Why the Short Term Upside Bias?
I mentioned yesterday why I was short term bullish. Quite a few emailers and commenters asked for greater specifics, and whether this changes my longer term Ursine perspective.
Nothing has changed long term, as the macroeconomic analysis continues to suggest that an eventual slowing of the economy is more than likely. Housing sales are softening, the yield curve is inverted, and the consumer is slowly tiring. Inflation, at both the retail and wholesale level -- core and non-core alike, -- is still rearing its ugly head.
Resolving the dispute is a relatively simple matter of carefully considering timelines and expectations. Technicians tend to respond to shorter term market moves (like this week’s!), while Economists ply their trade over much longer time frames. I find that combining these two dissimilar disciplines allows me to develop a view towards both the immediate and distant futures.
Why the Short Term is Bullish
Despite the up/down action this week, the Technicals favor an upside bias over the next month or so. There are numerous reasons for this.
Most of the major indices -- the Russell 2000, DJIA, the Dow Transports, the NYSE, The S&P400 midcaps -- are above their upwards sloping 50 and 200 day moving averages. The notable omission is the NDX, which remains just below its downward sloping 50 day. This is the most basic of trend indications.
We also see a continually expanding margin debt -- which is a net positive for equities short term. When this measure gets to extremes, it’s a warning sign. In March 2000, for example, the margin debit actually exceeded the Free and other credit balances, $21.4 billion to $17.4B. That told you that individual investors were rather extended. As of the end of 2005, the positive credit balances were nearly $55B, while the margin debt was $22.4, so that ratio is not at an extreme.
Studies have shown that as margin debt expands, it helps to fuel bull markets. Once the market turns south, however, it rapidly dries up, adding to the downside momentum. This remains a bullish factor, at least for now.
Sentiment is also on the side of the Bulls. Ignore the anecdotal evidence and stick with the actual data. Nearly 30% of Market advisers now read Bearish, and that tends to be the level where in bull markets, we get rallies (it’s different in confirmed cyclical bears).
Further, noted technician Stan Weinstein observed this week that Public short selling is at a very high 8.3%, while NYSE Member Short Selling measures “an unbelievably low at a reading of 40.3% (which is the lowest reading since mid-September 2001, which was registered in the immediately after the 9/11 tragedy).” That combination of the public shorting while the smart money chooses not to have historically led to market advances.
And, we are still in the seasonally best period for equities.
Long Term: Watch the Signals
So despite the negative economic future, with all these positives and the Indices near new highs, why have any concerns beyond the near term?
The answer lies between the long and short term. Over an intermediate term, there are numerous technical warning signs. I use these signals to help alert me to a possible change in trend or character of the markets. Investors ignore these at their own peril.
As mentioned in the Paul Desmond interview, the advances have become increasingly narrow. An increasingly narrow advance, with less issues participating in the gains, and a small number of 52 week high list – despite the indices being at or near multi year highs – all suggest a Bull market that is in the process of tiring. Note that the most active NYSE issues have a negative bias; I prefer to see that measure be moving smartly ahead on rallies.
This implies a major sector rotation, and not a new rush of money into equities.
Then there’s the volume issue. Of the major ETFs, only Semiconductor HOLDRs (SMH) managed to show a gain in volume from Tuesday’s sell off to Wednesday’s snapback rally. Even the QQQQs were softer on Wednesday. The broader Nasdaq Comp and the NDX did show volume gains, while the NYSE, S&P and Dow did not. Low volume on up days vs. heavier volume on down days is also a signal that a high degree of caution is warranted for equity investors.
Friday, March 03, 2006 | 12:00 PM | Permalink
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Your starting to sound like my 94 year old grandfather. You keep repeating yourself.
We got it. If someone ain't getting it then tell them to turn their hearing up or review past posts.
Sheesh Barry never thought I'd ever accuse you of beating a dead horse ;^)
Love and kisses metaphorically speaking
David
Posted by: David Silb | Mar 3, 2006 1:54:06 PM
You know what's really funny? There appears to be a reasonable chance they will turn Intel positive today. There is a chance they'll turn the Naz back at a Fib level here. Or at least short term. But, a realistic chance.
I'm somewhat familiar with INTC's microprocessor roadmap and the technical challenges they face with AMD. It ain't going to be fixed for quite some time, if ever. And, their shortfall has little to do with AMD. AMD is expected to grow revenues by 10% this year and INTC's shortfall, if blamed on AMD alone as the pundits appear to be saying, would have AMD growing their microprocessor business by over 100%. AMD doesn't have the contracts or likely even the capacity to grow that fast. The shortfall is slowing demand.
Posted by: B | Mar 3, 2006 2:10:57 PM
Let's recap today:
The NYSE makes new all-time highs today, yet the number of stocks making new highs falls > 30% from the last time it made a new high. And I shouldn't forget to mention that the NYSE is max overbought.
I could be wrong, just as Richard Arms' (of the Arms' Index fame) family was wrong to call him Dick Arms, and the market could trudge even higher. But, it will have to go on without my dollars fueling it.
Posted by: Bynocerus | Mar 3, 2006 2:37:43 PM
Its all macro -- I believe Intel and Google were just excuses.
When their is enough negativity and the cycle turns, we rally (at least short term).
I'd love to see us get up towards 2500/2600 -- cause you know exactly what I will be doing then . . .
Posted by: Barry Ritholtz | Mar 3, 2006 2:37:56 PM
no time like the present. in the words of famous love-market technician Marvin Gaye: "let's get it on..."
Posted by: scorpio | Mar 3, 2006 3:23:46 PM
Barry - wanted to disagree with the first comment and say that you are not at all beating a dead horse. Myself and your other readers greatly value each and every one of your postings.
Posted by: shek | Mar 3, 2006 3:57:36 PM
Dow 30. JPM and CAT make new highs while the remainder continue to retreat from their 52 week highs. On 2/16, there were 6 new highs.
S&P 600 made a new high on 2/24. In the top 10 stocks, there were 5 new highs. It made a new high today, there were 3.
10 year yield breaks above a descending trendline that goes back to 1981. Whether it holds is another question. Certainly very heavy bond sales last 2 days and the talking heads just barely mention it. The Fed Gov sez all is well (Animal House).
Like someone has said, it doesn't matter till it matters. Then it will really matter.
I'm more of the "something will come out of left field and smack us in the face" school. And afterwards, we'll all say yeah, we shoulda seen that coming.
Posted by: Michael | Mar 3, 2006 4:14:56 PM
They keep running up new leaders to get these highs then they later take them out back and shoot them. Dow 30 example? PG. What was PG doing at 62.09 the other day, eh? Look at the vertical drop since then. It's all part of keeping the drinks flowing. No one wants to leave the party.
BTW, I am long PG.
Posted by: Mark | Mar 3, 2006 4:26:47 PM
Looks like rapid rotation to me. Or funds/institutions trying to find a theme that works. Large caps one day, small caps, growth, semiconductors (what was with that rally off of Wednesday's sell off? Played it as a end of month trade on the long side, then dumped yesterday when it started cratering).
Full disclosure, about 50%, about 1/3 in the DJIA. And trading long around the short positions. One long now, JNJ.
Posted by: Michael | Mar 3, 2006 4:46:08 PM
Barry,
How short is your short term? And how long is your long term? Can you be more specific? Thanks.
Posted by: richard | Mar 3, 2006 6:01:37 PM
I think the short-interest among individual investors only reflects an increased sophistication among that group, and shouldn't be fodder for a bull case.
Posted by: todd | Mar 3, 2006 6:23:12 PM
Friday's SPX close is pretty bearish. After 2 inside days, we break out of the range in the morning on the upside, then it reverses and closes lower for the day.
That's the kind of doji with too much "stick" at the top of the candle.
And we're moving away from the "beginning of the month" inflows now.
Not bullish at all, near-term.
Posted by: John Navin | Mar 3, 2006 6:24:43 PM
This week, I think we could see a market crash that catches everyone by surprise. The DOW down 1000 pts in one shot. Here are my reasons: We're at extremely low levels in volatility, the market action on friday is near identical right before the dotcoms crashed, and I've got the perfect catalyst: OPEC. The OPEC nations are having extreme difficulty keeping up with production and will have to cut production this week, if it's as bad as I think it is, Oil could hit 70 a barrel, and since the markets have been like a coiled spring for a big move, this could be the catalyst that just throws it down, and then all the program trades kickin and push it further.
Dan
Posted by: Dan Weber | Mar 3, 2006 9:20:40 PM
I vote for a Nikkei crash with BOJ raising rates, causing a panic for speculators to get out of real estate/stocks. Nice H&S setup on the 3 month daily chart, upsloping neckline around 15300, about 1-2 days of trading from here. Measures about 1600 downside points or roughly 10%.
Posted by: Michael | Mar 3, 2006 10:08:09 PM
bonds sold off huge this week! good for my homebuilder shorts... If the homebuilders take a sudden plunge, the market could react badly.
A huge period of easy credit is starting to dry up... everybody is raising rates, and the BOJ will be the scariest to watch.
Posted by: todd | Mar 4, 2006 12:02:35 AM
My short term is less than 30 days . . .
Posted by: Barry Ritholtz | Mar 4, 2006 12:19:34 AM
Setup looks very similar to March 1994.
Bonds were getting routed---10yr yields moved in a straight line from 5.75% to 7.5% from mid-Feb to early May.
The ratio b/w Russell 2000 and Russell spiked up to 1.08 in early March 1994. It spiked up to 1.07 today. These are the only two periods in the past 15 years when this ratio has been in this zone.
Back in 1994, the RUT gained 3% during the first 3 weeks of March and peaked on March 21. Then fell 10% in just trading days by the end of March. SPX fell 7.5% in 10 trading days.
The March 1994 low on the SPX was the nominal low for the year, though it chopped around the rest of the year. The RUT made its low in late June and another slightly lower low in Dec. The Nasdaq bottomed in late June.
Interestingly, bank stocks held up OK during the 1994 bond rout. They made their yearly high in June, then fell like a rock (15-20%) from Sept-Dec.
Volatility is coming.
Posted by: angryinch | Mar 4, 2006 12:47:23 AM
Assume the following:
You drive your automobile to work every day. In that distance you encounter a variety of stops and starts and speeds ranging up to but not faster than 65 mph. Maybe you average 45, or 55, but you obviously can't average faster than 65.
But, let's suspend the speed limit and play this game: Every day you are required to recognize an increase in average speed of exactly 1 mph.
The question then is: Does the fact that you'll eventually crash become a destiny you can not avoid?
You can not change the rules (you must increase 1 average mph per day) but must only answer the question... Is it destiny or not? Yes... or no?
What would be the average speed (therefore defining the day) at which that destiny would be realized? Let's suppose you suggest the speed will be, say, 58 mph or 64 mph or 79 mph...
It doesn't matter... pick a number that's reasonable to you. However, when you do, can you honestly differentiate a reason that whatever speed and day you pick shouldn't have been 1 day sooner... or 1 day later?
Now to the point:
Use any source you want to to examine the number of times the S&P 500 has expressed a PE of 12 or under, even 9 or as low as 7... during the last 100 years, or during the longest period the data is available.
My question is: As I described destiny in my beginning story and game, is it destiny that a PE of 12 or under will occur again in the S&P 500... ever again? Yes or no?
It's just my personal opinion that if you say no, you're not in touch with reality, but maybe I'm not in touch with reality, and you would be free to claim it.
If you answer yes that 12 or under is destiny, then at what 'speed and day' or in this extrapolated sense, what 'level of earnings' would you pick for the day of destiny?
What means do you have to suggest it wouldn't or couldn't be at today's booked earnings, as opposed to why it wasn't yesterday's, or why it won't be tomorrow's?
Prior to all the past periods in which the PE of the S&P 500 descended to 12 or under.... what do you suppose your opinion would've been then? Are you telling me you'd have been sophisticated and erudite enough to discern it in advance?
Or rather, do you imagine that you, like all those that failed to discern it at those times, would've also failed then in the same way to discern that destiny was around the next corner?
Posted by: Eclectic | Mar 4, 2006 5:27:45 AM
"10 year yield breaks above a descending trendline that goes back to 1981. "
I too think that's the news from this week. Rates will be climbing all over the curve as Bennie and the Jets are forced to raise FF to 5.5%. They know the true inflation numbers and they are certainly not going to let the carry trade dissolve by pausing here while others raise. If Barry gets his 5-7% climb out of this Nash Rambler, I will be watching dumbstruck. That would be a ridiculous blowoff.
The only portfolio that makes sense in this environment is ALL CASH. Me? S/T treasuries, gold and everything else is completely hedged. Even that gets hit in what may be coming. But it will be better than 90% of portfolios.
Posted by: Mark | Mar 4, 2006 5:41:30 AM
For what its worth, my market timing composite system has once again turned bullish. We have been in such a narrow trading range for the last 3 months that it would sure be refreshing to see it begin to trend again.
Posted by: Rebound Trading | Mar 4, 2006 8:01:48 AM
A stock market correction is a fact of life that has repeated itself regularly since the exchange first started two hundred years ago and even before that. They don't always happen because of obvious reasons such as sustained slow downs or housing bubbles. The highest probability end game is not a gloom and doom scenario for the world. The housing bubble people are beginning to sound like the dull blather of nagging wives. A JOKE I can make until I tie the knot next year. Although doom is a distinct possibility. If I showed the housing bubble prognosticators the historical boom/bust cycles in housing, you'd have surely been on the side of a total collapse three other times in the last thirty years. Some spikes even more pronounced than now. Their slow down has nearly always led to a market decline and there were localized pricing pressures for five or even close to ten years but the world went on and the economy survived with a few scratches.
Back to the fives times as much positive feedback as negative feedback for the brain to remain in stasis. Looking at only negative data can make Jack a dull boy. "redrum, redrum, redrum"
The market conditions just do not support a total collapse right here. A top? Maybe. I've pull up the ten year bond chart every week for years and it has not come even close to breaking its down twenty plus year down trend line. But it might one day. Are rates going up? Historical precedence says yes.
A lack of bid in the PM is a sign no one wants to go home holding stocks. The funny thing is this behavior first started the Friday after Thanksgiving and continued into December. That is consistent with distributing money to weak hands. This is not a healthy market and hasn't been for months. The October free for all was the first true breakage in this bull cycle. Not the biggest decline but a total collapse of buyers. Internals really deterriorated beyond past corrections. We've seen the biggest one day decline since the bull began. We've seen distribution days which can be defined as capitulation days but they are near tops. We've seen trading curbs. Yet, the bulls still gleefully tap on the bear's heads. There is much reason to believe the top is in give or take the petty gyrations but there is some chance we could get more upside. Although I don't know why people would trust it given GE, IBM, Microsoft, Intel, Dell and other blue chips are near 52 week lows. Oh, that's right. They aren't what they used to be. Too big. Not representative of our new economy. Succumbing to competition. Oh, or as Pisani said on CNBC yesterday, "Box makers just don't matter that much anymore. It's what goes in the box that matters." WTF? Is CNBC paid to pump? I sometimes feel like I'm a character in the book "1984" with all of the government statistics and CNBC pumpers. Anyone talk to Morphius lately?
Posted by: B | Mar 4, 2006 9:56:24 AM
The lack of volatility is more proof of the coiled spring. In past cases, it usually takes a major downturn to get the volatility higher from such low levels, and then in an uptrend it manages to sustain it. There were plenty of events in the 1990s that created such, Long Term Capital, Bonds in 1994, ...
Posted by: Dan Weber | Mar 4, 2006 11:33:51 AM
Here is a link to the longest term view of the VIX I could get. http://finance.yahoo.com/q/ta?s=%5EVIX&t=my&l=on&z=m&q=l&p=&a=&c=
I think the VIX repeats the cycle it's in and we're at the bottom. However, I think it accelerates a big more rapidly into the 20 range...
Posted by: Dan Weber | Mar 4, 2006 11:38:16 AM
Barry (or anyone),
What's your thinking on terrorism... (chances of, and effect on... markets)?
Posted by: Eclectic | Mar 4, 2006 3:43:18 PM
re: Terrorism. Look how the markets react less each time, 9-11, Madrid, London, and the Saudi refining facility attack. Becoming a non event. It would have to entail a huge loss of life or be an economic crippling event to have much impact IMO.
Posted by: Michael | Mar 4, 2006 4:02:20 PM
