Even as the short term firms up, dark portends persist. Today, we review the interim positives – and longer term negatives – as they apply to US equity markets.

The positives are mostly obvious: The line in the sand was drawn on Friday’s low. I expect that to be a very significant number going forward. Prior to Friday, markets struggled to make any forward progress. We saw 6 consecutive down days for the Nasdaq, (8 of 11 red days); the SPX was hardly better, with 6 of 8 days down. Are Buyers running low on fuel, or are participants simply losing interest?

The bounce off of that Friday low has some interesting short term positive attributes. The sharp decline in the put/call ratio, and an increase in the Bearish advisors to over 31% are two signs that too much bearishness had permeated the crowd. Contrarians know these indicators reveal when a sell off creates sentiment that is too negative. That sets up conditions for a needed relief rally – which began Friday.

Further, the rally in US Bonds on the weak retail sales data lend some support to a market rumor circulating that the Fed was ONE and DONE. This helped send the S&P500 to new highs, levels not seen since March 2001. Index highs tend to feed upon themselves. We note also that leadership, which has been sorely lacking in this market, has also appeared: The financials rallied strongly on the back of Goldman Sachs blowout earnings (Lehman, too), with the Amex broker Dealer index up big versus the Bank index.

The negatives involve the usual end of cycle data: The increasingly small number of 52week highs, the weak market breadth, new 52 week lows rising even as markets rally. With fewer stocks participating in the upside, we become overly reliant on shorter term issues like Option expiry. Transports look extended while the Utility average has broken its 50 day moving average. The short interest ratio for the Nasdaq-100 – typically a source of fuel for rallies – is at its lowest level in 3 years. Also of note: next week begins the Q2 guidance/pre-announcement period. Macro issues – especially housing related – abound.

Given how tired the market looks, I suspect that this may be the last run towards our upside target numbers before the old gal gets put out to pasture. There is a very high probability of the indices breaking out to new highs. A failure, however, is potentially very negative. Look for the Dow to make a run at 11,350, the S&P500 to try to reach 1,335, (maybe even 1,350). The Nasdaq 100 could tag 1,795 theoretically. What the hell – let’s just call it 1,800.

I expect this lunge to reach new highs, then fail. We have discussed the many signals prior, while the market has ignored them. We now enter the period where it will become increasingly difficult to disregard these concerns. 

I see trouble on the way.

Category: Economy, Investing, Markets, Psychology, Technical Analysis, Trading

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

21 Responses to “Bad Moon Arising”

  1. TonytheTiger says:

    I agree, I still see some upside on the SP and Dow. 11,328 seems to be next resistance for the Dow…..oh what the hell! – let’s just call it 11,350.

    As far as when will the market crash?……only she know’s!

  2. Mr. Sammloer says:

    I’m watching the inflation proxies very closely…

  3. Abobtrader says:

    Because the rally has been fairly choppy to date, I believe the market is fairly healthy and am happy on the long side. Whether the optimistist or pessimists win in this particular cycle, there is no evading the fact that the optimists have the edge of a long-run upward drift in equities of over 5% a year.

  4. B says:

    Still pushing those predictions. lol. Isn’t it enough that you’ll likely win the BW survey? :) I don’t think you’ll get those numbers. In order for that to happen in the 1H, the Banking Index and S&P would have to eight and break three year trend lines they’ve been unable to violate many times before. Those lines usually aren’t broken this late in the cycle. And the broker/dealers have issued a technical sell as of last week on both the monthly and weekly. Alot of heavy money uses all three of those signals and program trading is also driven by those levels. We’ll just have to wait and see.

  5. Bob A says:

    aww come on… that’s just Satan whispering in your ear!

  6. vfoster says:

    i may have missed this earlier on this site, but have you guys checked out what is happening on the Saudi index? down 27% since 2/25 high. talking about correlations, chart the Saudi index over COMP, Dax, Nikkei and Gold… think BOJ ending QE had any affect?

  7. todd says:

    I got spooked today and closed my long trades. Options week is too weird for me anyway… I made some SWEET cash on CSX though!

    Last Friday was short covering into the weekend. I was looking for some real buying to begin this week, but nothing doing.

    10 year notes bounced back to 4.75 today… Nobody wanted to see that.

  8. B says:

    Rallies seldom start OE week unless the prices have dropped or risen well beyond the point where the big money has rolled their options bets. That is not so this week. But it was in January when we had a total cratering.

  9. angryinch says:

    For those of you interesting in voodoo factors, note that there will be a total solar eclipse on Wed Mar 29. This is one of the biggest ones we’ve had in years in terms of both duration and geographic area.

    Total solar eclipses aren’t that rare: there’s often one every year or two. But we haven’t had one in three years. In the past 50 years, that’s the longest stretch save for the eclipse on 3/18/88.

    The last three total solar eclipses marked reversals in the market. On 11/23/03, the market reversed off a brief downtrend and rocketed up through the end of ’03 and into ’04. That was the exact day of the eclipse.

    On 12/4/02, the market topped 2 days prior and started falling hard. It fell for nearly 3 months to the 3/03 lows.

    On 6/21/01, the market reversed a s/t countertrend rally on the exact day of the eclipse. After that, it continued lower and lower into 9/11.

    The last time we had a three-year separation b/w total solar eclipses was 3/18/88. The market topped on that exact day and the SPX fell 9% over the following 8 weeks.

    Two years later, on July 22 1990, there was another total solar eclipse. The market started breaking down two days prior and the SPX lost 20% by Oct.

    So it seems that these events have some predictive power, at least for the short-to-intermed term. If the market is screaming higher into 3/27-29, it should be a strong sell. And vice versa.

  10. Michael C. says:

    >>>So it seems that these events have some predictive power<<<

    Why is that?

  11. Selective perception explains the eclipses:

    One eclipse occured a few days after a reversal (hardly prescient) and another eclipse marked the day of reversal. Somehow, we manage to ignore all the other 30 eclipses that occured over the past half century that DID NOT occur on a reversal day.

    Hmmmmm. Its doesnt sound all that predictive . . .

    Never confuse correlation with causation.

  12. Michael C. says:

    >>>Never confuse correlation with causation.<<<

    Exactly right. Unless there is a reason or cause, it’s dangerous to attribute predictive power to something.

    The old “it just works until it doesn’t” would give unimaginable powers to my magic 8 ball. At least for a few minutes.

  13. pete Preissle says:

    Barry:

    Why the disconnect between the Dow and the SPX?

    Off yesterday’s close, Dow 11350 is less than a 2% ramp; SPX 1350 is a tad over 4%.

    In Cult of the Bear III you had SPX 1350 but Dow 11800 from your BW prediction.

    Just curious. Thanks.

  14. angryinch says:

    The last Saros total solar eclipse was on 3/18/88. The one on 3/29/06 is only the second one in over 50 years. The last one exactly coincided with an immediate 9% decline in the SPX. The last three non-Saros TSE’s also coincided with immediate change of direction in the market.

    I didn’t say that TSE’s cause markets to change direction. I simply pointed out the curious coincidence. Some folks—obviously not clever market mavens like yourselves—find this stuff interesting and possibly relevant. And given the heightened emotion of the current period, it might be worth paying attention to. Or not.

    I guess we’ll all find out how relevant this is come the last week of March.

  15. B says:

    Bradley Siderograph………….Lunar Lunacy still used by many including the well respected Jerry Favors. Now, the freaky thing is it actually has a fair amount of historical accuracy. It’s almost too accurate to discount. lol. Seriously. It’s not Elliott Wave or other witchcraft that is “curve fitted” to historical data. It predicts. 2006′s prediction is out and on the link below. Btw, anyone notice the VIX was up 6% today with the market rocking to highs?

    2006 Prediction
    http://www.amanita.at/e/faq/e-bradley.htm

    More Explanation and Historical Accuracy
    http://www.fibonaccitrader.com/HELP40/INDICATORS/bradley/default.htm

  16. Michael C. says:

    I believe any good old math & statistical data would disprove this astrological mumbo jumbo and it would fall to the side of “not statistically significant.”

  17. Leisa says:

    Heck, forget all the prediction stuff….Barry you are getting to be almost movie-starrish! Is this increased media exposure part of your new “big thing”? Anyway, it is terrific to see you on Kudlow. Even though you have curmudgeonly views on the market, you dress tastefully. If you can’t have a popular view, at least you’ve got great style! I always enjoy the panels on Kudlow–sometimes (and I can say this about myself as well) he needs to let his guests finish their sentences without his going into “I love capitalism, free markets stuff”. Given that I have leftist leanings, it sticks in my craw a bit.

  18. emdgmd says:

    let us know when you’re getting short

  19. Mike says:

    I’m so bored waiting for this crash.

  20. Mark says:

    Mr. Ritholtz-

    This letter is to remind you of the Agreement in place between you, in your capacity as President of Ritholtz Fashion Group, Inc., and my client “The Sweater” Marketing Group LLC. The Agreement calls for no less than four (4) appearances in the period February- April 2006 wherein The Sweater is worn by you in national media settings such as the one mentioned above, for product placement purposes. Your failure to execute your duties under the Agreement may seriously harm my client’s currrent marketing efforts, namely, the Spring roll-out of The Big Picture menswear line and hence the mutual profitability envisioned by the same. We trust that this matter will receive your prompt attention.

    Very respectfully,

    Mr. Richard Head, Esq.
    Attorney for “The Sweater” Marketing Group LLC

  21. Drew Yallop says:

    I thought a drop in VIX was a bearish indicator, i.e. investor complacency is a contrarian signal?