Newsletter_042009

Conversation on Mr. Market

I told you so! Actually I didn't but I would have, for sure. As I type this, the stock market is down about 3% from the recent highs. What's interesting is that it is the US markets following the European markets into losses. Is there something they know that investors in the US don't? All this recent talk of green shoots belies the fact that they are growing in a massive pool of toxic waste! So much for the nascent recovery.

For the short term (couple of weeks timeframe) the markets seem to be sorely in need of a breather after the massive 30% run up from early March lows. Moreover, many indicators I have been following tell me that we are severely overbought (CBOE put/call ratio, % stocks above 50 DMA's), and this buying has been done not by longer term investors but by speculators/traders who will dump their positions and even go short if that is what will make them money. As for whether this is the time to short the market, here is my view: please don't! I know it's an adrenalin rush to time the market perfectly and make those couple of hundreds but guess what comes next...hubris, which leads to further losses along the way! I say this from years of trading experience (yes, it has been that long). Rather, exercise patience. This is a race for the long run so at most I'd say sell some longs and hedge others if that is what you want to do.

Critical levels (I will quote these on the S&P 500 since I consider that to be an appropriate index to monitor the broader market)
Below 803 -> Don't just walk, run!
Below 839 -> trouble
Above 856 -> strength
Above 873 -> Man this market has legs

---

Chart of the week: $SPXA50R

As mentioned earlier, I see the market as heavily overbought. One trustworthy indicator is the number of S&P500 stocks trading above their own 50 day moving average ($SPXA50R). When this indicator goes above 80, alarm bells start ringing in my head (similarly, below 20 sets off a different set of alarm bells). As of Friday, this indicator was at 89.6!

For those with a keener eye (hopefully all of you), note the chart below, of $SPXA200R, the number of stocks trading above their 200DMA. This is still at a measly 25.8 meaning that on the shorter term (50 days), although we are very overbought, there is still no "intermediate term" conviction in this advance.