General Market Action
"Four things come not back. The spoken word, the sped arrow, the past life, and the neglected opportunity." ~ Arabian Proverb Sayings of Arabian Origin
Standard Deviation Analysis
The premise here is simple. When either the +3sd band or negative -3Sd bands are hit; it suggests that an oversold or overbought condition is in the works. Example if the market is topping and the +3SD band has been hit, then it would indicate that there is a pretty good chance of rather sharp downward move occurring and vice versa. If we are in an up trend, meaning that the +3Sd band was hit and the markets have pulled back. A test and the ability to hold above the 18 or 30 day moving average would indicate that the markets will most likely rally to test the +3Sd bands again. This tool should be used in conjunction with 2-3 other TA tools or simple trend analysis. One should never make a judgement based on this tool alone or any other individual tool; always use 2-3 tools. The more TA tools you familiarize yourself with the better. However one should not exceed 6 tools as you will most likely overwhelm yourself. Ideally 3-5 tools should suffice.
|18 day SD moving average||12509||2412|
Difference between -3Sd and +3Sd bands
(15 weeks worth of data provided below; updated on a weekly basis)
Highest value between the -3Sd and +3Sd band for Dow = 2688 Another New
Highest value between the -3Sd and +3Sd for NASDAQ= 765 Another New high
SD bands still in record territory even though they have pulled back from last weeks all time new high.
Risk takers can open up new longs via futures or options on the Dow, SPX, and OEX etc on a re test of the 11670-11760 ranges. As always buy options with 6 months or more of time on them. If you get into these high risk plays sell half automatically when it's up 100% and then ride the rest. We are still holding onto one position we took from the profits of two highly profitable previous trades. Once again these types of plays are only for risk takers.
Its times like this that we need to re read books such as "the Crowd" by Gusatave le Bon. It clearly illustrates how the masses always seem to react in unison towards the end rather than at the beginning. Another book that clearly explains this point is popular delusions by Charles Mackay; both books are available for free in E format and the links to these books and many more are posted in the pass coded section of our website. Market update Jan 22, 2008.
Those that acted fast were able to purchase call options as we suggested and are already holding onto stupendous gains. Average entry price was in the 11700-11760 ranges and those options should easily be up by at least 200%.
The action on Jan 22, 2008 was extremely unnerving for most traders; after dipping below 11700 the Dow managed to close above 11930 (the higher end of our extremely oversold zone). However Wednesday was the day that really jolted most traders' hearts as the Dow tacked on 632 points from its low to its high and the volume was out of this world. It came in at over 7 billion; to put this into perspective 10 years ago it probably took almost two weeks to generate this kind of volume and up to 2-3 years ago it would have taken at least 3 days to hit this mark. The fact that the markets closed up on the highest traded volume ever suggests that a lot of buyers local and international wanted to jump in a take a stake before prices soared up. Note that the recent surge in volume is not just coming from the United States only; its expanding to fast and this suggest that there are a lot of big international players involved.
In addition to taking to a 96 million dollar stake in BNI last week, Warren buffet invested over 1.58 billion in Swiss Re; the worlds largest re insurer. The fact that Buffet is doing this when there is blood in the streets suggests that he views the current market situation as nothing but a lovely buying opportunity. Many insiders appear to be adding to their positions and this indicates that they have a favourable longer term view.
Additional jumps were in seen in the following Public/NYSE specialist short sales ratio jumped to put in yet another new high and is now sitting at 19.88 after having dropped briefly to 11. Public/NYSE member short sales ratio is also in record territory.
The 4 week AAII moving average of investor sentiment spiked and the number of investors that were bearish rose to the 56.88% mark; this is clearly a very bullish development.
However while the sell off last week was rather strong; fear levels did not spike as much as we would have liked them too. One positive measure was that on the sell off volume surged past the 5 billion mark and tested the 6 billion mark and prior to the 7 billion share day on Wednesday the 6 billion plus mark was a new record. Thus it at least indicates that while the fear levels were not extremely high there was quite a bit of fear in the markets. The guys we are now paying a bit of attention to are the odd lotters they are notoriously famous for taking the wrong side and while they are increasing their short position they are not shorting the markets aggressively yet. Other than this and the fact that our smart money indicator has not flashed a buy almost all the other indicators have tested either the upper end of the extremely oversold ranges or have tested the lower zones of the extremely oversold ranges.
In general this action is bullish and it suggests that a trend change is close to taking shape. There is going to be a lot of volatility but the direction should now be in the upward direction. So one could say it will be like 2 steps forward and 1 ½ steps backward. In time this will change to two steps forward to one step backward and then eventually to half a step backwards for every 2 steps forward. What one should pay attention to now is the stocks that are going to do well when the market resumes its upward trend and attention should be especially directed stocks that are showing early strength.
One very interesting piece of data and we mentioned this last week was the fact that the Dow transports never broke down even though the Dow traded all the way down to the 11634 mark.
Almost all our indicators are in the extremely oversold ranges now; some in the lower ranges and some in the upper ranges and we feel that the worst maybe behind us. The 20 day moving average of new lows and new highs experienced a shocking turn around; last week the number of new lows on this average buried the number of new highs. The number of new lows exceeded the 4700 mark and this week they barely came in at 250 while the number of new highs surged to 820. This massive turn around in such a short period of time indicates that the smart money was busy buying while the masses were panicking. Note how fast the markets pulled back over the 12000 mark after dipping below it. One of the most telling signs was the massive surge in volume on Jan 23rd; as we previously stated it shattered all known records and came in at whopping 7 plus billion shares; this clearly illustrates that buyers outpaced sellers as the markets closed on a very positive note. We are also quite certain that most of these buyers came from the smart money crowd which for some reason has refused to short this market aggressively. While the indices will not recover as fast due to the current massive sell off, many stocks will go on to put new highs well before the indices do so and indeed we are already witnessing signs of early strength in several sectors.
The time to panic is never when others are panicking the time to panic is when everyone is busy celebrating as was the case with the housing bubble. We started to advise individuals to bail out almost one year before the party ended but when the party ended it ended very badly and the hangover thought painful has only just begun. Use this time to add to your positions for many of these stocks might never trade at these levels again. Finally remember this roughly 2 weeks ago the Dow was at 11634 and today it's trading roughly at 12400 (a move of roughly 800 points) after trading up all the way to the 12800 mark. What has changed in that time nothing? The situation still looks bleak (key word being looks) and actually it might look even. In the end the dynamics of the markets revolve around one fact only and that's an investors perspective; your job is not let your emotions influence you but to watch how it influences others and then use these observations to your advantage.
Please take the time to write down what was going through your mind and what you were tempted to do during this time of stress and whether you actually allowed your emotions to lead the way. If they did then write down detailed notes for future reference; come back to these notes when the markets are trading higher for that is when their true meaning will hit you. Market update Jan 22, 2008
We hope you took the time to follow the above suggestions we made last week; if not please do so now while the info is still fresh. Those that took the time to do so will already be somewhat surprised at their reactions and months and years later from now you might be tempted to ask yourself was this really I, did I really think and act like that, what made think like that and so on.
Extracted from the January 29, 2008 market update.
New Comments Feb 15, 2008
While negativity continues to rise; the chaps who short odd lot of shares are not shorting the markets as aggressively as we would like to them too. Usually when they capitulate and start too aggressively short a intermediate to long term tradable bottoms is close at hand. The only other indicators that could by pass this requirement is if our smart money indicator flashes either a strong positive divergence or an outright buy signal and or 4 of our proprietary indicators all flash new buy signals at the same time.
One recent positive is that on down days volume is generally not swelling up and has remained well below the 5 billion and 6 billion mark; this is a positive as it indicates that for the most part the wrong chaps are doing the selling. In addition the day when all volume records were broken as we zipped past the 7 billion share mark occurred on a day when the markets closed in the black.
While we continue to expect more volatility and it's could possible the 12000 mark could be tested once more we feel that the trend is changing and that investor should be looking to accumulate stocks in select sectors. As the say the time to buy is when everyone is trying to flee for the exits or when there is blood in the streets.
"The reasonable man adapts himself to the world; the unreasonable man insists on adapting the world to himself; therefore, all progress depends on the unreasonable man." ~ George Bernard Shaw