Will The Relentless Selling Reach Exhaustion?

On Monday, once again, traders used early rallies to unload stock. The overhead supply is still too large for feeble Bulls to overcome. With background economic news depressing and plans of action from the new administration clearly lacking, buyers are on strike. A general malaise hangs over the Street.

The Daily Sentiment Index (DSI) poll of small speculators (MBH Commodities, Winnetka Ill.), shows a record oversold 5% bulls [10 day average reading]. This is one of the lowest DSI 10-day average levels in any market ever seen. Risk/reward says this will lift. BULLISH.

When a market is this oversold and rallies are measured in minutes instead of days, the moment of truth is near. Are we about to submerge into cataclysmic spiral into the abyss, or will the relentless selling finally exhaust itself, paving the way for a multi-month or year bull market?

Take a step back for a moment, think about just how far this market has fallen the past six months, and you’ll realize the losses are 50%. March is the seventh month in a row down. When was the last time the broad market had two consecutive days of strong gains? The monthly 7-period RSIs are in single digits! Occasionally that reading occurs for individual stocks, but almost never for for broad market indexes.

Bearish headlines proclaiming the death of equities have been page-1 news in magazines and newspapers for 12 months now. You have to ask yourself, who hasn’t seen the dire predictions and how many disgruntled longs are left?

All this of course doesn’t help traders identify low-risk entry points. The market could drop another 10-20% as the key stocks become even more oversold, the owners of risk capital even more pessimistic. All we can do is observe the price action and let the market tell us when all the bad news has been discounted, and prices ready to move higher.

Financial stocks, crude oil, and interest rates higher — all things we anticipated would be a precursor to an equity market rally — provided no upside impetus for stocks Monday. So, we have to wait a while longer, no matter how frustrating the situation may be.

We are patiently awaiting a scary early morning sell-off to put cash to work. Conversely, if the market suddenly finds some traction and moves higher, we will use positive price action (ie, break outs on high volume) to enter the market. One way or another, at some point in time, we will become aggressively bullish, and you will read about it here.

Hopefully the Bull is right around the corner.

I’ll be traveling to Bahamas today. In a few hours, I’ll be enjoying the sun, the sand and the sea. Let’s call it a much needed attitude adjustment.

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