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Trend table status

Trend

SP-500

R2000

COMPX

Primary

Up 7/31/20

Up 1/29/21

Up 5/29/20

Intermediate

Up 10/2/20

Up 8/21/20

? 3/26/21

Sub-Intermediate

Up 3/29/21

?- 4/5/21

? 4/1/21

Short term

Up 4/1/21

Up 4/5/21

Up 4/1/21


Don Worden of Worden Brothers (makers of Telechart software) used to keep a trend table before his health issues got in the way. I always found it useful. Mine is slightly different. Hopefully helpful. Up? or Dn? means loss of momentum. ? by itself means trend is neutral. ?+ or ?- means trend is neutral with bias of up(+) or down (-)

Friday, October 5, 2012

Should we be worried about October?

The Wednesday USA Today money section had an article titled "October's known for spooky stuff on Wall St." and sub titled "But this year may bring more treats than tricks".  The article discusses past crashes, but says it could not happen this time.  They even have an interview with Harry Dent that is predicting the DOW will fall to 6000 or lower in the coming crash.  Mr. Dent says the crash won't start this month.  He even was quoted as predicting new all time highs this year.  This is pretty much the same thing I see and hear everywhere.  In the fourteen years I have been studying the markets, this is the most agreed upon thing I have ever seen.  There is no way the stock market can go down this month.  I guess what everybody needs to do is put every penny they have in the stock market today.  It is a sure thing!

I am on record as saying I think we are making a major top.  I am still looking for some sign the final high is in.  I was not really expecting any big decline until after the election.  However, the one thing that has been true in the markets many times is that big declines happen when the fewest people expect them.  I think this is the fewest people I have ever seen.

Lets look at some interesting charts.  I have shown this one before, but lets look at the put/call ratio again.


The put/call ratio is low, indicating there is not a lot of hedging going on.  That is confirmed by the low VIX values.  If the market gets to selling off, there could be significant long liquidation by those that aren't hedged.

Here is an interesting chart.


Source Schaeffer's Research

The last time the rolling 1 year return got to this high of a percentage, the market sold off.  There is a table in that article with many historical instances where the return was greater then 30% and what happened after.  Sometimes the market sold off and sometimes it didn't.  It is likely there are a lot of people sitting on good profits.  If the market does sell off, there could be some sellers come into the  market to protect profits.

This one is also interesting.

Source: ZeroHedge

We have the highest net long open interest since the 2009 low.  We have sold off from levels similar to this in the past.  I have shown a number of pieces of sentiment data indicating lots of bullishness.  This is just one more data point.  If the market heads down enough to cause some futures long liquidation, it could add fuel to the fire.

The market is clearly loaded up with longs, and many of them are unhedged.  The prevailing theory by an extreme number of market pundits is that the market cannot possibly go down. The market is not really going to go down significantly without a catalyst.  The question then becomes is there something that could cause a problem.  There are plenty of well known issues in the world today, but most seem unlikely to be a problem now.  The only thing I would say that could derail the market is earnings.  Lets look at some charts.

Source: ZeroHedge

It looks like corporate earnings are being affected by the slowing economy in a much bigger way then CEOs were expecting.  The negative announcement ratio is the highest it has been since the last recession.  Analysts have been busy lowering their estimates for the 3rd quarter.  They probably will get them low enough to beat.  They usually do.  The problem may be the 4rth quarter.

Source

Estimates are already expected to be negative for the third quarter, but look at those estimates going forward.  Analysts are expecting a huge turn around for the 4th quarter and beyond.  Most of the economic data is still getting worse.  CEO expectations are clearly getting lowered (see CEOs lowering expectations).  I think the biggest risk to the market is if companies lower their future earnings guidance when they announce their earnings for the 3rd quarter.  I don't know if that is going to happen.  If it does happen, will the market actually react to it? 

Here is what I do know.  In all the years I have been trading, I have never seen such complacency.  Even major bears don't think the market is going to go down in the short term.  That is an environment where the market can surprise people.  I suggest paying close attention to how the market reacts when earnings start coming out.  When nobody is worried is usually when people should be. 

Bob


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The information in this blog is provided for educational purposes only and is not to be construed as investment advice.