It Looks Good On Paper, But...

11/13/08 3:30 PM EST

As of: SPX 1045 HELP  ARCHIVE

This morning we touched on a couple of measures that reflected just how severe the selling pressure over the past few days had been, which was on a par with some of the most dismal sell-offs in years.

That brought us right down to the October lows during the pre-market futures this morning.  But like we discussed before the open, that was an awfully scripted place to expect a bounce, much less a major bottom.  It seemed more likely that we'd get a complete undercut that just kept going, or at best a "fake" breakdown - a move under the lows that washes out sell stop orders resting just underneath, then a move over the prior low (which should then lead to at least a short-term snapback). 

Today fit that latter scenario to a "t".  When the S&P 500 broke its October low, we got a quick whoosh lower.  In the real-time Twitter comments I've been posting on a trial basis to the intraday snapshot, I noted that at 1:00 EST the NYSE TICK had reached a new all-time low at -1940.  That means that at that moment, there were 1,900 more stocks on the NYSE that last traded on a downtick than an uptick.

That is a truly incredible number, at least 300 issues larger than the previous all-time extreme.  There is only one explanation for it, which is no surprise - the market moved far enough below the October low to trigger a massive amount of sell stop orders that had been resting in a fairly obvious place.

Typically, such a huge negative TICK is a good contrary indicator for the very short-term, and is less reliable the longer out we look.  It was a good signal that we had probably seen the worst of the selling today, but beyond that it's less meaningful.

After the washout of all those stop orders, we got the prototypical reversal, with the S&P reversing back up above the breakdown level of 850.  That was the "all clear" signal that many had been looking for, and it was enough to carry us another 40 points as I type.

So is it really the "all clear"?  Many factors would suggest it is - over the past month, we've looked at a number of positives including seasonality, a multitude of historic oversold readings in mid-October and subsequent signs of explosive buying interest - two 7% rallies within a month of each other, an exceptionally low Arms Index reading and the quick flip in breadth.  Now we have a truly classic washout below a prior panic low, and major upside reversal.

It all seems a little too perfect, but sometimes it really does happen that way, so I'm not ready to completely dismiss today's activity.  I'm not ready to rush in and buy, either, not after the disappointing behavior earlier this week.  So I'm still holding back, being even more conservative than I have been, wanting to see some better sign that this isn't just going to be another quick rush higher followed by yet more new lows.  As long as we can hold over 850, I'll be looking for a good spot to add back some intermediate-term long exposure, but that probably won't come until we see more of a push higher, then a relaxation of what would probably be overbought conditions at that time.

A Telling Day Ahead

11/13/08 8:30 AM EST

Good Thursday morning...We begin the day with mixed trading in the pre-market futures.  We were down significantly after Intel's lowered guidance yesterday evening, but have waffled back and forth ever since.  Buying interest has come in every time the S&P has tested the 840ish level overnight - we'll see if that interest remains once regular trading hours open.

The selling over the past three days has been brutal, pushing the Down Pressure reading to 89% for the S&P 500 and to 92% for the Nasdaq 100.  That means that over the past three sessions, an average of about 90% of all points gained or lost in the component stocks were lost, and about 90% of the volume went into stocks that were down.

That is a level of selling pressure that even eclipses what we saw heading into mid-October.  It is "oversold", certainly, but the market has not responded especially well to oversold readings lately.

One of the hardest-hit indices has been the small-cap Russell 2000, which has been beaten down at least -2% on five of the last six trading days.  There have been three other times it suffered such a stretch since 1979 - 10/23/87, 10/08/08 and 10/27/08.

The instance in 1987 didn't stop the selling, as the index dropped for 3 more days before bottoming.  The last two were better, at least for the short-term, as the Russell bottomed within one day each time last month.

I mentioned yesterday that the selling was so broad-based that it pushed the Up Issues Ratio down to one of the lowest levels we've seen.  That'll happen when more than 3,000 more stocks decline than rise on a given day.  Despite that pressure, "only" 700 securities on the NYSE hit a fresh 52-week low yesterday (far fewer than the 2,500+ extreme we saw in October).

Among the major indices and sectors, the Nasdaq 100 (NDX) closed at a new low along with the BKX Banking Index and the SOX Semiconductor Index.  The latter two are considered leading indicators for the broader market, and do a fairly decent job of that.  The SOX has a relatively short history dating back to 1994, and in that time I couldn't find another instance where those three all closed at a 52-week low but the S&P 500 did not.

If we forget about the SOX for a moment, and substitute the S&P Banking Index for the BKX Index (they're very highly correlated anyway), then we can get a bit more history, dating back to 1989.  In that time, there have been two other occasions when both the NDX and S&P Banking Index hit a new low while the S&P 500 did not.

Those dates were 08/20/90 and 10/04/02.  We can't read much of anything into a sample size of two, but I thought it interesting that the S&P 500 continued to drop after both occurrences for precisely three trading days, losing -6.5% and -3.0% respectively.  After that, the S&P 500 jumped +4.7% and +8.3% over the next few sessions.  Again, it's hard to have a lot of confidence in just two instances, but with all the unprecedented developments we've seen we have to take what we can get.

The market's behavior heading into the past couple of days was very poor.  We should have been able to rebound after the double-whammy down days last week, then we undercut the 890ish support area on the S&P.  The immediate focus is painfully obvious - the October low that's just a few points below where we closed yesterday, and have revisited during overnight trading.

This is an awfully scripted place to expect a bounce, much less a major bottom, so it seems unlikely that we will put in THE low right at these levels.  More likely is a complete undercut that just keeps on going, or at least some kind of "fake" breakdown - a move under the lows that washes out sell stop orders resting just underneath, then a move back over the lows.  The latter scenario should at least give us a short-term snapback.

I don't think sentiment and breadth extremes mean a whole lot at the moment.  The main driver for the short-term is likely going to be the technical levels that everyone - and I do mean everyone - is watching.  Those are (roughly) S&P 845, NDX 1150, DJIA 8000 and Russell 2000 440.  The best risk/reward attempt for a trade would probably occur on a break of those levels that spikes us lower, then a move back above.  That should usher in enough relief to trigger a short-term bounce.  I've become less convinced that it can turn into something more than just a trade.