Negative Divergence

S

stonedinvestor

Well the fact that the Nazdog has reached new 4 month highs has NOT been confirmed by the SPX and that has caused a BIG negative divergence. Before this rally a DIVERGENCE of transports and DOW theory pointed the way... this too should be taken as a direction changer.

There have been some studies of option ending weeks and wed tend to be the best day so might we have a big up and fade day tomorrow and a change of direction ahead of us? I have not checked cycle theory on this but going off my own level of grumpiness and a torrid of successful trades it feels to me like it might be time to back off a bit.

Wednesday brings data on the Consumer Price Index for April, followed by reports on capacity utilization and industrial production on Thursday. The week closes with building permits and housing starts. In my view thursday and fri offer glimpses at a rapidly slowing economy and the next leg down the double part of our double dip theory will no doubt be set off by numbers indicating a slowing ecomnomy combined with rising inflation indicating a boxed in fed. For now we coast along on these rebate checks but for how long? The market feels like it wants to look past that story and what i sense might be around the corner is (1) a big drop in oil and (2) a relatively flat line market. We will be asking ourselves shouldn't we be rallying with oil down and the talking heads will be telling us over and over that falling oil is the same as tax relief for the consumer and money will be lured into the market in that way and then the carpet yanked out.

Make no debate about it-- there's a lot of cash on the sidelines, that needs to be invested before we can really dive and it is for that reason that i sense a flatline situation arising soon. Probably at S&P 1,350 the site of the SPX's 80-day moving average. This would have as many bears trapped as bulls as violating 1400 will cause a lot of hoopla. 50 S&P points is not the end of the world but it's not a sneeze either. I'm debating selling some winning positions in tech tomorrow and into next week. If a stock you own is up 14% - 20% in two weeks and the market has just given a divergence warning.... it's perhaps pig headed to stay with too many tech stocks here.

I'm wondering if this is really pure buying we are seeing today and yesterday. Or is this the result of so much portfolio insurance unwinding the other way? In other words we keep hearing about how to sell calls in front of a winning position to hedge risk I don't do this of course but enough people do and this leads to a continual pushing ahead of stocks and likewise the unwinding of index options ahead of expiration are those selling the puts short stock futures to hedge their short put positions. I think. As expiration approaches, portfolio insurance sellers unwind their short futures positions, behavior that becomes supportive of stocks.

A lot of folks are wishing that oil would just come down can you imagine where our stock market would be if that happened... well be careful what you ask for, oil might just come down hard but that does not mean our beloved stocks will go up. ~stoney
 
The big question for me is whether the slow down in the economy becomes deflationary meaning companies cannot raise prices consumer holds bac buying... or if we can borrow our way through this raising prices and incurring debt to pay for it.... earnings will be great! And then a depression.

This week the Federal Reserve reported that consumers added $15.2 billion to the $2.56 trillion debt heap in March. That was an increase of 7.2% annualized-not good.

I might add this last month I mailed in quite late the largest Amax bill I have ever had.

taking the bull argument Louie Navellier- on why not to go away in May!

Five Reasons Sell in May and Go Away Will Not Occur in 2008
First, since this year got off to an awful start, traders likely made little or no money, so there is not much reason for them to sell in May and go away...in fact, they may have to actually work this summer for a change!

Second, the cash on the sidelines in money funds was recently (2/29/08) at an abnormally high 26.2% of the market. It is now at about 24.4%, since some money returned to the stock market in late March and April; but there is still plenty of cash on the sidelines to fuel a stock market rally. Furthermore, the tax-rebate checks could become a catalyst for a summer rally.

Third, corporate stock buybacks, outside of financials, remain relentless. Buybacks are still running at a 30-year high, so this should continue to help firm up the overall stock market. Go to Pages 2 and 3 of PDF

Fourth, when the Fed is at or near the end of cutting key interest rates, investors know this is historically one of the best times to buy stocks, because it usually precedes an upturn in the economy. This is largely why the stock market started to rebound in March and April. Go to Page 4 of PDF

Fifth, the presidential election cycle indicates that the best time to buy is in late April/early May in a presidential election year. The data go back 108 years. As a result, sell in May and go away does not usually happen in election years.

>> Some great points to be sure. I'm worried about the last three under thirty stock jocks that have consulted with me have pointed to low VIX as a sign the market is about to go vertical. I guess I'm too old but I always remember the low VIX being a warning on complacency. Beauty as always is in the eye of the beholder.... We can take heart that whatever correction comes shouldn't be to bad for election cycle reasons.... and I too early on was making the point that with hedge funds down early they will stay in the game... it's an interesting tug of war, are we ahead of Europe and are we now the place to invest??? If Ben would raise rates we could really make that illusion come off. Or do our multinationals get dragged down by slower growth everywhere? ~ si
 
Yes that was a great strip we finally agree. Up volume to has been lagging this is worrisome and here's a stat from about midday in todays market when the naz turned positive- NYSE new highs/new lows 34/17, Nasdaq new highs/new lows 21/22). That would seem to indicate a chink in this rally. Oil has become such a huge weighting if that cracks the whole house of cards will come down, people stuck in that bubble will sell other stocks to cover losses. I am very close to taking a chance with DUG the ultra short oil play. As the S&P staircased up in this rally making higher highs the number of stocks making LOWER highs is heading up as well- that's another key divergence.

These yellow flags should not make you leave the market but rather the next outside day when we have a clear reversal we will not re think things over and bounce right back the next day we will continue down for a while. These minute chinks in the armor are telling the astute listener something about the strength of this market now. ~stoney
 
I know I'm not alone in saying that the Stoned one's ponderings are always devoured.

Thanks, Stoney, your opinions are greatly respected and appreciated.

Ansare
 
Vix and vix options and spx options and bullish sentiment all suggest there may be too much bullishness and complacency for a push much higher for the moment.

Did you see the last increase in consumer credit, a whopping $6.4B, way more than anticipated. The consumers tank is long past empty and they are now living on their cards in record numbers. Probably figure they are going to destroy their credit when they lose their house may as well go whole hog and stiff the CC companies too.

There is corporate credit available in seemingly record amounts to those who are qualified at very good rates but I don't know many who are using it as we are all to scared to make any business commitments at the moment not knowing if we are going to get a deeper recession or a soft landing later this year.

A straddle might be a good play here as it looks like the market might be about to pick a direction in a big way.
 
I estimate we see a CPI of .03-.05% tomorrow morning. Crude inventories will be positive sending oil down to $118-119 range.

The market no longer cares about anything related to housing or financial institutions.

Initial claims on Thursday will be right at 360k which will send the market higher.
 
I agree with Mr Dodge (I think) better than expected cpi news coupled with build ups in oil should fire us up yet each earnings story after hours has been met with selling as the executives spoke about the future. The hot hand now is jamie Dimon and he said this week that the debt crisis is 75% through and we are just starting the recession. A recession which will be longer and worse than the debt crisis!

This point >Did you see the last increase in consumer credit, a whopping $6.4B, way more than anticipated. The consumers tank is long past empty and they are now living on their cards in record numbers. Probably figure they are going to destroy their credit when they lose their house may as well go whole hog and stiff the CC companies too.... bares watching. You just feel the CC companies are not telling us the whole story right now... How can Visa and MA keep going up in the face of more and more late filers and no filers? The high end is not immune internal Amax documents I'm sure are ugly right now... ticking time bomb in the CC sector...

PS Thanks for the props Ansare I don't ever want this site to be snarky like a sports site or yahoo finance. Fun informative and a multiplicity of views is what we strive for I think here at ET and Stock_trad3er can be a downer when he's the only one checking in. I value the ability to bounce ideas off you all. This is the HIGHEST & MIGHTIEST trading site on the web. ~ stoney
 
Well it's easy to say something but harder to act. I am a man of my word though and I just sold SIMO 14% GAIN and FFIV 23% gain and I've got MRVL on the trigger awaiting what should be good earnings. I've rotated into some beat up names which I think is the way to go here... We have gotten our wed big up day withing an option expiration week this is a good sell day.~ stoney
 
Quote from stonedinvestor:



This point >Did you see the last increase in consumer credit, a whopping $6.4B, way more than anticipated. The consumers tank is long past empty and they are now living on their cards in record numbers. Probably figure they are going to destroy their credit when they lose their house may as well go whole hog and stiff the CC companies too.... bares watching. You just feel the CC companies are not telling us the whole story right now... How can Visa and MA keep going up in the face of more and more late filers and no filers? The high end is not immune internal Amax documents I'm sure are ugly right now... ticking time bomb in the CC sector...
More...

lol

MA and Visa going to keep rising. These are global companies that aren't dependent on the US consumer.
 
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