t see a correction to the 200dma until January of 2004. Markets tend to mirror the past and this time isn’t any different. We aren’t predicting there is a 0 chance we pull back to the 200dma it is something to simply be aware of. Let’s not forget during the period of 1933 thru 1937 the Dow Jones Industrial Average ran 288%. With 25% unemployment, tariffs, and the New Deals ruining the economy stocks were still able to etch out gains. It is possible we still can run after we work off this nasty reversal, yes, but we will stick to taking it stock by stock.
Like 9/23 today’s reversal more than likely signals this market will move to the downside in the near-term. An oscillator that is good for showing the level of oversold/overbought conditions is the McClellan Oscillator. It has been a pretty darn good gauge of when the market “could” (key word, oscillators and indicators aren’t always reliable and shouldn’t be used as “the holy grail”) reverse. It has been especially useful on when the market may reverse higher. Below, you can see the indicator becomes extremely over sold with a reading over 100. Remember, this is a guide to show where we are at with the market and not a crystal ball.
As you can see the oscillator shows there is downside left in the market, so if you have any weakness in your portfolio it is wise to remove it. Sitting on strong stocks with cash is the best place to be and don’t forget to be pulling some profits off the table as well.
Today was the signal to get defensive with your stocks and wait for a clearer picture.
