Stock Market Averages Put In A Key Short-Term Reversal, On Stronger Volume; How Long Will This Bounce Last?

March 14, 2007

It was a wild ride this Wednesday as stocks started the day off where they left off yesterday. On the back of Labor Dept. data showing the import price index rise .2% and the Commerce Dept. showing 4Q account deficits narrowing, stocks kept the pace of yesterday’s losses early. But after the markets made new lows for the year, breaking past the March 5th lows, stock market indexes quickly reversed and rose into the final bell, closing at or near their HOD.

When the wild day was over, the Nasdaq reversed from a .8% loss to close higher by .9%, the SP 600 finished .8% higher, the SP 500 gained .7%, the DJIA rose .5%, and the SP 400 and NYSE rallied .4%. Leaders managed to keep pace with the broad market as the IBD 100 and IBD 85-85 both rallied .7%. That is better than lagging.

Volume was a tad higher by about 5% on both indexes. That would appear to be positive on such a reversal day but there is a key number that should be paid attention to. The run-rate on volume while the market was selling off was about 10-15% higher on the NYSE and the Nasdaq. After the reversal off the intraday lows, volume died down, and as mentioned above only finished 3-5% higher. That shows that today’s selling was more intense than today’s buying. That low volume on the rally, along with the fact that the price gains didn’t even come close to covering the losses from the previous day should continue to leave investors agnostic on this market. For a real bottom, normally volume to the upside explodes after low dull selling.

More key statistics that make me believe this wasn’t a real bottom include the fact that breadth, on such a strong up day, was not more positive on the Nassy and NYSE. Advancers beat decliners on the NYSE by only an 8-to-7 margin. On the Nasdaq it was 10-to-7 positive. A bit better, but considering the gains after the losses, not good. The other statistic that was quite telling was the new highs to new lows. There were 63 new highs (17 of those were closed-end funds) to 268 new lows. I don’t have the statistics anymore on the key lows since 1996 but I am sure the amount of new highs to new lows were no where this far off at key important large-rally producing bottoms. If this was a bottom today (which I do not think it is), those statistics would be much closer as new leaders would have worked there way to the top by now. There are no new leaders.

However, it would not surprise me at all anymore if the dead-cat bounce does not continue for a couple of more weeks. The put/call ratio after spiking down to .66 is back up to 1.47. That is amazing! This indicates there is too much fear out there and that more people are betting on the market going lower than moving higher. Most of the time this crowd is wrong, so this is something we have to watch. The other new finding today was from the Investors Intelligence survey. That came out with bulls falling to 45.5%. That is the lowest since September 1. Bears climbed to 28.9%. They have not crossed yet so looking for a bottom from these numbers is not there yet. However, with bulls dropping so much, it seems that less people “believe” in higher prices here. But if you look at the dumb money via a new CNBC poll, you will see that only 6%!!! think the stock market will be lower a year from now. This could help keep the markets in a sideways holding pattern for a while as more people are convinced this is a real bottom. Remember, all of these surveys and indicators are all secondary to the price and volume action. To be honest, that is all that really matters.

Another area that caught my attention today was the fact that the leading industries today were, once again, all the old leaders/new laggards. Steel, Homebuilders, Finance, and Investment Banks were the winners today. Too bad they have been real losers recently and one day of gains does not a new trend make for these ugly stocks. Until new stocks climb the ranks of leadership, I can not be convinced this is a bottom. It doesn’t feel or look like a real bottom. Especially with laggards leading.

I guess I should not have been surprised by the rally today (trust me, I am not), considering that it was clearly obvious that after such a failure yesterday that there “had” to be more selling. Those kind of thoughts are borderline evil for my accounts. However, my overall thesis of this being a dead-cat bounce remains and my shorts are still on. I just have to remind myself that every time I am sure that more selling has to follow-through immediately, I need to step back and consider a bounce possibility. Thank you Mr. Market for humbling me, once again. I am sure you will do that again soon. The obvious play is not always the obvious play. Sometimes the obvious play, for me, takes a little while to work itself out.

Could this be the real bottom? Yes, but I truly doubt it. If you will please read my post on Tuesday of the first sell-off and yesterday’s post, you will see all the reasons why I feel this rally will not hold and why we have topped. But, remember, my opinions are just as good as everyone else, when it comes to the stock market. The market does not care or listen or follow my opinions or anyone else. What really matters is the price and volume of the market. Since we undercut the lows on the DJIA yesterday, undercut the lows of the Nassy today, and had a clear distribution day yesterday, the rally attempt from March 5 is over.

However, the fact that we finished up today on an increase in volume now makes this rally day attempt number one. Remember, we can have no distribution days and we can not undercut today’s lows. If we do not do that, we will be looking for a 1.7% move on higher volume on day four to seven (or 10) to signal a follow-through day. This tells us that it is safe to start buying longs again. However, it doesn’t guarantee a bottom. And since we were not even up 1% today and volume was barely above yesterday’s total I have a tough time believing that this will hold.

So then how long will this rally last? I don’t know that and neither does anyone else. If you think they do, you are fooling yourself. It is so ugly out there and I have so many ugly charts that I don’t think it can last long. But if pretty charts start showing up left and right, trust me, I will be the first one to turn myself around and start going long those pretty charts. Just like I do at every other market bottom. Trust me, I have no solid opinions in the market. My opinion will change one day to the next if the market tells me to do so. So far it is still telling me to be calm and stay on the sidelines. It is also telling me it is safe to throw out some test shorts. If they don’t work, no problem. Simply cut your losses and wait for the market to give you another signal.

If you have taken my advice and been daytrading the solar stocks, you have been doing very well, despite the selling. The sad thing today, for me, was ASTI. I flagged that stock two days ago as a long. I passed on it because BOP fell while the stock rose. If BOP would have stayed max green, there is no doubt, I would have gone long this stock. But I passed and missed an overnight 89% gain. I hate looking at it (not really because it is so beautiful) knowing that I passed it on 3/12. However, the stocks recent action is much more wild than what it previously was and BOP did diverge lower so this stock could have just as easily have become a DTPI. Did you see that stock? From a pretty chart to a destroyed chart overnight. Three months of gains gone in one day. So because I followed my rules and did not take a position in a risky market, I have to be ok with that, even though the stock was up 89%.

I am going to cover 25% of all my shorts that did not close red today. It appears it is not the right time. Remember, if this is a real top, the leaders will have their real breakdowns and biggest price plunges FIVE TO SEVEN MONTHS AFTER they top. It still doesn’t feel like it is a right time to be too bearish here but nor does it feel right to be on the sidelines and not testing the short waters. However, for now, I am keeping my shorts small and on a tight leash.

Stock Market Averages Put In A Key Short-Term Reversal, On Stronger Volume; How Long Will This Bounce Last?

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