Yesterday saw a short term selling climax on strong volume as market participants disgorged their wishful thinking over the progress of the US economy, political system and corporate profits.

Markets have been down for 8 straight days, the longest such run since October 2008, according to the WSJ. That run, in the midst of the TARP failure and banking crisis, led to a healthy oversold bounce (7800-9200).

However, those were different circumstances than now. It was 12 months after an all time peak had been hit, and 9 months into a recession. Markets in October 2008 were very deeply oversold, and so a bounce for a month and a half was not a huge surprise. Following the bounce, they then resumed their historic collapse.

Lacking the sort of conditions that led to that October 2008 rally, I suspect this will be a brief bottom, followed by a resumption of selling. This is only my suspicion (My managed accounts are running about 50% cash and bonds, the rest reasonably valued ETFs and funds). Every investor’s favorite months — September and October — present the opportunity for the sorts of convulsions that make market for good historical reading.

We also see the Transports rolling over, breaking 5000 for the first time since March. The 200 day SMA is at 4400, and that is a fair target. Dow Theorists will tell you that Trannies leading Industrials down never a good sign for the overall market.

Now for the good news: The drop yesterday has generated significant oversold readings. Dick Arms noted that his eponymously named Index suggests some fear is coming into trading. That — and the S&P approaching the 1250 level (prior support) is likely to provide a temporary bounce.

I would suggest to nimble traders that they closely watch the quality of any rally after the slide of the past 8 days. From that, you must decide whether to jump back into the fray, or use the opportunity to lighten up your equity exposure.

You can guess what I am going to be doing . . .

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click for larger chart

Chart via Dow Jones Market Data Center

Category: Markets, 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.

20 Responses to “Sell the Bounce”

  1. bda_guy says:

    I would have to agree with the assessment here. Lots of weakness everywhere that I look. It would require a notable rise before the trend indicators that I have flip to bullish. Even the stalwarts that have resisted the downward pressure of recent days (GOOG, AMZN, AAPL, WFM) have now follow below levels that I’ve identified as likely bearish turning points.

  2. Market Panic says:

    S&P-500 Weekly H&S Broken Neckline

    http://chart.ly/5jbj7f6

  3. theexpertisin says:

    Europe and the U.S. appear to be experiencing an interesting circumstance. As the economies fold, regulators keep pouring on new rules, demands and expectations that cripple both business formation and business expansion. In fact, they lead to contraction.

    Working out of the economic mess is problematic unless this is rectified.

    As Mr. Ritholtz indicates, investors should lighten up equities and play defense. The question is, where?
    Swiss Francs, Gold/Silver, and natural resource-heavy economies in reasonable shape such as Canada may be enticing.

  4. Ted Kavadas says:

    The stock market looks very unsettled here. It appears to be continually “bouncing” off of technical support levels, just to fall through them eventually. We’ve seen this at various levels, most notably the 200dma; this is illustrated in a chart I posted yesterday, found here:

    http://economicgreenfield.blogspot.com/2011/08/stock-market-various-technical-analysis.html

  5. dead hobo says:

    Good advice.

    As mentioned before, I got out when the S&P looked like dead money in May and made a few bucks from QE2 asset inflation. I experimented with a bond fund to make money on the flight to safety trade and would happily still be there today if I hadn’t decided to cash out with OK profits on Friday, rather than risk it all for what was behind door #1.

    I learned several things and confirmed another.

    Confirmed: any profit is a good profit. The OK profit I made was better than even a tiny loss. Anyone who barfs about not wanting to leave money on the table is either a risk junkie, someone who can’t take profits and, thus, always eventually loses, is lying, or just trying to impress you and is otherwise clueless.

    Learned: This was my first flight to safety trade and I learned by doing. I made three buys, all at terrible entry points. From this, I learned what I did wrong and am, hopefully, waiting for a better entry point. I discovered 30Y rates don’t go in a straight line. Every big move up or down appears to be followed by a 50% retracement. At this moment, I am looking for a re-entry point of 30Y 4.15%, more or less. I believe the 30Y rate is eventually going to sink to the bottom and my plan is to get back on the money train and scoop up more .. but not until a better entry point appears. My bond fund has a minimum 30 day hold period, but no transaction costs and guaranteed end of day prices. Thus, I have to think like a I’m steering a cargo ship at sea.

  6. mark says:

    “That — and the S&P approaching the 1250 level (prior support) is likely to provide a temporary bounce.”

    And if 1250 doesn’t hold what will you be doing?

  7. DC says:

    This just slays me (from the LA Times):

    “Investors are looking past the budget situation and realizing this is an austerity plan,” said Jack Ablin, chief investment officer at Harris Private Bank in Chicago. “We have an economy that’s struggling to stay afloat and we don’t have the ammunition to keep prodding it forward.”

    Right. The debt limit debate lasted over a month. Tax hikes were taken off the table weeks ago, leaving the debate centered on the degree to which federal spending would diminish. The ratings agencies rattled sabres to indicate that $2 trillion was insufficient and $4 trillion was required.

    But only now, ex post facto, do “investors realize this is an austerity plan.” Such “investors” are either simpletons or liars, or both.

    I’m sick of the fevered ravings of “investors” who can’t read a newspaper, or whose teabaggery left them blinded by the fear of a personal tax increase. Will lighten up somewhat with a good bounce but some old-timers like Biggs and Birinyi are buyers here. Hope it’s typical overreaction and hysteria, fear it’s a failing alternator at 3am in the Arizona desert.

  8. mark says:

    And by the way BR, your favorite economist has new piece out. Here’s the money quote:

    “But the real problem is that the global economy is badly overleveraged, and there is no quick escape without a scheme to transfer wealth from creditors to debtors, either through defaults, financial repression, or inflation.”

    The Second Great Contraction
    Kenneth Rogoff
    http://www.project-syndicate.org/commentary/rogoff83/English

  9. Petey Wheatstraw says:

    theexpertisin Says:

    “. . . regulators keep pouring on new rules, demands and expectations that cripple both business formation and business expansion.”

    What regulators? What kind of rules, demands and expectations?

    Seems to me, we’ve been the victims of serial economyjackings at the hands of corporate/big business interests (specifically: If you don’t give us what we want, we’ll crash this bitch into a telephone pole). The “regulators” are nowhere to be found.

  10. theexpertisin says:

    Petey — I’ll tell you, since you asked.

    In my county alone circa 2011.

    1370 jobs lost: EPA kills a wooden pier to a river with deep water port access because the SHADE may cause an erosion of swamplife. Company stays in Germany.

    810 jobs lost: EPA kills a stone crushing plant. Dust exceeds limits (parts per billion). Company remains in Mexico.

    208 jobs lost: Army Corps of Engineers disses dredging, effectivel landlocking mom and pop fishing vessels, due to possible harm to sea turtles (nests) and native swamp species.

    7600 jobs lost: Congressman lines up with environmental activists to indefinitely delay a state of the art deepwater container port because of concern over loss of swamp environment and potential pollution. The location rests between a nuclear plant and the armed forces’ largest ammunition and supply port on the eastern seaboard.

    There’s more, but this is illustrative enough.

    How’s your county doing?

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  12. franklin411 says:

    So much pessimism. I’ve used all the previous bouts of extreme pessimism to add to my holdings, and done very well since early 2009.

    No more. Austerity equals Depression. In 1929-1930, the US Gov’t launched an immediate austerity program in an attempt to deal with a severe recession, turning it into the Great Depression. Then in 1933, Roosevelt and the Democrats inaugurated a massive stimulus program that almost immediately doubled GDP and halved unemployment. Then in 1937, the return of austerity produced a new recession, which was ended only by the ginormous stimulus program called WWII.

    In 2009, the US Gov’t launched an immediate, if mediocre, stimulus program in an attempt to deal with a severe recession, turning it into a tepid recovery. Then in 2011, both Democrats and Republicans surrendered to homegrown terrorists who make Al Qaeda look like pikers. Mediocre stimulus was replaced with extreme austerity, making recovery an absolute impossibility, and raising the risk of a new Great Depression. Will we be lucky enough to have an excuse for a ginormous stimulus program (maybe war with China)? Probably not.

    I sold all of my oil and 50% of all other positions, putting me 50% in cash. This is very extreme for me, since I’m in my early 30s and this is my retirement IRA. My normal bias is to add to what I have even when the market is in decline, because short term corrections don’t really mean much to a fund I won’t tap for 40 years.

    This time it’s different. We have terrorists in charge of our government, and there is no negotiating with Al Qaeda Republicans.

  13. dead hobo says:

    Then again, copper just dipped a bit and, just perhaps, the rout has begun. Just perhaps, there will be no bounce for equities and, maybe, not even for rates. However, the only time 30Y rates didn’t retrace 50% was in late 2008 when Lehman collapsed. That Europe looks pretty nasty. Fortunately, I am in a position to do an obnoxious happy dance by getting out of equities in May and goosing things a bit from the flight to safety. What we need now is a good short squeeze.

    You know, if there’s no QE3, then the S&P will probably fall to mid 3 digits due to the fact that robo traders are most of the liquidity and margin calls will remove a lot of the existing real cash the HFT spooks like to bat around. Interesting times await. Which hedge fund will bust first due to an idiotic investment in a goofy sure thing?

  14. Petey Wheatstraw says:

    theexpertisin Says:

    How’s your county doing?
    ______

    My county’s income is derived primarily from proximity to the Federal government.

    As for the environment, locally, the Potomac river runs through here, and it’s toxic. Our air quality is some of the worst in the nation, and the nearby Chesapeake Bay — arguably the greatest estuary fishery in the world 50- to 60-years ago — is almost dead due to lax regulation of fishing, shoreline development and pollution. Menhaden and horseshoe crabs (both important species in the food chain, and as bellwethers of environmental health), are in serious decline, yet the industries that profit from their wholesale plunder manage to keep reasonable regulation at bay.

    The Army Corps of Engineers has fucked up most of our major waterways with reckless dredging and water control projects. I’m glad they’re saying no in your area. If you don’t protect your natural resources, you lose them.

    We already have underutilized deep water container ports from NY to Hampton Roads, VA (including NJ, DE, MD, and PA).

    Seems like you have a grudge against environmental regulations.

    BTW: Why are Germany and Mexico vying for these projects?

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  17. theexpertisin says:

    Petey:

    You say, “my county’s income is derived primarily from proximity to the Federal government.”

    Thank you for enhancing my point.

    I rest my case.

  18. Lukey says:

    So deficit spending is NOT “stimulus?”

    This familiar source disagrees:
    http://www.ritholtz.com/blog/2011/04/david-levy-deficit-spending-is-helping-not-hurting-the-economy/

    ~~~

    BR: Helps the stock market; short term stimulus of economy — longer term issues in terms of interest rates

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