10 January 2008

Bouncy bouncy?

So it seems the NASDAQ is down almost 7% for January, and that takes into account the 1.4% jump that happened late this afternoon. The Dow is down a nifty 4%, and when I use the word 'nifty', I use it incorrectly.

Again, until late this afternoon, my stock watch list was chock full of extremely oversold options, including eight Dow components with a RSI(2) at or below 2.

Perhaps the market's about to turn itself around, at least in the short term. I generally like the 2-period RSI overbought/oversold indicator. But it's always good to look at fundamental and technical indicators outside one's favorites as well.

Here are some links and excerpts to ponder:

Adam from Daily Options Report suggests the VXN, trading far above its moving average, is signaling a bounce:

311 is coincidentally where the Nazz looks headed.

What could convince me I am wrong? Well, volatility is finally getting very overbought. When a volatility index gets 10% above it's 10 Day SMA, it's a bit extended. The VXN is now 20% above, so maybe, just maybe, that rubber band is going to snap back one of these years.

Again, this indicator had an awful track record in 2007, as down moves tended to go way past the station. And this is no different, after all if you trusted it and went long QQQQ's when we were 10% above the SMA, you are sitting underwater already.

What I will say though is it's a sign we're getting quite overdone, and it's suggestive that a pop back up will be one of those monster rallies that will get the pundits all atwitter. Where that starts is anyone's guess, but sure feels like one of those terrifying rinse and reversal days is up soon.

Barry Ritholtz offers up a black box pointing to bullish sentiment, if not much else:

Phil Davis is unsure. But he thinks the Bush administration may, once again, ignore their alleged free market principles and intervene:

Forbes jumped on the recession bandwagon and it hit the USA Today as well and, while I still feel this is a massive, coordinated effort to "foment" a panic ahead of action by the famous Plunge Protection Team, the fact is I'm not 80% sure of anything. I'm not 70% sure and I'm barely 50% sure but I think that's as unsure as you can be so that means that unless I am investing in things that are going to, on average, return 50% to me with near certainty, then I am better off not playing until I become a little more certain of direction.

Yes, the Plunge Protection Team. Wouldn't Plunge Protection Posse be a better name? I am a sucker for alliteration.

Damn. Somebody already used the PPP.

From the Telegraph story on the PPT:
Bears beware. The New Deal of 2008 is in the works. The US Treasury is about to shower households with rebate cheques to head off a full-blown slump, and save the Bush presidency. On Friday, Mr Bush convened the so-called Plunge Protection Team for its first known meeting in the Oval Office. The black arts unit - officially the President's Working Group on Financial Markets - was created after the 1987 crash.

It appears to have powers to support the markets in a crisis with a host of instruments, mostly by through buying futures contracts on the stock indexes (DOW, S&P 500, NASDAQ and Russell) and key credit levers. And it has the means to fry "short" traders in the hottest of oils.

At least the shorts will be fried properly--not sodden with grease.

Unlike Phil, Doug Kass is certain that Helicopter Ben will save the day:

I have friends.

I have friends in Washington D.C.

I have friends who are very close to the Administration.

I have friends who are very close to members of the Fed.

This morning, several of those friends gave me an indication of heightened concerns regarding the domestic economy -- far more than what has been expressed by the President, the Secretary of the Treasury, and the Federal Reserve in various platforms over the last week.

And they say that the Fed will ease momentarily.

Enough said.

Finally, Seeking Alpha offers up some chart analysis of recent rebounds:

At some point, probably some point soon, stocks will bounce. There are still bulls out there and at some point some will step in and start buying stocks.

The question is: How much of a bounce can we expect?

Personally, while I think there will be a bounce I don't expect it to be much. I think that sentiment is undergoing a shift towards the bearish camp and that higher prices will be met with selling.

For an idea of what we can expect, let's look at the last three bounces:

From October 22 through October 31st the S&P managed about a 50 point move from around 1500 to around 1550 leading up to the Fed meeting on October 31st.

From November 27th through December 11th, the S&P managed a more impressive rally from lows around 1407 all the way up over 1520 - a move up of about 115 points - ahead of a hoped for 50 point rate cut by the Fed on December 11.

From December 18th through December 26th, the S&P put together a Santa Claus rally that took it from 1446 to 1498 - again about a 50 point move - before the assasination of Benazzir Bhutto on Thursday December 27th put an end to it.

What this suggests to me is that any bounce is likely to be capped at about 50 points on the S&P. That would retrace about half the move down over the last couple of weeks and put us up around 1440.

But I also wouldn't be surprised to see a smaller bounce in the range of say 20-30 points before the selling resumes.

I appreciate that nobody mentioned above is being so bold as to call a bottom. There is a plethora of reasons to think that we'll have a market rebound, soon.

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