Volume
was high today on the S&P 500, about 120% of the 20-day moving
average. Volume on the NYSE was
ridiculous high – 215% of its 20-day moving average. (20-dMA is just another
way of saying the average over that last month.) That is huge volume with little change in the
value of the indices. S&P was down
only 1 point
"…(a)
mix of buying and selling, high volume with little change in price. This is important…it indicates that while
shares of stocks are changing hands, the current price range is considered reasonable
by the market as a whole." - Getting Started in Options, by M.C. Thomsett.
I’m
not sure I agree with that observation.
On the surface it seems to make sense, but I am always concerned that
what is really happening is that the “smart money” is selling and the “dip
buyers” (those perma-bulls who always buy the dips) are buying. The perma-bulls are right in a Bull market,
but perhaps not in a Bear. Do today’s
buyers represent the “dumb-money”? I don’t
really know. We may find out Monday
though. After the markets closed the S&P
downgraded the US to AA from our AAA rating.
We now have the same credit rating as Slovenia. That can’t be good for the market.
I
am also concerned about the pace of the decline. This week’s steep decline represented panic. As the following slide shows, we have seen
panic not long ago (2008).
(By the way...the huge spike in volume shown on the right side of the above graph is an error in the Historical Yahoo data that they didn't bother to fix. SInce it is in the data, it also shows up on the graph.)
Breadth
(the numbers of advancing vs. declining stocks) continues to deteriorate. Breadth can be a harbinger since it can show
what is happening with the market as a whole rather than just the indices. There are about 3000 stocks traded on the
NYSE. The S&P 500 is only, well, 500
stocks. Since it is also a weighted
average, it is heavily influenced by the largest stocks of the 500, say the
nifty fifty. So if the other 2950 stocks
start going down, the S&P 500 might not show it. Following breadth can sometimes help predict
the future. The 10-dMA of advancing
stocks showed that 51% of stocks were advancing on 14 July. Today, the 10-dMA shows only 31% are
advancing.
In
spite of all the negatives I’ve written above, we are due for a bounce. With the debt downgrade, it may not be Monday
though. There are many that will think
about the market over the weekend and decide to sell on Monday or Tuesday.
The
Navigate the Stock Market system was SELL again today.
I
sold last week on the 27 July sell signal to be defensively positioned with 30%
invested in stocks. (Zero stocks in the
401k.) I sold more today because I will
need more cash (non-tax sheltered cash) within the year. I was slow to sell
because I don’t like the tax implications, but it was overdue. Today I am about 15% invested in stocks. I think keeping 30% in stocks is OK for most
people, though, because if the market is cut in half, you are only down 15%. Also, most people have some non-tax sheltered
investments that you may want to hold so you don’t have the taxes and
accounting associated with the capital gains (or losses). Also, if the bet is wrong and stocks go up,
you are hedged since you will make some money.
