| If you’ve not seen the movie, it’s about Michael Oher, a homeless black boy from a broken home, taken in by the Touhys, a rich white family. Due to his hard work, and help from the Touhys, Oher becomes First Team All-State as a high school senior, then an All-American offensive left tackle at Ole Miss and, finally, is drafted by the Baltimore Ravens as the 23rd pick in the ‘09 NFL Draft. As a left tackle Oher protects a right-handed quarterback’s “blind side.” While leaving Dallas and watching Bloomberg on our Blackberry last Thursday we thought about the movie and wondered, as the DJIA cascaded lower, “Who’s protecting the investor’s blind side?” Sure the market was down all day, and a correction was overdue, but 650 points in less than 10 minutes? That’s not a correction, that’s a joke. As Ricky Ricardo used to say, “Lucy, you’ve got some ‘splainin to do.” Here’s what you should know to protect your technical “blind side.” 1) Someone’s got some splainin’ to do and they better start quickly because the whole system is irresponsibly fragile if Accenture (ACN, 40.32) can trade to one penny because somebody with sausage fingers made a mistake. We know it’s more than that, but you get the point. 2) The market is oversold as only 14% of the stocks in the S&P 500 are above their 50-day moving averages. This figure is down from a recent high of 92% on April 14. We sent this chart out on Friday and said, “The oversold is currently occurring with the S&P still above/just on its upward-sloping 200-day moving average. We’d expect a period of rebuilding/consolidation to follow. At this point, we think the current correction is a correction in an uptrend.” But, as you’ll see below, there’s important indicator deterioration elsewhere and we are concerned. Concerned enough to say “Sell rallies.” 3) While the market is “short-term” oversold, there are important internal problems as technical indicators are deteriorating. (A) NYSE new highs have collapsed and NYSE new lows have jumped. The 10-day moving average of NYSE new highs has fallen from more than 400 on April 27 to 204 as of May 7. Meanwhile, the 10-day moving average of NYSE new lows rose to 42 on May 7 from single digits on April 26. It’s our experience that almost nobody makes money on the long side while new highs fall and new lows rise. (B) The % of NYSE stocks > 200-day moving averages has fallen to 59%. Lower highs and lower lows since the September 2009 peak are a bad sign. This indicator is not oversold and will likely work lower before the current corrective phase is over. An oversold reading corresponds with less than 34% of the NYSE above their 200-day moving average. Sell rallies. Charts p2.
4) Whether you’re bull or bear, the “range” for the S&P 500 for the foreseeable future (funny, right?) is April’s high and last week’s intra-week low: 1220 (4/26/10 intra-day high was 1219.80) to 1065.79 (5/6/10 intra-day low). If this range is too wide then you should be on the sidelines. Truthfully, most people should be on the sidelines as intra-day volatility likely remains high until everyone has lowered their gross and net invested positions. We spoke to more than a handful of accounts on Friday and only one guy said that “painfully,” he’d reduced his gross and net exposure. Sell rallies. |