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Friday, December 12, 2014

Daily update 12/12

People were more interested in selling the gap down then they were the other day.  Here is the chart.

Yesterday's dip buyers got hit hard over the head overnight.  While there were a few this morning to come out and try again they were overrun with sellers.  The breadth was 78% negative.  Once again the selling wsa broad based.  New highs were 57 and new lows were 363.  First time under 100 new highs in a while.  I guess the buying enthusiasm waned with a second big gap down.  SPX came within 2 points of the 50 SMA.  Over the last two years only twice has it bounced off the 50 and went to new highs.  It has not done it at all this year.  The 100 SMA is a much better bounce target and that is only a bit further down (1987).  Lets take a look at the futures chart.

The futures are getting close to the 200 SMA which is another good bounce target.  That is about another 7 points down.  The -DI line is still above the ADX line so still no sign of a bottom yet.  Today's late day meltdown would probably need to be tested before any significant rally could take hold.  At the moment the bears are clearly in control.

The VIX ended the week well above its 200 SMA.  When it did that in Oct. it kept going higher early the next week before reversing as the market bottomed.  It then went into meltdown mode as the market rocketed up.  That was a straight up move that created no support areas along the way.  It was also an unprecedented streak above the 5 DMA.  All the while huge market internal divergences persisted.  I have no idea how this will play out, but it is not hard to imagine retracing that entire rally really.  I think it was just a matter of a lot of people had been waiting for a correction and when it came they piled in.  There was no real fundamental basis for it with valuations this high.  I am sure some people would beg to differ, but that is my opinion.  You are welcome to your own.

While we are oversold enough a bounce could happen at any time.  I think we need to be careful about extrapolating any bounce into a lasting rally.  With the VIX spiking up we need clear signs a bottom is in.  Today turned the short term trend of R2000 down to join the others.  The TRIN was 1.49 and the volume while elevated was not especially high.  This did not really have the look of a capitulation day.  There could be more down to come.

They paraded a lot of people on CNBC today telling us all not to worry about falling oil prices.  It is absolutely a positive for stocks not related to energy.  I wonder how many of those people were having their traders back at the office selling with both fists.  Oil and SPX over the long history are much more tightly correlated then most people think.  Rapid oil price drops are not unequivocally bullish for stocks.  The opposite is also true they are not unequivocally bearish either.  Each situation is unique and must be analyzed on its own.  The last three years have seen cash flow negative companies borrowing hundreds of billions of dollars to drill.  There is no way in the world there is not a high risk of a lot of defaults if the oil price stays low for a longer period of time.  New financing will be cut off and as mentioned most of these companies were already cash flow negative at higher oil prices.  While not a certainty I have to say there is potential for this situation to be worse then the mortgage mess.  The search for yield caused large amounts of money to be loaned out to energy plays with the idea that oil would be somewhere around $100.  I don't think that is going to happen for a while now.  I think it wise to monitor this situation.

The market and sector status pages have been updated.  Have a great weekend all.



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