November 25th, 2008

A Selling Climax Behind Us?

OK, a 14% two-day move is worthy of some respect being the largest two day percentage gain since …. you put in a date …. but according to Floyd Norris of the NY Times, the first time since 1933. But, I’m sorry, I just don’t get it. The market moved up 14% over two days because it moved down 25% over the prior 12 days. It recovered less than 40% of the cascading decline from 1005 on November 4. Will it go back up to that level? Regrettably, I’m about as confused as you are.

I love to read comments on other blogs to get a sense of what the average investor is thinking:

  • “This market is great! We are almost back to 8500! I didn’t think I would be getting ready to reload the shorts again so soon.”
  • “I’m slightly long. I’m thinking 1110 – 1120 and possibly a little higher going into Jan. The shorts will get some pain on this one. I still think we could see 450-550 SP eventually. It will take a long time to get there though.”
  • “Wild swings on low volume. Continuing bad news. A tapped out Treasury. Perhaps a phantom Santa Claus rally. I’m staying long – in cash. Money can be made in this market. The question is what will your USD be worth now that we can all hear the whirring noises of the Feds printing press.”
  • “citi bailout was very decisive. big bears cannot risk it anymore. we are going up. there is a lot of skepticism about this rally including this blog, bloomberg, cnbc etc. i think it is a denial stage for bears. we were down 55% from the pick. this rally has some legs. i am 100% long. good luck (since last thursday.)”

Those are just a few examples and I’m sure I could have found many more had I continued looking. Yes, I hate the thought of letting a quick, very quick, 14% pass me by and, yes, I’m concerned that a huge relative strength advantage I have from remaining mostly on the sidelines is slipping through my fingers. But this market just isn’t ready to move headlong to the upside just yet. There’s just too much baggage to load on the train before it’s ready to move out of the station.

I turn again to Barry Ritholtz and his Big Picture blog who referenced a classic market technician, Richard Wyckoff. On doing some research, I found that he was a contemporary of Charles Dow of the Dow-Jones and Dow Theory fame. Both were searching for ways of avoiding in their future the same sort of financial and banking crises we’re seeing today … but it was back in 1907, exactly 100 years ago. What we’re struggling with is not dissimilar from the panics experienced before the launch of the Fed (created as a response to that crises).

It’s difficult distilling his extensive writings into a few sentence but it’s sufficient to say that he focused on market supply and demand, on trends and on volume in support of trends. Ritholtz referenced the following chart assembled by the San Francisco Technical Securities Assoc.:

See Big Picture for a description expaining the chart. Sure Wyckoff cobbled together his concepts nearly 100 years ago in a less technologically sophisticated era (he strongly advocated careful “tape reading” to get a feel of market direction and momentum). But as even Einstein said, “Everything should be made as simple as possible, but not simpler.” and “Any intelligent fool can make things bigger and more complex… It takes a touch of genius – and a lot of courage to move in the opposite direction.

For our purposes, it’s sufficient to point out that while we may have seen selling climas, we’re nowhere near having waded through all the transactions necessary to put in a base from which the next bull market can be launched (in MTI terms, we still have to wait for the moving averages to descend to the level of the Index itself in order to see a cross above them). Here’s a chart through yesterday’s close:

Subscribe below or click here to learn more about help for navigating turbulent markets.