What 'Lies' Beneath
Although the S&P 500 made a lower low last week, a major fly in the ointment with regards to proclaiming, "Come on in - the water's fine" - is the realization that it also registered a lower low for the NYSE New Highs - New Lows calculation. And while today's market environment has been rewriting the annals of comparative data series - it would be the first time in recent market history that a major corrections final swoon was accompanied with a lower low in the NYSE - NHNL.
In tearing a page from the Keep It Simple Stupid (KISS) playbook, THE low for an equity correction was always accompanied by a higher low in the NYSE - NHNL. This point also dovetails neatly to my previous note that described THE low for a major correction was typically made with a diverging low in the VIX.
The most dangerous, although highly unlikely scenario for the bears, would be a market that bounced similar to the late 2007 tape to new highs, before promptly turning right back around and sliding lower for the next 18 months. I believe the most likely scenario would loosely follow the 2008 script - where the headline risks associated with the gauntlet of moving parts in Europe introduces another downside catalyst - sooner rather than later. To a certain degree, last weeks decline and reversal was out of step with where the Europeans are within the crisis and their own set deadline. To expect that the market finale for the correction would end so discretely and without overlap seems naive at best and reminds me of when traders were celebrating the 20% rise in the SPX from the lows in December of 2008 - before the details of resolving our own banking crisis were enumerated by the Fed and Treasury.
In light of these observations, I am expecting the SPX to diverge in the next several weeks with the EKG of a Crash analog - as the market comes to terms with the continuing kinetics out of Europe and what that will mean towards price discovery.
As always - stay frosty.