Today's new low occurred on lessening downside breadth, dwindling down volume and a decrease in NYSE Ticks (intra day). There was also a clear divergence at today's low between the VIX, which remained beneath its May 21 extreme (48.11), and both the Dow and S&P, each of which made new intra day lows beneath the lows of that day.
There remains an open gap at 1115.05 in the S&P from May 19 (10,444.40 in the DJIA). Prices may try to fill this gap before rolling back to the downside. A 60% retracement is 1120 (S&P), which is just above the late high on May 19 (10,488.00 in the DJIA). So the rally should ideally end in the 1090-1125 area in the S&P and the 10,200-10,522 area in the Dow. A break of 9853.30 in the Dow and 1050.93 in the S&P would indicate that another selling phase to even lower lows was underway.
Current head winds in the Euro zone offer considerable headline risk. A crises of confidence can arise at any time, and derail any short term rally. Also the potential of escalating war of words in the Korean peninsula can destabilize markets and the world economy at any time. North Korea's clear act of war has gone under reported.
Markets in my view have not properly priced in the true effect of rising taxes on small business, or the cost of increased regulations and the effect on future employment. The Presidents threshold of $250,000 for higher taxes will impact the small business sector more then any other. With no bailout or access to capital because of higher lending standards, I expect additional layoff's to come in 2011.
Hang on to your seats, because this ride is not done.
Eduard Hamamjian
GeaSphere LLC
Tuesday, May 25, 2010
Saturday, May 22, 2010
Bigger Than A "10% Correction"?
Every Big Bear Grew From a Cub
The famous "10% correction" that market pundits talk about sounds so nice and tidy, so predictable and tolerable. It's as if this "cute little correction" came neatly wrapped, looked like an M&M candy character, and smiled at you and your family after you open the box.
If only it were so.
"If all the market ever did on the downside was dip 10% once every two years, then investing would be easier than shooting fish in a barrel. Obviously, this is not the case. The fact is that the stock market's movements are a fractal. Declines come in widely varying sizes."
Elliott Wave Theorist, December 2001
There is no way to know in advance whether a particular market downturn will fall 11%, 35%, or 89%. Even the Wave Principle only forecasts probabilities -- not certainties.
One thing that is certain -- every bear market reached a 10% drop before prices fell even further.
And another near-certainty is that too many money managers will use the phrase "buying weakness" when the market falls 10%. On May 7, after the Dow Jones had fallen several hundred points in a few days, two money managers being interviewed side by side said in effect, "Buy." Not a word was said about caution. Not a word was offered about even the possibility of a major trend change in the market.
On the other hand, it was refreshing to hear a representative of a fund family say, "I don't know why anyone needs to be a hero, and try to catch the bottom."
You may be tempted to jump back in because the market has recently "corrected." Yet consider what EWI's Short Term Update subscribers read on May 7 -- ". . .we would caution that some of history's largest stock declines have occurred only after stocks were deeply oversold."
Eduard Hamamjian
GeaSphere LLC
The famous "10% correction" that market pundits talk about sounds so nice and tidy, so predictable and tolerable. It's as if this "cute little correction" came neatly wrapped, looked like an M&M candy character, and smiled at you and your family after you open the box.
If only it were so.
"If all the market ever did on the downside was dip 10% once every two years, then investing would be easier than shooting fish in a barrel. Obviously, this is not the case. The fact is that the stock market's movements are a fractal. Declines come in widely varying sizes."
Elliott Wave Theorist, December 2001
There is no way to know in advance whether a particular market downturn will fall 11%, 35%, or 89%. Even the Wave Principle only forecasts probabilities -- not certainties.
One thing that is certain -- every bear market reached a 10% drop before prices fell even further.
And another near-certainty is that too many money managers will use the phrase "buying weakness" when the market falls 10%. On May 7, after the Dow Jones had fallen several hundred points in a few days, two money managers being interviewed side by side said in effect, "Buy." Not a word was said about caution. Not a word was offered about even the possibility of a major trend change in the market.
On the other hand, it was refreshing to hear a representative of a fund family say, "I don't know why anyone needs to be a hero, and try to catch the bottom."
You may be tempted to jump back in because the market has recently "corrected." Yet consider what EWI's Short Term Update subscribers read on May 7 -- ". . .we would caution that some of history's largest stock declines have occurred only after stocks were deeply oversold."
Eduard Hamamjian
GeaSphere LLC
Thursday, May 13, 2010
DJIA: Rally Killer on the Loose?
How sentiment extremes mark trend reversals.
Here's something they don't teach you in Economics 101: Too many bulls can kill a rally.
Conversely, too many bears can stop a bear market. It sounds paradoxical, but it's true: When market sentiment gets to an extreme on either side -- pessimistic or optimistic -- more often than not, the trend is near its reversal.
We are not the first ones to pick up on that. Bernard Baruch, a famous rich man from "the roaring twenties," observed this before the 1929 stock market crash:
"Taxi drivers told you what to buy. The shoeshine boy could give you a summary of the day's financial news as he worked with rag and polish. An old beggar who regularly patrolled the street in front of my office now gave me tips and, I suppose, spent the money I and others gave him in the market. My cook had a brokerage account and followed the ticker closely. Her paper profits were quickly blown away in the gale of 1929."
Here's also Elliott Wave International president Robert Prechter's comment:
"Extreme opinions, shared widely, constitute the single most reliable indicator of an impending change of direction for a market. If virtually everyone is thinking one way, they have already acted..."
-- The Elliott Wave Theorist, July 2006
Extreme sentiment is not a guarantee of a trend reversal -- no market indicator is. Yet it's worth paying attention to.
"...the latest weekly Investors Intelligence Advisors' Survey has the percentage of market bulls at 54, which exceeds the extreme set at the January high of 53.4."
January, as you remember, was the month the DJIA started an 800-point drop.
Note also that mutual fund managers' cash levels are low -- the rest of the money is in stocks. This chart is from our March Elliott Wave Financial Forecast:
In his current Elliott Wave Theorist, Bob Prechter adds:
"In March, the market rose virtually every day, so there is little doubt that the percentage of cash in mutual funds is now at an all-time low, lower than in 2000, lower than 2007!"
Eduard Hamamjian
GeaSphere
Here's something they don't teach you in Economics 101: Too many bulls can kill a rally.
Conversely, too many bears can stop a bear market. It sounds paradoxical, but it's true: When market sentiment gets to an extreme on either side -- pessimistic or optimistic -- more often than not, the trend is near its reversal.
We are not the first ones to pick up on that. Bernard Baruch, a famous rich man from "the roaring twenties," observed this before the 1929 stock market crash:
"Taxi drivers told you what to buy. The shoeshine boy could give you a summary of the day's financial news as he worked with rag and polish. An old beggar who regularly patrolled the street in front of my office now gave me tips and, I suppose, spent the money I and others gave him in the market. My cook had a brokerage account and followed the ticker closely. Her paper profits were quickly blown away in the gale of 1929."
Here's also Elliott Wave International president Robert Prechter's comment:
"Extreme opinions, shared widely, constitute the single most reliable indicator of an impending change of direction for a market. If virtually everyone is thinking one way, they have already acted..."
-- The Elliott Wave Theorist, July 2006
Extreme sentiment is not a guarantee of a trend reversal -- no market indicator is. Yet it's worth paying attention to.
"...the latest weekly Investors Intelligence Advisors' Survey has the percentage of market bulls at 54, which exceeds the extreme set at the January high of 53.4."
January, as you remember, was the month the DJIA started an 800-point drop.
Note also that mutual fund managers' cash levels are low -- the rest of the money is in stocks. This chart is from our March Elliott Wave Financial Forecast:
In his current Elliott Wave Theorist, Bob Prechter adds:
"In March, the market rose virtually every day, so there is little doubt that the percentage of cash in mutual funds is now at an all-time low, lower than in 2000, lower than 2007!"
Eduard Hamamjian
GeaSphere
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