Oversold as early October 2008

Just when you think you saw it all. Wow! There's no way to sugar coat Monday's action. Ugly to the last second and a close at the LOD suggests ultimately, we're not done yet bounce or no bounce. Regardless, this sell-off is getting asinine and at yesterday's close we were as oversold as we were in early October of 2008 which was where the market made a bottom. It wasn't the ultimate bottom mind you...but .it was one of the 3 series of bottoms that marked the ultimate low of the bear market.

As of Monday's close only 6.6% of stocks in the SPX is trading above the 200 DMA, while 0.2% is trading above the 50 DMA and 0% above the 20 DMA! Stats like this all occurred near the depths of the bear market of 2008.  The ST trading oscillator I keep tabs on hit -1412. During the crash of 2008 the lowest it ever got was about -1520.

Let's try to look at this objectively. Yes, this crash is similar to the panic of 2008 in terms of the oversold readings we are getting but let's remember this....the above stats are what you see in  the bottoming process  not the topping process or first down leg in a new bear market. Also, prior to the crash of 2008, the market trend, along with fundamentals i.e. earnings and credit quality conditions were already in deterioration for several months whereas this time around they weren't,  not to mention that there was nothing close in the way of optimism on main street and the retail investor prior to this crash....they were still pessimistic.  That to me makes me quite skeptical to believe this is a new bear market but if there's one thing I've learned over the years is to respect the market when it's not agreeing with you and I was fortunate enough to detect danger in June when I noticed the market was showing a change in character and significantly reduced exposure in the weeks that followed.  I said this before.....respect the market or it will beat it out of you. Discipline (prudence) must trump conviction. If you have a thesis about the market, only act boldly when it's agreeing with you. When it's not, it means you are either early or wrong, so step aside.

The market right now is saying that I stand a reasonable chance of being wrong....but it could also just be correction, albeit a severe one within an ongoing bull market to clean out the weak hands and test the conviction of bulls. If you're still LT bullish and have doubts that's a good thing....that's what corrections are supposed to do...they are supposed to humble you and make you sweat. I'm sure many who were bullish last summer had strong doubts too...I know I did and I'm having them now again. There's a lot of calls for a new recession and new bear market and again, that's what corrections are supposed to do. Anyone who traded the bear market from 2000-2002 would have experienced the same thing but in reverse...strong rallies gave hope to everyone that worst was over and made bears sweat or capitulate.

So, in conclusion I reiterate was I've been saying lately. I doubt it's a new bear market but I'm respectful of market action telling me that it could be and I need to see evidence of a LT bottom first before getting aggressive on the long side.  Cherry picking some names you have on you watch list that are showing ridiculous selling is warranted but keep powder dry. Throughout the  history of panics and crashes triggered by financial fears (not exogenous events like 911 or Japan earthquake) it took at least 2 months of base building before the market was ready to take off again in a sustainable way. Therefore, if you wait it out, you'll likely still have plenty of opportunity to get in at good prices. You may not be buying at the ultimate bottom but you'll still make good money and with the wind at your back you'll do it much easier, less likely to get whipsawed.

Most people lose in this game because they obsess too much about the day to day. They trade every day or every week thinking they can catch every little wiggle in the market. A lot these people try to be smart asses by zigging when the market zags making a dime here and there. That's a losers game. Eventually they either miss out big time or get ran over when the market makes a big move. In fact, I can tell that a lot of bears who got crushed shorting the market for 2+ years either didn't capitalize on this crash covering way too soon and/or got ran over being a smart ass playing for a bounce that never happened last week and the week before. This is exactly what happened in 2008 as well.

Days like today will make you think "Damn, I wish I would have loaded up the boat on Monday's close". That's a gambler's mentality. Gamblers are always attracted in trying to pick tops and bottoms and catching all the day to day moves. If I had to give just a few pieces of advice when it comes to investing/trading successfully it would be this....stop obsessing about the day to day and focus on the bigger picture. Only take a position when the wind is at your back which implies no bottom or top picking no matter how tempting...I know, it's difficult to resist picking tops and bottoms. I've been trading full time since 2009 and my success thus far is largely attributed by strictly following this principle. The exception I have to this rule is when there is a blow-off panic or mania. In that case, bottom or top picking is permitted but only with a very limited amount of capital (so you can be a strong holder)....no aggressive bets are permitted until you have the wind at your back and are showing a profit with your initial entry.

Take a look at the trade I was considering with TLT about a month ago to see a perfect example of what I'm talking about. In early July there was a pullback in TLT in what appeared to be a new uptrend. That's the sort to opportunities I look for....pullbacks/consolidations in emerging up trends (not mature ones). These are the sort of "sweet spot", premium opportunities you should be looking for but they don't come around every day. You may have to wait several weeks or even months for them while twiddling your thumbs all day and that be can difficult...the temptation to do make something out of nothing is always high because you feel you have to make money every week/month. More often than not that will backfire.

Do you notice a theme here? To be success at this game you have to do difficult things. I suppose that could be a life lesson a well.