A Case for a Mid-Term Equity Bottom

[OAC]

	Quote:	atto
	Thanks for the additions guys. If anyone has anything else to add, feel free. On a similar macro-market view (-ish), I saw this and thought it was interesting. It's projecting, with 97% historical accuracy, that inflation will be over 7.5% in a year. Eeesh.

With the federal bailout of Fannie Mea and Fredide Mac, and most likely many more financial institutions to come. This means only one thing: The Fed turning up the printing press into high gear. That will provide a big shockwave to the projection and inflation figure is likely to be a lot higher.

[atto]

	Quote:	OAC
	With the federal bailout of Fannie Mea and Fredide Mac, and most likely many more financial institutions to come. This means only one thing: The Fed turning up the printing press into high gear. That will provide a big shockwave to the projection and inflation figure is likely to be a lot higher.

Yeah, I've thought so for a while also. But, the "official" numbers have always been much less. This study put a little kick into that notion (and remember, the bottom bound is around 7.5%.. it could just as easily go over 10%, or more).

[firewalker]

	Quote:	atto
	Let me start this by saying that I want this to turn into a productive and informative discussion regarding the dynamics of market tops and bottoms. Specifically, I outline a case below for a current mid-term market bottom. I'd like to stay away from "market calls", and would absolutely love anyone who differs (or agrees using similar or differing analysis) to respond. This is definitely a work in progress, and as usual, I may be completely wrong. We're obviously still in a bear market, so any near term bottom will most likely not be "the" bottom. With that said, a few of us in the TL chatroom discussed this today, and I wanted to bring this to the greater TL community.

Interesting case & thread atto. As you point out that this might be a mid-term bottom but not 'the' bottom, it would be interesting to know how or what elements would define 'the' bottom. Are you looking for a certain number of downlegs in this bear market? Are you looking for a specific time window? Are you looking at extreme pessimist market sentiment (but how do you gauge that, other than using VIX & relatives)?

Personally, I think it looks like this second big "wave of selling" might have ended. As the Nasdaq and ES has been discussed, I might add that the DOW has also attained by initial target of 10800 (something I posted 6 months ago on another forum). I had that figure in mind, because of the price action in the first two, and final two months of 2005. Yes, that's a long way back, but the time price spent trading around those levels, proved to provide enough support even three years later to make up for a very decent bounce (+700 points).

So, with all indices reacting strongly (+50 ES has been mentioned), I think the market might be entering a period of sideways or consolidating price action. June was pretty straightforward one-way (not intraday obviously, but the big picture is fairly obvious) downtrending, and after strong trending days the market often needs some time to 'breathe'...

I also agree with jasont, the selling on the way down, especially near the beginning of July, was of a different kind than what we've seen in March/January. Personally, I've found the market more difficult to trade last couple of weeks, often making new lows, but immediately reacting to bounce higher. I wonder if I'm the only one having experienced this kind of "unusual" behaviour. Normally after a break of support (on decent volume) you'd expect some sort of continuation. But the market often turned violently back up. Only to resume selling the next day or several hours later.

I've also attached some charts, with trendlines to illustrate what I'm looking at right now. A break of these lines would clearly show more strength, but right now only the ES has broken one line, and the DOW and NQ are still below this. I've also added another NQ chart, where I think price is finding support on the midpoint of a hinge back from January (at that time a similar chart was posted by dbphoenix).

Thoughts, comments, suggestions,... very welcome

[firewalker]

... about divergences.

Despite the Industrials making decent now lows (1000 points below March lows), the DOW Transports is quite clearly much higher:

Atto posted a chart of the $COMPX, where we are again at the same price level from Jan & March, but the NASDAQ-100 ($NDX), set in a higher low...

[atto]

We are now close to my first technical target (a 50% retrace of June high's) on $COMPQ. Dow is close to a 50% retrace of June high's.

We are nearing some significant possible resistance areas, so we'll see. I expect at least a short term test of this new move, regardless of if we continue up, or head back down.

[OAC]

I got this interesting piece in the e-mail today:

"Since 1995, this stock market indicator has flashed "buy" on 41 days.

If you'd bought stocks the day it flashed, and simply held three months, you'd have made money 39 out of 41 times – that's 95% of the time!

The largest of the two losses was -1.7%. Meanwhile, the biggest gain was 33% – in three months. The average gain was an incredible 13% in three months. That's not an "annualized" number... 13% is what you would have made in three months.

I tell you this because the indicator flashed again on July 10.

Fortunately, you haven't missed the gains yet...

The stock market is only up about 2% since the indicator flashed. To equal their average 13%gain in "buy" mode, stocks still have to rise another 11% in just over two months.

The indicator is simple. It's from Jason Goepfert, who runs sentimenTrader.

The indicator is simply the difference in "Smart Money" Confidence versus "Dumb Money" Confidence. Jason says:

If the Dumb Money Confidence is at 100%, then that means that these bad market timers are supremely confident in a market rally. And history suggests that when these traders are confident, we should be very, very worried that the market is about to decline.

When the Dumb Money Confidence is at 0%, then from a contrary perspective we should be [buying stocks], expecting these traders to be wrong again and the market to rally.

Jason's "confidence indexes" are built based on real money – what real traders are actually doing.


In mid-July, the "Dumb Money" (essentially small traders) was remarkably scared. Jason's Dumb Money Confidence Index dropped to 17%. Readings this low are incredibly uncommon. Meanwhile, Smart Money Confidence stood at 67% – a whopping 50-point spread.

Whenever this spread hits 50 points, history says you have a 95% chance of making money over the next three months... with an average gain of 13%.

In general, I've found sentiment indicators are difficult to use as timing indicators. The results look good. But as they say, past performance is no guarantee of future results. It's better to use a sentiment indicator like this one from Jason as a "get ready to buy" or "get ready to sell" indicator.

Still, the timing this month wasn't bad... The indicator flashed on July 10, and the market appears to have bottomed just three trading days later, on July 15. Since then, the market has spent the last two weeks fighting its way into an uptrend. So far, the "up" move has been so weak, we can hardly call it an uptrend yet. But it's trying.

Actually, when you step back and size things up, we're very close to an ideal situation for making money in stocks:

1) Stocks are relatively cheap now... For example, the forward price-to-earnings ratio of the Dow is only 12.5 today.

2) Investors are scared, as Jason's Dumb Money Confidence Index shows.

3) We're just missing the uptrend. "

[MC]

The most recent down move has built bullish divergence where price tested lows yet the MACD as well as the MACD histogram failed to even come close to their prior lows. This was a VERY bullish indicator. I would have preferred the volume had been lower on the 2nd test giving a 2nd and more important diverging indication though. That would have told me there were less sellers at a prior key level and we didn't get that so I'm not a total believer of this rally yet. I will become more bullish if/when the same level (or lower) has very low volume aka: brings out very few sellers. I will become full bull when the red downtrend and structure resistance are cleared and legitimately defeated. Thoughts?

[RobS]

While my view is less based on indicators, I tend to agree that we saw the bottom in mid-July. On the lowest day, oil was $147 and the market feared a Fannie and Freddie collapse. Oil is now @116 and the Feds have stepped in to protect Fannie and Freddie. As a result, the market seems to react very positively to any good news and yet heavily discounts bad news. Today the Dow rose 300+ points even though the news was mixed. Therefore, I don't see us retesting the mid-July lows unless there is some VERY bad news that drives oil back up or there are new reports of significant financial system melt downs.

[firewalker]

	Quote:	RobS
	While my view is less based on indicators, I tend to agree that we saw the bottom in mid-July. On the lowest day, oil was $147 and the market feared a Fannie and Freddie collapse. Oil is now @116 and the Feds have stepped in to protect Fannie and Freddie. As a result, the market seems to react very positively to any good news and yet heavily discounts bad news. Today the Dow rose 300+ points even though the news was mixed. Therefore, I don't see us retesting the mid-July lows unless there is some VERY bad news that drives oil back up or there are new reports of significant financial system melt downs.

(Very) bad news always comes out near bottoms... Northern Rock was the same. This doesn't mean the bear is over imo.