Dr Faessel on the Market > "Oversold Conditions"

A MUST READ - from The Economist

The “Too big a fail count” - The sheer number of unsettled trades is rattling regulators.

       http://www.economist.com/node/18774844/print

Finally some good press on this!  

Stock Market now OVERSOLD

McClellan Oscillator @ minus207  

Bullish Market SentimentEvaporate

Major indexes approach 200-day moving averages

Let's start by remembering that USA GDP will come in at new all-time highs, as will profits in the S&P 500 (SPX). That said, a slowdown is underway; the depth of which is yet undetermined. Unpredictable mega natural disasters on top of skyrocketing Euro land debt that is coming home to roost in Greece and elsewhere, plus the worries about a China slowdown have had the effect of freezing stock market inflows of capital. All eyes will be on retail sales to see how deep and hard the slowing effect has had on consumers.

The USA middle class continues to get squeezed by higher food and energy prices and it appears that there is no way out. The CRB commodity index is up 65% from the 2009 lows in the face of near historic unemployment. Add into this cauldron of economic maladies; fresh new lower lows in the home housing market and a manufacturing slowdown to make matters worse. It's definitely chaotic out there to put it mildly.

After six straight weeks of tumbling lower on below average and low volume, (a retreat "in time" not seen in nine years) the stock market is hyper stretched on the downside. Considering the news flow, the 6.8% pullback, to date anyway, appears well contained. The McClellan Oscillator is "finally" officially quite oversold, but ideally not at really deep snapback levels. The daily stochastics are near the zero level, but the weekly picture opens the door for more downside. Bullish sentiment has nearly evaporated* and a fat cluster of high put / call volume ratios suggests a batch of latent buying in the brew somewhere soon.

We're approaching the 200 day moving averages and a drop to those levels would likely bring the McClellan to the necessary deep snapback levels that stick. While the S&P futures are up six points any takeout of Friday's lows and will likely send the market to reversal levels (and the TICK to deep minus 1400 (hopefully deeper) levels.

Perhaps a “Turnaround Tuesday” is setting up... looks like it...

Short term price resistance in the in the S&P 500 (SPX) is just above 1279. The 50-day moving average resistance in the S&P 500 (SPX) is at 1327.

Short-term support in the S&P 500 (SPX) is 1269.  Eight (8) -weeks ago Monday's low (S&P downgrade of our debt) and price support is at (SPX) 1249. The 200-day moving average support is 1253. The (SPX) closed at 1270.98.

Tracking the Bond Markets $ 91 Trillion –

Alert - The BARRON’s Confidence Index ** last week rose to 77.7  It was up a couple of ticks from last week’s posting of 77.5 a low not seen in over 9-months. Just over three-months ago it posted newcycle highs of 83.7, but so far this cycle it never did reach the 2008 highs of 85 & 86.

Cycle highs or lows indicated inRED

Friday’s key indicators and metrics:

·                 Friday’s McClellan Oscillator is OVERSOLD @ minus 207  

·                 Copper – 4.05

·                 Friday’s Gold (COMEX) $1528.6

·                 Friday’s Silver (COMEX) 36.327

·                 Crude oil (NYMEX) $100.22

·                 The Treasury 10-year yield 2.9710

·                 3-month $ LIBOR at 0.248 (5-year / forever lows)

·                 CBOE Put / Call Volume Ratio – 1.18

·                 Euro – 1.4352

·                 VIX – 18.86

·                 US Dollar Index – 74.80

·                 Canadian Dollar – 1.0236

·                 Aussie Dollar – 1.0569

·                 Swiss Franc – 1.1876

* Key WEEKLY BULLISH SENTIMENT (i.e. CONTRARY INDICATOR) data points are showing that BULLISHNESS has flitted away.

Last week Consensus overview ofBullish Investor Sentimentdramatically fell again and is now approaching the hideous stage. 

Recent Put / Call Volume Ratios show the extent of the worry;   Friday’s 1.18 / Thursdays 1.06 / Wednesday 1.19, Tuesday’s 1.08, Monday’s 1.11 and last Friday’s at 1.24.   

(High BULLISH readings in the Investor Sentiment Readings usually are signs of Market tops; low ones, market bottoms.)

·       The American Association of Individual Investors [AAII]Investor Sentiment Survey ofBULLISHNESS fell to new lows at24.4% from the 30.2%. In January it ticked new cycle highs of 63.3%. [The lows registered on March 9^th 2009 were an historic low posting of only 18.9%BULLISH.]

·       The AAII Investor Survey ofBEARISH sentiment spiked higher to 47.7%, up from last week’s 33.4%. January’s BEARISH sentiment cycle lows were at 16.4% and that was lows not seen since 2005. The highest Bearishness occurred when it ticked the summer “market retreat” high at 57.1%. Item of note: In August 1987 it ticked the lowest low ever recorded at 6% BEARISH – Remember what happened on October 19, 1987...                                                                          

·        Consensus Index BULLISH investor sentiment was down another chunk to 50% from the 56% posting of last week. Six-weeks ago it was 73%. The recovery cycle high at 76% was established 2-monts ago. Multi-year highs in Bullish sentiment of 76% were first reached in the first week of May 2007 just prior to the massive down-leg.

·        The Market Vane (Market Letter Survey) fell to 50% from last week’s 59% . The survey posted new cycle highs in bullishness at 68% 13-weeks ago. Market Letter writers have reversed off the levels of the Bullishness seen in late 2007 when the Market Vane routinely registered routinely above 70%.

·       The Citygroup “Panic / Euphoria” Model matched last weeks plus 0.07. Seven-weeks ago it registered a cycle high of a plus 0.38 that was still in the neutral zone but, close to the euphoria zone. The model moved from panic into neutral in October 2010. During the dot-com bubble highs of December 1999 the model posted ALL-TIME highs of La-La-Land euphoria at 1.70.

** The Confidence Index is the premier measure of how the bond markets trillions (total global is around $91 trillion and USA is 39% of that) are allocated: (The bond market is twice the size of the stock market.) The ability of this key indicator of market health to post near new highs bodes well for the economic recovery and for stocks to continue forward. One year ago the index was 77.7.

For my Best Ideas for 2011 please send an e-mail request to:Dr.Faessel@onthemar.com