Spike

Capitulation Low?
Saturday October 11, 2008

The S&P 500's opening down-spike to a multi-year low at 839.80 spiked the VIX into orbit that hit 70.90 early in the day before reaching a high of 76.94 in the afternoon. It is interesting to note that despite the rally in the SPX, the VIX remains extremely elevated at near 70, suggesting that investors remain very fearful of additional selling pressure on equities. This is a very good sign from a contrary perspective -- that the VIX has not reversed and plunged in the aftermath of what had the feel of a capitulation low.

In other words, even though the market rallied 350-400 Dow points at the time of my intraday chart snapshot and much more later in the day, the VIX continues to circle 70, giving me added "confidence" that the spike low, and rally in equities, likely has some shelf life this time, albeit amidst intense swings and volatility.

Moving to gold, as the streetTRACKS Gold Shares (GLD) continue to spiral lower -- closing at 83.22 from a high Friday of 90.72 -- I have to put Friday's action within the context of a big picture outlook to see how much damage has been inflicted by the day's weakness. When viewed from a weekly chart perspective, Friday's $5 (6%) decline feels worse than it looks. In fact, based on the weekly chart, current weakness represents a relatively minor pullback within a much larger dominant intermediate-term uptrend.

Be that as it may, the pain of the decline is palpable, but if I use my best efforts to remain objective, I still come to the conclusion that the GLD is "killing time" ahead of another upleg within the 2005-08 underlying bull trend.

Themes for the next 10 years

Looking ahead to themes for the next 10 years, we continue to embrace agriculture (farming/forestry), water (water rights, water treatment, etc.), new technologies playing to energy conservation (including alternative energy and nuclear); as well as climate change, including environmental pollution and resource limitation.

Crash into me

Bloomberg summed it up this way: “U.S. stocks fell for an eighth straight day, yesterday, with the Dow Jones Industrial Average capping its worst week since 1914. The MSCI World Index of equities in 23 developed countries slid 20 percent this week, the most since records began in 1970.”

Run an RSI chart for the S&P back to 1928. Note where we are.

The S&P gave up almost all of it's 02-03 gains.

All 30 DOW components are below their 200 DMA. That happened once before, 1987.

Investor cash is above the 21 year mean and are the highest since 02, 98, 90.

Last week saw three 90% down days. That can't continue for long...

% of NYSE stocks trading over 200DMA is at multi year lows.

Cost of an ounce of gold is now greater than the S&P.

Extreme VIX. These extremes historically lead to rallies.

S&P down 47% YOY, Trannies 38%, historically suggesting upside

Where did all the bulls go?

US Market Timing
Advisors Sentiment

Overview

Advisors continue to reflect a level of pessimism that was last shown more than thirteen-years ago.

The bulls edged higher to 27.8% from 27.4% on the last report, their lowest reading since July 1994 when the bulls were 23.3%. The bears advanced to 48.9%, up 1.6% from a week ago. They are now at the highest level since January 1995 when we counted 50.9%.

1994 and early-1995 was a period that included lots of advisory pessimism. The bears outnumbered the bulls for 46 consecutive weeks from April 8, 1994 to February 17, 1995. February 1995 ended with the first ever close above 4,000 for the Dow Jones Industrials and from then on, off it went to the races for the remainder of that decade.

Record oil prices and crashing financial stocks continue to fuel the bearish fire. The Fannie Mae and Freddie Mac disasters last week maintained a high level of fear amongst the advisors who may have been hoping for some bargain buying. Many advisors are trend followers and don’t want to recommend stocks in a falling market, so it could take a significant reversal before the shift to accumulation mode.

Advisors have made a quick shift from their May outlook, when indexes were all in positive territory for 2008. That month saw the bulls at 44.8% and the bears at 29.9%. As a contrast, at the prior March 2008 lows the bulls were 30.9% and bears were 44.7% and when those figures began to shift we noted that as a buying opportunity. Both those March levels have now been exceeded in a positive manner. The current readings remain bullish. The current plethora of bad news is typical of a market bottom, when it often seems it just can’t get any worse, it then does.

Our short term indicators tuned negative with the sentiment at the May top. They have traded at oversold levels for the last few weeks and we are waiting for confirming reversals up and new bullish formations. Last week had the third highest number of selling climaxes (350) for this year. We only noted more at the March (577) and January (1,385) bottoms. Expect many more selling climaxes this week.

Advisors classified as correction are looking for a near term drop in stocks, but see it as a potential buying opportunity. Their number fell to 23.3%, from 25.3%, as the sell-off turned them bearish.

The difference between the bulls and bears is -21.1%, compared to -19.9% a week ago. Those are even stronger levels then March 14 when the spread was a ‘negative’ difference of -13.8%. The opposite signal occurred in October 2007 when the spread was very bearish at +42.4%. We now need to see the chart turn up.

Sentiment Charts

Guru Analysis: Stock Screener

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Identify stocks that meet the investment criteria of some of the greatest investors of our time.

The Bottom: Are we there yet?

http://prudenttrader.com/pt/content/view/205/31/

http://www.stocktiming.com/Wednesday-DailyMarketUpdate.htm

Wednesday, July 16th. - Stock Trends, Charts, and Commentary

Staggered capitulation indications are now coming in from market indicators ...

Everyone is looking at the VIX (Volatility Index) and wondering where and when it will show the capitulation that the Pit Traders have been looking for.

Signs of capitulation can be seen on more than one indicator ... not just the VIX. Watching other indicators is especially important now, because the VIX is showing abnormal readings due to extreme and opposite sector volatility coming from energy, and financials. (The extreme rises and swings from the oil and energy groups are offsetting the dropping financials and "dampening the rise on the VIX".)

So, this morning we will look at other market indicators that have correlated levels of capitulation to the market. These will be important to look at since the VIX is showing "out of context" movement due to sector extremes.

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The first indicator/index we will look at is the action on the New York Stock Exchange daily lows. At the bottom of the chart below, I have also plotted the SPY (ETF for the S&P 500), so you can see the correlation.

Note that extreme "up spikes" often signal that a capitulation level is being reached. This is more true when the New Lows are above 800 from an historical basis.

Since 2000, there have been 8 occurrences where the New Lows have gone above a daily close of 700.
- Four of those times signaled the final capitulation.
- There were two other occasions where the New Lows went above 700 and remained below 900, and then they were followed by a New Lows level exceeding 1,000 which were the final capitulation levels. (These resulted in a total of 4 readings.) The previous time this happened was August 16th. of 2007, and the other occurrence was yesterday when the New Lows reached 1144. (The NYSE New Lows are posted every day on our paid subscriber site.)

So, from a New Lows historical basis, yesterday was at a level that correlated with a high capitulation probability. However, this morning, the Labor Department reported that consumer prices jumped 1.1 percent last month. This was the second largest monthly advance in 26 years. With the Fannie Mae/Freddie Mac problems, and this morning's huge inflation jump, there is a possibility that yesterday's New Lows historical reading could have more to go. Past "New Low" spikes did not have the double punch of the aforementioned events, so we do not know the after effect these events will have on historical levels.

(Note that I have placed the blue vertical lines just before each event so that you can see the data without a line going through it.) See the next chart ...

The Second Indicator: The VIX vs. the Leadership to Broad Market Stock Ratio ..

Every night, we do a measurement of the Ratio of Leadership and Broad Market stocks trending up or down. From this, we create a Ratio that shows how the Leadership stocks are trending relative to the broad market. The value of this indicator/index is that Leadership stocks always lead the market up and always lead the market down. Large down spikes on the ratio correlate with the VIX and rightly so.

Since the VIX is moving with abnormal readings due to sector extremes, watching the action of the trending Ratio of Leadership stocks to Broad Stocks is important. (The Ratio of Leadership stocks to Broad Stocks is posted every day on our paid subscriber site.)

The chart below compares the VIX spikes and the spikes on the Ratio of Leadership stocks to Broad Stocks.

During the past year, there were three events where the spikes in both indicators had occurred simultaneously as they should. There was one event last October where the timing was off, but none the less, there was a VIX spike shortly thereafter. What is truly puzzling here, is what is currently happening. We just had the largest, one year spike down on Leadership stocks on July 7th., and the VIX had a meager rise WITH NO spike up. Like November 2007, it is possible that the VIX will show a lagging relationship, and that the New Lows and the Ratio of Leadership stocks to Broad Stocks are showing a satisfactory level of capitulation.

Options expiration occurs this Friday, so by Monday we may indeed know if we have reached satisfactory capitulation levels. And, ... on Monday, a new SEC rule is going into effect regulating shorting activity. That should act as a braking mechanism to market down movements. (The new rule will be in effect through the end of July and may be extended through August.)

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