First off, some comments about today's action. We finally got what I called good "market action" on the upside. We started off weak and ended strong building momentum slowly but surely throughout the day. It's only 1 day though and unfortunately the put/call ratio was rather low and the VIX collapsed too easily again. Am I being too picky here looking for everything to be just right? Probably. I'm game that today could end up being the low point for the next few weeks or so but I have nagging doubts that we’ve seen the worst. I realize that AAII sentiment is showing bearishness that marked previous bottoms, mutual fund investors have fled equities to the same degree as they have at previous bottoms (by the way, they withdrew another 5 Billion this week), bonds are very overbought and the Rydex ratio has also dipped back into pessimistic territory also consistent with bottoms. So what's bothering me still? Well, we got oversold but not the same degree as we did at prior solid lows this year. The VIX behavior is still bearish. It continues to drop too easily on rallies. We never got extreme readings in the put/call ratio...they got high but not the 1.2 threshold that has marked prior lows. Lest I forget, the macroeconomic data has turned decisively bearish which is something new this time around which could require chronic extremes in bearish sentiment before a lasting bottom can be made because during bearish fundamental conditions, what is considered "extreme" sentiment wise is different than when bullish fundamental conditions are in play.
But just how bearish are the "fundamentals"? Well, we haven't seen a broad rollover in earnings yet but with the macro data down ticking it could be just a matter of time. Intel guiding down today is a warning and it isn't a good thing for the rest of the tech space which has been the leader of this bull market. Cisco's John Chambers said a few weeks ago that his customers are showing uncertainty which echoes the warning from Intel.
As a result of the downward momentum in fundamentals bulls need to be careful trying to catch bottoms. There's enough pessimism right now to warrant a further bounce but if we do I think there would be another run at the lows in the fall. The ideal situation would be if we get a washout to SPX 1000 or lower accompanied by a big spike in the VIX and huge put/call ratio readings. I’ve been waiting all summer for such a thing but I realize Mr. Market doesn’t give a rat’s ass about my demands and we can bottom without such things happening.
Since I'm not so sure we've seen the true bottom but fairly confident that any more downside would be contained if we haven't, I've compromised with myself by making a partial commitment to the long side. I'm looking to take positions in stocks that are showing good relative strength and low correlation to the market. They are hard to find but I've already identified a couple and took a position in one of them. Last year at this time I did the same thing and I uncovered a few gems that really soared. There were duds as well but I managed to successfully cut the losers short while riding the winners fully. This time around it will probably be harder to repeat that feat.
Next week we will see a ton of important macro data. If the data is soft this will be really good test to see if the market has fully discounted the slowdown in the economy or not.
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