Big Picture Review

Stock indices staged another mini-crash Wednesday as the bottom gave out soon
after the open. By the end of the day, the S&P was down 9%, which represents
the sixth time in the last month that the S&P has posted an absolute move of
5% or more. You have to look back over seventy years, to the 1930's, to find
the last cluster of five or more 5% moves in a single month. TICKscore
settled at -48, Cumulative TICK -90,000. Declining issues outpaced advancers
by an 8:1 margin, and volume associated with declining issues accounted for
97% of total NYSE volume, the eighth 90%+ down volume session since the
beginning of September.

The only glimmer of hope regarding Wednesday's session was that overall volume
levels declined from Tuesday. That triggers a 1-3 day buy setup, given that
lopsided negative breadth days on light volume typically precede some sort of
short-term bounce. In the table below are the last thirty instances in which
we've seen NYSE volume decline on a 3:1 or better negative breadth day. Note
that in 28 out of 30 cases, or 93% of the time, the S&P posted a subsequently
higher close within three trading days, significantly better than the 72% at-
any-time odds...

NYSE Decliners 3:1 over Advancers, NYSE Volume Down
10/15/08... ???
10/09/08... Higher SPX close two sessions later
10/07/08... Higher SPX close four sessions later (*)
09/22/08... Higher SPX close three sessions later
09/17/08... Higher SPX close one session later
09/09/08... Higher SPX close one session later
08/25/08... Higher SPX close one session later
07/24/08... Higher SPX close one session later
04/11/08... Higher SPX close two sessions later
03/10/08... Higher SPX close one session later
03/06/08... Higher SPX close three sessions later
02/14/08... Higher SPX close one session later
12/14/07... Higher SPX close five sessions later (*)
11/19/07... Higher SPX close one session later
11/15/07... Higher SPX close one session later
11/05/07... Higher SPX close one session later
05/10/07... Higher SPX close one session later
03/02/07... Higher SPX close two sessions later
01/05/07... Higher SPX close one session later
04/07/06... Higher SPX close one session later
08/05/05... Higher SPX close two sessions later
07/17/03... Higher SPX close one session later
06/23/03... Higher SPX close one session later
03/24/03... Higher SPX close one session later
03/10/03... Higher SPX close three sessions later
01/27/03... Higher SPX close one session later
10/09/02... Higher SPX close one session later
10/07/02... Higher SPX close one session later
09/19/02... Higher SPX close one session later
08/05/02... Higher SPX close one session later
07/22/02... Higher SPX close two sessions later

Whether the market closes in new lows for the year first before bottoming out
or manages a short-term bounce prior to closing in new lows remains to be
seen. The Equal Weight S&P500, SOX and NDX all closed below last Friday's
settlement, and the S&P is probably not far behind.

One thing is clear, however - it remains a very dangerous environment for
investors. When the S&P sells off 9% in one day and a poll on CNBC finds 95%
of respondents saying they're either 'buying' or 'holding', when key gauges of
risk like the Ted Spread remain at a ridiculously high 4.3% compared with just
over 1% at the beginning of September, when this same Ted Spread was
considered relatively high when it moved over 1% in August of 2007 because
anything much over 0.5% was considered high in the years before, when all of
this is mostly ignored by the media and the lead story is that LIBOR has eased
the past three days (albeit just barely), there's some serious denial at work.
Days like Wednesday ultimately set the stage for another one of those huge 7%+
up days like we saw Monday. As I discussed at the end of Tuesday evening's
commentary, it's a particularly negative sign to see a cluster of near-record
percentage gains for the S&P within even a year or so of each other. When we
do see the next such rally, I hope some of those folks watching CNBC change
their mind.

Stepping back for a big picture review, here's a rundown of five key
indicators that signaled the potential for trouble long before it was
apparent, and where they stand now (click on links for longer-term charts)...

Cumulative TICKscore: A running summation of our proprietary TICKscore
indicator, a measurement of institutional buying & selling activity based on
intraday NYSE TICK action. It's been longer-term bearish since August of 2007
when it fell into a pattern of lower lows. We'll need to see a convincing
'higher high' on the longer-term cumulative TICKscore to indicate renewed and
sustained institutional buying. Given the indicator's mostly straight down
path over the past month and a half, there's no evidence this will occur
anytime soon.

Market Vane: One of the best surveys for monitoring 'smart money' sentiment,
this survey of commodity trading advisors has been bearish since mid-June.
CTA's have a long and solid track record of staying on the right side of the
market. They've been net bearish since mid-June, and until we begin seeing
readings back over 50%, this indicator will remain bearish.

The Last Hour: Another very good smart money indicator, calculated by
comparing the market's performance during the first and last hour of each
trading day. While it can lead the market by a long time, it's been very
accurate over the last 40 years. Currently this indicator needs to retrace the
entire move down seen on the long-term chart before it will turn bullish, and
it has a long way to go. As I noted back on July 24th... "From 2005 - 2007,
this indicator plunged much the way it did in 2000, a major red flag from a
big picture perspective...It's on its way higher again currently, but has a
long, long way to go before it reaches its old highs. If the SPX eventually
tests 1100 and the Last Hour is still nowhere near its late '04 top, which
looks likely at this point, it would imply that upper trendline channel will
not hold." That last bit was in reference to the long-term trendline channel
seen on this logarithmic chart of the S&P500 stretching back to the 1930's.
The fact that the SPX is now back in the channel for the first time in over a
decade suggests it could ultimately test the lower trendline in the 550 area.

Nasdaq/NYSE Volume Ratio: This provided a good heads up over the past couple
of months that things were not right. The 20-day moving average was holding in
territory normally associated with market tops (>1.50) and wasn't budging. As
I noted in my 9/23 column... "more significant is the length of time that the
20-day average has held above the 1.50 level. It's been nearly five months
now, indicating speculative participation remains stubbornly high, while
institutional participation remains light. That's not a healthy combination.
There's only been one other time in history we've seen NASDAQ volume maintain
such a commanding lead over NYSE volume - December 1999 through June 2001, the
peak of the speculative bubble. The market didn't bottom until the 20-day
average of the Nasdaq/NYSE Volume Ratio had made a full round trip back to 1.0
in August of 2002." Note that it still remains above the 1.50 level.

Advancing Volume - Declining Volume: The 200-day moving average of up volume
minus down volume slipped below the zero level around the beginning of the
year and has remained decidedly negative ever since. We'll need to see a long-
term shift of better volume in advancing stocks before this indicator will
flip into positive territory. As I noted in my October 1st column... "There
have only been two other times in the last forty years that the 200-day
average has remained negative for six months - August of 1973 and February of
2002. In both cases, the market continued to trend steadily lower until the
200-day average rallied convincingly back above the zero line, signaling a
real end to the selling pressure and a long-term bottom. There's little reason
to think this time will be any different."

Categories : Archived EOD Commentary, End-of-Day Commentary

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