Why has the market failed to bounce (or bounce much, anyway) ?
My guess is that everyone is calling for a bounce.
Technicians, value players, macro-economic observers, traders have by and large been looking for a bounce (present company included). Me, Jim Cramer, Cody, Bob Carver, Dick Arms, BCA, John Roque, and many many others all asked for a bounce.
Hence, we didn’t get it.
A few people deserve credit for not guessing the bottom: in particular, Alan Farley and James Rev Shark DePore.
BCA ran this chart:
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A Technician friend sends this chart along:
Until we get more disbelief, there will likely be no bounce . . .
The Nasdaq-100 broke a year old trendline in Thursday’s wide range selloff. But it’s hard to believe the markets will follow through with a legitimate trend to the downside, considering all the fakeout games this year.
No prize for guessing who said this.
I think Paul Desmond would say that you can’t bounce because sellling pressure was at extreme high and buying pressure was very low and that hasn’t worked off it was so bad. It USED to bounce off technical conditions like this but now the general trend is downward. Why are you looking for the same result when conditions are different? It’s not that it WON’T bounce at some point (Turnaround Tuesday!) but what it TAKES to bounce is gonna be different. THe market is telling you that and you’re fighting it. JMHO.
WHAAAAAAAAAAAAAAAAAATTTTTTTTTTTTTTTT?????
Here is a sampling of Rev Shark’s posts from the last few days:
The best thing about today’s across-the-board pounding is that sentiment is now fully bearish – 5/11
Play some defense but don’t listen to the dire forecasts – 5/12
This washout could help us move higher in the future. -5/15
Sometimes bottom fishing isn’t so bad – 5/15
We fall further, and it’s a real washout. The upside is that this could get us to a tradeable bottom – 5/15
Negativity could lead to a setup – 5/17
The high inflation number is spreading doom and gloom that could leave us in a good spot – 5/17
This breakdown now offers a good time to aggressively buy some index plays – 5/17
Don’t fight this downside momentum, but we are down far enough to see some upside -5/17
Then, today, we got:
Hard to go long, and short candidates are way too extended. – 5/19/06
Too many are trapped in longs they want out of for this market to go straight back up – 5/19
Revs been wrong all the way down. And he’s contradicted himself quite a bit in the last week. Nice guy, smart trader, but consistently wrong through this whole thing.
Byno-
Sounds like he is another one of the “experts” who throw enough stuff out there that they can proudly point back to one or two statements that now jive and say “See? I told you so!”
it’s no coincidence that commodities and equities are falling apart together. for stocks to bounce they will need some sign that liquidity is not receding. flattening yield curve and stronger dollar (with declining stocks and commodities) are all signs of tighter money. we are now at the inflection point. the dollar weakness kicked off the selling last week by driving inflation premiums higher, thinking the Fed would be too dovish. this week the dollar ended up stronger on anticipation of tighter Fed which also drove selling in stocks. at this point stocks need a weaker dollar to help a rally but it could also drive bond yields back higher which would be restrictive for stocks.. this is the real conundrum.. damned if the dollar rallies/damned it the dollar falls.
we may have finally bottomed today but the resistance levels are still way above current prices.. we would need a massive rally on strong volume (which will be difficult if liquidity is receding) to get thru those levels. i’m watching gold. stocks won’t be able to rally without material and energy sectors.
Byno:
I stand corrected
-BR
No bounce, but a bottoming?
I bought back in at (spy) 126.25 which was just above the 40 wk. moving average. Today’s “bounce” occurred right above that moving average. If you look at the weekly chart, this week’s movement was miniscule and an overdue pullback.
http://stockcharts.com/gallery/?SPY
I thought today was a nice technical inside day for a bounce next week. The market rarely does what the masses expect. And people are either expecting 1) a small bounce with quick resumption to the downside, or else, 2) a larger bounce followed by a breakout to new highs.
What, will probably happen is that the market will confound both groups with a meandering bounce that looks like it has further potential and then just when people start getting secure in their optimism, probably around June – July, it reverses back down again (Aug-Sep), followed by one more recovery attempt (Nov-Dec), that closes out the year with a drop of around 7-10%.
Then, in 2007, the real carnage begins.
We are at the same level of oversold on negative volume that we were right after 9/11. That said, I look at the asset stocks and they are as extended as the technology market was in 2000. These dumbasses drove asset themes right off of the cliff. So, I’m not exactly excited about buying into a rally with anything other than trading money with the same leadership.
For us to have a meaningful rally that enthuses, we need technology to step up to bat. The market acts like it is signalling the beginning of the end for economic growth. If I had to bet, the economy is falling off of a cliff as we speak. Of course, guessing is just that. Looks like Cramer has adjusted his tune. It was about a month ago when he was saying metals and mining were going to the moon because of China. People blabbering about two days supply of copper on the LME. Yet they don’t even know what the normal supply on the LME is. Two days just sounds good. THE NORMAL SUPPLY IS TEN DAYS. That was when copper was thirty cents and it got to four bucks. Running out of iron ore and copper thanks to that genius Jim Jubak over at MSN. Christ. The psychology is that the higher these things move, the more smart people actually believe it to be so. And, it still might be so. Right along with my house value going up another 500% next year. IF IF IF this continues to play out over time, inflation is dead.
Everyone has been trying to predict the “snapback” rally. All week long, folks on blogs and financial sites have been trying to outguess each other on when it will occur. Whoever gets it right, gets braggin’ rights and can say “I TOLD YOU SO!”
Rev Shark seems to do well at his style of trading. He’s an IBD mo-mo guy who trades hot smallcaps on breakouts. That works great in a mo-mo environment such as we’ve had off and on from 2002-2006.
But when the worm turns, those breakouts become fakeouts. He seems to be of the permabull persuasion and assumes that every dip is a buying opp. That has generally been true since the markets have gone up over time.
But every so often we get periods that can last a few weeks, a few months or, in the case of 2000-2002, a few years, where the mo-mo has gone-gone.
From what I can gather, he rarely goes short because he considers it counter-trend. But there are some periods when going short IS going with the trend.
I don’t understand why so many fear or criticize short plays. They say it is risky. What’s risky about it? Why is it more risky than going long, especially if you are trading short term?
They say that, theoretically, a $20 stock can only drop to zero but can rise to infinity. That’s true. But who would short a stock and go away for six months and see what happened? For that matter, who would buy a stock and take a long sabbatical and not see what the stock is doing.
This long bull move off the 2003 lows has fooled a lot of folks, especially with some stocks/sectors making new all-time highs in the process. But take a look at most stocks in the market. They are well below their all-time highs and didn’t even come close while rallying over the past few years. Two-thirds of the Dow components are below (often 20-40%) their 1999-2000 highs. Yet until this decline, the Dow was only 1% away from its all-time highs.
Angryinch,
Good post. Just like the good Reverend successfully trades Mo-Mo stocks during bullish trends, why not trade (short) weak Mo-Mo stocks or weak ETFs during bearish trends?
You guys are an interesting bunch and I’ve enjoyed lurking here for a month or so, but now I’ll put my two cents in.
My own bias is that we have topped, whether there is a near term bounce in store or not, and are looking at some serious nosediving. In fact, I was surprised by the slide on Thursday, followed by Friday’s anemic buying. I would have thought that there would be a Thursday pause followed by a spike back up on Friday as the Happy, Happy, Joy, Joy crew got to work.
In the event, today I decided to dump the defensive sector ETFs I had just gotten into on Tuesday and put most of the proceeds into 90 day CDs, while adding to my index ETF puts with the rest. I have little interest in trying to time a real bounce and am more inclined towards tolerating a brief upturn and looking ahead to what I suspect will be a 10% drop over the next 2-3 months.
So that’s my story, but I have some questions for you guys:
1. Where was the Plunge Patrol the past week? The market should have started dropping two months ago but they prevented it, so is the sudden absence of govt manipulation a pointer to a change of policy?
2. Do you think that any major hedge funds crapped out over the past few days?
3. I don’t recall whether I saw it around here or elsewhere, but somebody commented that things felt like they were in 1972-73. I remember that pretty vividly altho I was still in undergraduate school then. I also remember the rest of the decade was one of stagflation. I think that’s where we are heading, but somebody tell me why I am wrong?
Thanks.
We may have a bounce but that is different from a tradeable rally. I define a tradeable rally as one that can last between 2-4 weeks. And I do not have a set up for a tradeable rally yet.
Shorting stocks is more risky because of the margin requirements. It takes a lot more capital to short a stock than it does to buy it, which means that a short squeeze works better than a long squeeze (which is sufficiently difficult that the concept doesn’t exist). Single stock futures fix this problem and make the market symmetric.
The amount of money you make is entirely determined by how often you are on the right side of price movements (short when prices drop and long when they go up) minus how often you are on the wrong side. The major index movements are about 52% up and 48% down, so going long is more profitable in the long run than going short. But if you can correctly predict the market direction 55% of the time, you will do better than buy and hold (even after commissions). I’ve done Monte-Carlo simulations and the only thing that matters is what % of the time you are right about the direction. Refusing to go short significantly reduces your profit potential. Buy and hold only captures about 4% of the theoretically ideal trading strategy returns. Only going long but still timing when you are in the market captures at most 52% in the long term.
Check out the 10-day average of the Put/Call ratio on
http://perfectlyuseless.typepad.com/perfectlyuseless/
It is screaming “Buy” as loudly as ever.