A Short Term Bottom?

I am not sure what all the excitement is about. Maybe it is the fact that so many investors were positioned a little too bullishly, and with the S&P Depository Receipts (symbol: SPY) down 2.45% for the day on above average volume, it is too much for them to bear - no pun intended! After 6 months of almost no pain for the bulls, I guess a little scratch must feel a like mortal wound.

But the facts are this: since the bull run began in March, 2009 there have been a total of 7 days where the SPY closed 2.45% or lower than the previous day's close. These 7 days are shown in figure 1 (with gray vertical bars), a daily chart of the SPY. A one day rate of change indicator is shown in the lower panel.

Figure 1. SPY/ daily

Each one day sell off was a buying opportunity, so I am not so sure what all the angst is about. Yes, everyone is all in, and one wonders who is left to buy, but the fact is this has been a good buying opportunity the previous 7 times. Can we roll for number 8?

Now all this is written ahead of Friday's employment report, and the market could be up 1.5% pre -open or down the same depending upon "the number". I won't even conjecture what a good number will be; usually what is bad for Main Street (i.e, loss of jobs) is good for Wall Street (i.e, Fed easing). But the Fed can't ease anymore, and after a 50% plus move in the markets, maybe we need to see some real numbers put up on the scoreboard. So a bad number (i.e., loss of jobs) could be bad. Who knows?

In any case, a down open makes the buy more compelling (in my opinion); a big up open less so.

One other factor worth noting. Thursday's price bar on the SPY was a wide range price bar. This means the value from high to low was big, and this difference (between high and low) was statistically significant. Proprietary research shows the following: when such wide range bars occur above the 200 day moving average, higher prices are seen about 80% of the time over the next 5 to 7 trading days.

This is a short term trade set up that you may consider depending upon tomorrow's open. Pick a stop loss point. Control your risk. Set a sell point - like at the 20 day simple moving average or 3% above your entry price. Don't get greedy. This is nothing more than a short term trade.

Two other considerations. One, based upon the McClellan Oscillator of advances and declines, the market is oversold. Figure 2 shows the oscillator below a daily chart of the SPY. Oversold areas are identified with ovals.

Figure 2. SPY/ McClellan Oscillator

Two, the yield on the 10 year Treasury bond (symbol: $TNX.X) has been falling, and I believe that it was good insight on my part to identify the divergence that has been occurring in Treasury yields and in the stock market. See "Long Term Treasury Yields: Someone Is Going To Be Wrong" which was written on August 26. Three points were highlighted in the article:

1) I identified an intermediate term top in Treasury yields.

2) I noted the divergence between yields on the 10 year Treasury bond and equities. Why were yields heading lower (which is a sign of economic weakness) and equities heading higher (which is a sign of economic strength)?

3) I linked the rollover in Treasury yields in 2002 to the rollover of equities that lead to a 25% plunge in the S&P500, and I suggested the possibility that the current weakness in Treasury yields could lead to the same result for equities.

Enough patting myself on the back already as the point can be seen in figure 3, a daily chart of the yield on the 10 year Treasury bond (symbol: $TNX.X). Yields are approaching the 200 day moving average. I still believe we will see lower yields over time - not in a secular, long term way but over the next couple of months - but, it would not surprise me to see yields on the 10 year Treasury bounce at this "key" level for at least a few days. Like 2002, yields appear to be leading stocks lower as economic reality starts to set in. A bounce at the 200 day moving average may be enough to bring in the equity buyers.

Figure 3. $TNX.X/ daily

Now just hope - I hate that word - for a down open!