When trying to think of a title for this post, really the only word that came to mind was “destruction.” Although the market had already been going through stages of destruction for weeks, seen by looking further back at the Russel 2000, the energy sector, or even just how many individual stocks have been failing to make new highs, Friday really showed its hand.
Where things currently stand:
SPX closed a point above its 200-day MA on Friday, its fifth longest streak since 1928. It’s a change in character no doubt, but that doesn’t necessarily mean things are any different then the typical V-bottoms we have experienced over the last two years. We are still only 5.6% off the highs. For reference, since the end of 2012 (since the now infamous V-bottoms became a regular occurrence) this is the 4th pull-back over 5% (the highest being 6.2% which began at the end of 2012 and also happens to coincide with the end of Operation Twist).
Stocks above their 50-day MA closed around 24%, which you can see below has been at or near a bottom preceding a sharp rally to new highs since the end of 2012. 
However, since I am beginning to see less correlation with this current pull-back and the previous ten above (more on that later), I went back just one more year and you can see below that this reading can and has become more oversold.
Stocks at 20-day highs is also at a very oversold reading near only 5%. However, note that since early summer that reading has not gone above 40%. This represents the longest streak being below 40% looking back three years offering some evidence that this market is 1) extremely oversold 2) may have run out of V-bottom lives.
Furthermore, stocks reaching 20-day lows have now gone over 55% twice within the same pull-back/correction. The last time that happened was in Spring of 2012, again something not from the playbook of the last two years.
Evidence of something more:
As you know, no two pull-back/corrections are alike. However if you are a regular reader of my work you have read many times over my bias for the usual probability of a V-bottom to new highs after every pull-back. In fact, each time we have pulled-back and I have posted similarities to pull-backs since the end of 2012 I have been criticized for not going far back enough. My response has always been until things begin to look different I would continue to use the playbook that is working. This time I finally have begun to take a further look back because I am less convinced that the V-bottom playbook is going to work this time around.
Can you see 2011? For this look-back I am going to use comparisons to 2011; however note that I am not suggesting we will correct in the same manner as we did in 2011. I am merely using 2011 as an example because one:
- It is within the same bull market run that began in 2009.
- There are similarities to that correction and what we are experiencing now.
- It was a different type of correction then we have experienced in the last two years.
What similarities?
- We have had three back to back days of over 1.5% moves. The last time that happened was November 2011.
- There is an increase in the amount of ticks over and under 1200 within a very short period of time. If you look below this also happened once in June of 2013, but didn’t last long. If this streak continues in the next couple weeks then again it may begin to look more like 2011.
- The energy sector has fallen off a cliff and hasn’t been this oversold (based on the RSI) since 2011.
- It has become increasingly harder to ignore European woes. Furthermore, the DAX (representing the German stock market) fell below its 200-day MA at the very end of July for the first time since 2012. After a recent bounce attempt it is now back below its 200-day and making a lower low. The last time the Dax made a lower low after falling below the 200 day was in 2011.
- Right before the correction in 2011 QE 2 had just come to an end.
- Bonds (TLT) staged a huge come back from a false breakdown in 2011, similar to their recent run.
What’s the point Sassy? The point I’m trying to make is this is the first time the evidence appears skewed toward the probability of a lower low in store for this market rather than a V-bottom to new highs. I am very aware that fighting this bull market has been a losing battle since 2013 and that seasonality now favors upside; however, when taking all the evidence I have put forth STFR (Sell the f*n RIP) now resounds louder than BTFD (Buy the f*n dip).
Given the recent extreme oversold conditions the strategy for next week is to expect a bounce that ultimately fails to deliver new highs. Failure to bounce at all next week should be taken as a serious message by the market that this time is not just different, but very different.
Good luck next week!
For daily market commentary, trade and option ideas check out a subscription.
Destruction!!! What next???
Where things currently stand:
SPX closed a point above its 200-day MA on Friday, its fifth longest streak since 1928. It’s a change in character no doubt, but that doesn’t necessarily mean things are any different then the typical V-bottoms we have experienced over the last two years. We are still only 5.6% off the highs. For reference, since the end of 2012 (since the now infamous V-bottoms became a regular occurrence) this is the 4th pull-back over 5% (the highest being 6.2% which began at the end of 2012 and also happens to coincide with the end of Operation Twist).
Stocks above their 50-day MA closed around 24%, which you can see below has been at or near a bottom preceding a sharp rally to new highs since the end of 2012.
However, since I am beginning to see less correlation with this current pull-back and the previous ten above (more on that later), I went back just one more year and you can see below that this reading can and has become more oversold.
Stocks at 20-day highs is also at a very oversold reading near only 5%. However, note that since early summer that reading has not gone above 40%. This represents the longest streak being below 40% looking back three years offering some evidence that this market is 1) extremely oversold 2) may have run out of V-bottom lives.
Furthermore, stocks reaching 20-day lows have now gone over 55% twice within the same pull-back/correction. The last time that happened was in Spring of 2012, again something not from the playbook of the last two years.
Evidence of something more:
As you know, no two pull-back/corrections are alike. However if you are a regular reader of my work you have read many times over my bias for the usual probability of a V-bottom to new highs after every pull-back. In fact, each time we have pulled-back and I have posted similarities to pull-backs since the end of 2012 I have been criticized for not going far back enough. My response has always been until things begin to look different I would continue to use the playbook that is working. This time I finally have begun to take a further look back because I am less convinced that the V-bottom playbook is going to work this time around.
Can you see 2011? For this look-back I am going to use comparisons to 2011; however note that I am not suggesting we will correct in the same manner as we did in 2011. I am merely using 2011 as an example because one:
What similarities?
What’s the point Sassy? The point I’m trying to make is this is the first time the evidence appears skewed toward the probability of a lower low in store for this market rather than a V-bottom to new highs. I am very aware that fighting this bull market has been a losing battle since 2013 and that seasonality now favors upside; however, when taking all the evidence I have put forth STFR (Sell the f*n RIP) now resounds louder than BTFD (Buy the f*n dip).
Given the recent extreme oversold conditions the strategy for next week is to expect a bounce that ultimately fails to deliver new highs. Failure to bounce at all next week should be taken as a serious message by the market that this time is not just different, but very different.
Good luck next week!
For daily market commentary, trade and option ideas check out a subscription.
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