A Quick, Unscheduled Note
Monday, May 10th, 2004 7:32pm EST
I received so many requests today
to answer individual questions on some of the extremes we're seeing
that I thought I would take a few moments to send an unscheduled
note to everyone noting what some of them are. I think you'll agree
that we're seeing a truly unique moment in market history.
Overbought and oversold readings can be dangerous tools if used in
isolation, but there are times when the readings become so
incredibly lopsided that we very often see at least a short-term
snapback no matter the severity of the uptrend or downtrend. We are
approaching one of those times. Below, I have outlined several of
the near-historic extremes we’re seeing as of today’s close.
• The popular McClellan Oscillator, which is the difference between
a 19-day and 39-day exponential moving average of advancing issues
minus declining issues, is the second-most oversold in 64 years,
behind only 9/20/01 and 9/21/01 (which saw an average 19% gain in
the Dow after 90 days). Other readings that came close to today’s
reading occurred on 7/23/02 (16% gain after 90 days), 8/31/98 (28%
gain) and 10/27/97 (20% gain).
• The total put/call ratio (including both equity and index options)
from the CBOE over the past three days has averaged 1.18. This is
the second-highest 3-day average since 1995, behind only a few days
in late September 2002. As you know, this is not my favorite option
gauge in the world, and as far as data from the CBOE goes, I prefer
to use the equity put/call ratio with QQQ options removed. A 3-day
average of that ratio is a bit higher than it was in mid-March, and
before that we’d have to go back to April 2003 to see a higher
average. Still, the 3-day average of that ratio has reached over 1.0
at the major intermediate-term lows in 2001, 2002 and 2003, so we’re
not seeing the same type of extremes there.
• The lowrisk.com sentiment survey showed 20% bulls and 58% bears in
its most recent survey, ended this past Sunday. This is in the
bottom 7% of readings of bullishness, finally an indication that
bearish opinion is beginning to become widespread. This isn’t
exactly historically extreme, but this survey has a pretty good
correlation to the other “major” sentiment surveys, and gives us a
heads-up that when those other surveys report their numbers later
this week, we may finally see a decent uptick in bearishness.
• Our NYSE cumulative TICK, which unfortunately only goes back to
very late 1998, is now the most stretched since 3/31/99 and 9/28/99,
which both marked short-term market lows. Our same measure for the
Nasdaq has reached this kind of oversold level a few times over the
past five years, and again they marked short-term market lows.
• Over the past three days, declining issues have averaged 73% of
total issues traded. This is an incredible display of a short burst
of indiscriminate selling, which has been exceeded only once before
– October 19th, 1987, aka Black Monday. The only other times that
even approach this kind of selling over a span of three days were
6/28/65 (an excellent short- and intermediate-term buying
opportunity), 8/29/66 (a good short-term opportunity, and an ideal
intermediate- and long-term one) and 10/10/79 (a poor short-term buy
spot, and decent intermediate- and long-term one).
• I touched on this one this weekend, but new lows on the NYSE
reached close to 25% of total issues today. Again, this is an
extremely rare occurrence over the past 20 years, each marking
excellent intermediate-term buying opportunities. A valid question
may be the number of non-operating companies on the new low list,
which is backed up by the relatively tame number of new lows on the
Nasdaq. Today’s number of new lows on that exchange ranks only 42nd
over the past four years.
• I noted this in an intraday comment, but a combined NYSE and
Nasdaq TICK that I follow hit -2400 intraday on Friday morning
(meaning at that moment, there were 2400 more stocks that last
traded on a downtick than traded on an uptick). I show only five
other such occurrences in the past four years, those marking either
a low or very close to it on 4/14/00, 5/24/00, 3/21/01, 9/19/01 and
7/23/02.
• Ironically, even though breadth has been horrid, the TRIN on the
NYSE has been not only tame, but downright low. In fact, on a 3-day
or 5-day basis, it is actually overbought! The reason is because
volume flowing into the incredible number of down issues has not
been able to keep pace. I've noted many times that the TRIN is a
poor measure of broad-based selling, due to its construction as a
ratio of a ratio. Looking back over the past 65 years, we've NEVER
had a time like now, where the a/d line has been so negative while
the TRIN has been so low. The only other times that were even
remotely comparable lead to mixed performance, and personally I
wouldn't read much into it.
At the risk of missing the bottom tick, my preference remains to
wait and see how the market reacts around these levels. As I said
yesterday, I have been approaching this decline as a test of the
supposed intermediate-term low made in March, and am allowing for a
slight (and temporary) undercut of those levels. We got the slight
undercut today, so the next few days become important to me. We are
seeing breadth readings normally seen at washout lows, and some of
our more pure sentiment measures are getting there, so we certainly
have some of the ingredients to make a nice low from somewhere very
near these levels. I’m not ready to jump in yet with both feet, but
the historical precedent is strong that a tradable low is close at
hand.
Jason Goepfert
President and CEO
Sundial Capital Research, Inc.
Disclosure: no positions
This disclosure is not intended as trading advice in any form. It is meant as a note to subscribers that the author may have a position directly affected by the market outlook reflected in the commentary. Although the author takes great pains to remain objective in any commentaries, it is only fair that readers should know that the author may have taken positions in accordance with his market outlook. Positions can and do change at any time, without notice to the reader.
© 2004 Sundial Capital Research, Inc. All Rights Reserved.