Stock Market Worsens - Is That A Contrarian Signal Of A Market Bottom?

THE FINAL NUMBERS - INTERNAL WEAKNESS

NEWS: If the closing bell would have rang at 3:00 the day would not have looked so bad. But unfortunately for the trading session closed an hour later and there was more red on Wall Street. The Dow finished the day down 92 points or 0.8%, well off the highs and even further off the lows. The S&P 500 tumbled 13 points or 1.1% and the NASDAQ bucked the trend with a gain of 2 points.

THE BOTTOMLINE: Today’s closing numbers were clouded a bit by moves in several sectors, when in reality the market internals tell a different story. The declining issues on the NYSE outpaced the advancers by a 3-to-2 margin and the number of new 52-week lows hit quadruple-digits. It was clearly not a good day for most investors that have exposure to the broad market. A few pockets of strength hid the real weakness in stocks.

The pharmaceuticals had a solid day after Johnson & Johnson (JNJ) reported stronger than expected earnings. Microsoft (MSFT) also had a hand in the strength of the NASDAQ, rallying over 4%. The commodity stocks were the hardest hit after oil plummeted $6.61 to close the session at $138.57/barrel.

Going forward the cautious strategy remains until the market internals and the technicals of the major indices give any type of bottoming signal. As of yet, that is not the case.

McCALL’S CALL - MORE NEW LOWS — GOOD!

NEWS: The number of new lows hit on the NYSE today shot up to the highest level of the year and some experts look at this as a good thing believe it or not.

THE BOTTOMLINE: The chart below plots the number of new 52-week lows that occur on a daily basis on the NYSE. As you can see when the number spikes above 1000, it is often an indication that the stock market is due for at least a short-term bounce. Will today’s spike to the highest level of the year be a contrarian signal that stocks are oversold and ready to rally?

Along with the new lows on the NYSE spiking, the CBOE Volatility Index (VIX-X.W) also jumped today to levels that typically identify market bottoms. The VIX hit an intraday high of 30.81; the only other times in the last year the VIX traded above 30 was in March, January, November 2007, and August 2007. The same dates that the NYSE new lows spiked, the VIX rallied to highs.

In my honest opinion, the market is extremely oversold in the short-term and a rally of a week or two would not be out of the question.

Along with the indicators mentioned, the psychology on Wall Street right now is at panic levels usually found at bottoms. The market internal and psychology studies are great, but at the end of the day they are not enough to run out and buy. Once the technicals confirm the bottoming process, then you can consider buying.

THE DAILY ETF UPDATE - VOLATILITY IN ETFs

NEWS: If you are an adrenaline junkie, this is the market for you. Today the UltraShort Financials ETF (SKF) had a 28-point trading range; form a low of $183 to a high of $211. An amazing 36 million shares were traded, last year at this time SKF traded a mere 100,000 shares.

THE BOTTOMLINE: The introduction of the Ultra ETFs that track anything from the Dow to the financial sector give investors an easy way to gain instant leverage. But the question is whether individual investors should be taking more risk with increased leverage in this type of market environment.

Let’s look at the intraday action of SKF today. In the first hour of trading the market was hitting new lows and it appeared we could be in for a freefall. At that time SKF rallied from $200 to $211. An individual investor watching the action this morning could have panicked and decided to buy SKF to hedge their portfolio, we will assume they bought at $205/share. By lunchtime on the east coast, the ETF was down to the low of the session ($183). The investor who bought at $205 is now down over 10% in three hours. It would not be uncommon to have emotions take over once again as they second guess their early purchase and decide to sell. I will give them the benefit of the doubt that they sold at $190. The end result is a $15 loss or 7% in 3 hours. To add insult to injury, SKF closed the day at $203.91.

I hope this did not happen to you, but I have been around this business long enough to know this is not uncommon practice in times of panic. Unless you are a trader that uses the leveraged ETFs for short-term trading, I suggest you bypass their usage until volatility diminishes.

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