Bear Mountain Bull

I’m not sure if there will be a ChartWatchers newsletter this weekend or not. If so, this piece from Carl Swenlin will be in it. But just in case there isn’t a newsletter due to the holiday, I think his column and charts are worth a look:

A bullish take on the stock market would be that (1) market indicators are very oversold, (2) there is a triple bottom setup on the S&P 100 Index, and (3) sentiment polls show a lot of bearishness. I agree that those conditions exist, but we are in a bear market and these conditions can easily see price movement transition into a crash. The reason, as I have said many times before, is that bullish setups don’t always work so well in bear markets, and an oversold market can very quickly become significantly more oversold.

Let me be clear, I am not predicting a crash. If the market does crash, I will not claim to have “called” it, because that is not what I am trying to do. I want my readers to be aware of the danger and not try to pick the exact bottom of this decline. That bottom could be very far away.

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Bottom Line: We are in a bear market, and it is suicide to try to take positions anticipating the next rally merely on the evidence that the market is very oversold. Conditions are such that a sharp decline could materialize at any moment. This is not a prediction — I don’t suggest placing bets on it — just something that traders should consider. Bear markets are dangerous. Wait for solid evidence that a rally has begun before sticking your neck out.

The current oversold conditions haven’t changed Larry McMillan’s bearish outlook (click here for column with charts):

This bear market has shown just how nasty it can be. On Wednesday, new $SPX closing lows were made — below the March and January lows. Then, on Thursday, new intraday lows were made. The Dow had already violated its lows last week. Selling spilled into sectors that had previously been strong; in fact, it was nastiest in those sectors. It was as if hedge funds and other large traders were saying, “Sell what you can, not necessarily what you want to.” This is certainly a bearish development and opens up the downside for a whole new leg down, modulo any rallies that might spring up because of an extreme oversold condition.

The equity-only put-call ratios continue to remain on sell signals. The slight “wiggle” in the standard ratio last week was nothing to be concerned about. Even though these ratios gave sell signals back in late May, they still are not near the tops of their charts. Thus, they are not in oversold territory.

Market breadth has been terrible. Everyone is citing oversold indicators as reason for the market to bottom. We don’t necessarily buy it. Yes, there is certainly the possibility of a large, short-lived rally. Given the oversold state of the market, it could easily be 200-300 Dow points in a day. However, that won’t change the major trend (down).

Volatility indices continue to trend upward, which is bearish. $VIX made new relative highs, but is still lagging far below levels at which bottoms were made in January and March. The fact that $VIX has lagged is indicative of the fact that traders have not yet felt the need to buy out of the money ($SPX) puts in a panicky manner. They will, before this leg of the bear market is over.

In summary, our indicators remain bearish. Yes, an oversold rally is overdue, and it could be quite a doozy, for the declining moving averages are far above current levels ($SPX closed about 70 points below its declining 20-day moving average). However, unless our other indicators were to start to register buy signals, we look for lower prices after any such oversold rally runs its limited course.

The Energy SPDR finally gave up the 50-day moving average (red line) late last week:

Health Care and the Utilities have both been going sideways, but at different levels:

The others? Well, see for yourself:

Here are the numbers to start the second half of the year:

Charts courtesy of StockCharts.com