Last Friday's action now looks to have been the first sign of
internal suffering for the markets as the NASDAQ-100 Bullish
Percent ($BPNDX) reversed back into "bear confirmed" status with
just 42% of the point and figure charts showing a "buy signal."
As of yesterday's close, that number had dropped to 30% and
today's action probably isn't going to show any improvement.
NASDAQ-100 Bullish Percent - 2% box
Thursday's close showed just 30% of the stocks in the NASDAQ-100
on point and figure buy signals. It's interesting to note that
last Friday's action had this indicator reversing course and into
a column of O's at 42%, but early this week the NASDAQ-100 Trust
(QQQ) actually rallied on Monday and early Tuesday morning.
While the patient was up running around in a "euphoric" state,
the guts of that patient were in turmoil. Eventually, the
internals had the patient seemingly losing consciousness. The
good doctor that monitored the internals may have avoided that
"sucker rally" as the internals had reverted back into "bear
confirmed" status. With the NASDAQ-100 bullish percent now
nearing the "oversold" level near 30%, traders that are short/put
some big tech stocks should be lowering their stops should we get
a similar snapback rally like we saw earlier in the week. I'd
equate this market environment (Nasdaq-100) to that of a patient
out cold on the operating table and about to go flat line. At
some point, there's a catalyst that presents itself like a set of
"defibulator paddles" and shocks the patient back into rally
mode.
Subscribers will note that the play list on PremierInvestor.com
is practicing what it preaches. When a trade gets more than a 5-
10% gain, we're raising stops on bullish plays and lowering stops
on bearish plays.
S&P-100 Bullish Percent Chart - 2% box
AMGN, CSCO, INTC, MEDI, MSFT, ORCL and NXTL share commonality
between the NASDAQ-100 and the S&P-100. There are 93 other
stocks that don't. Traders/investors will note how the bullish
percent chart above (bullish % for S&P-100) is less volatile and
actually lags the NASDAQ-100 bullish percent. Thursday's trading
had the indicator reversing into a column of O's and back into
"bull correction" status. A reading of 36% would have this
market (S&P 100) in "bear confirmed" status.
By putting the two together and understanding the makeup, the
trader/investor makes the observation that yesterday's snap back
rally was just short covering. With very little bullish money
coming into the stock markets, the short covering stopped and the
progression lower continued.
Lower YIELD good for stocks myth
To be able to make the statement "With very little bullish money
coming into the stock markets" I look no further than the bond
market. Traders that still believe a lower bond YIELD is good
for stocks are getting a bitter taste of how wrong that thought
process has been. Since reaching a recent peak of 5.9%, MARKET
participants have been buying bonds like there is no tomorrow and
driving YIELD lower. The 30-year Treasury bond is considered the
most "risky" of the US Government Treasuries (30-years time is a
lot of risk). It's frightening to think that the MARKET loves
this bond so much to buy a YIELD of 5.422% when many stocks are
50-60-70-80% off their highs.
30-year Treasury Bond YIELD - last 9 months
The YIELD on the 30-year dipped to its lowest level since late
March. This should have traders and investors wondering what
kind of money is buying stocks and propping them up at this
point? I haven't heard of massive inflows into stock funds in
recent months. Perhaps all this is propping up stock prices are
bearish traders buying back some shorts.
As it relates to the YIELD on the 30-year Treasury, I'd want to
see a YIELD above our 61.8% retracement bracket level and bond
YIELD of 5.475% before I begin thinking that any type of recovery
for stocks is anything but short covering. With very little new
money coming into the markets, any money that is going to find
stocks from the bull side is going to have to come from the bond
market. A fund manager that didn't like Intel (NASDAQ:INTC) at
$31 may have opted for the 30-year YIELD at 5.5%. Now Intel
(INTC) has fallen to $28 (down roughly 9%) and his/her 30-year
bond has appreciated in price. At some point, a stock like Intel
will offer favorable risk/reward compared to the YIELD on the 30-
year. It's when we see the reversal in bond YIELDS that we begin
to think some money is beginning to shift back toward stocks.
I've set an alert on my 30-year YIELD chart at both the 5.47%
YIELD and down at 5.35% to alert me to some levels that may
triggers some buy/sell programs in bonds and perhaps stocks. I'm
using these as alerts to wake me up out of hibernation and alert
me to a potential turning point for stocks.
Right now, YIELDS are in a nasty downward trend and stocks sure
seem to be following. The more shorter-term internals like the
NASDAQ-100 and S&P-100 bullish percent charts show internal
weakness. The tells us that past support levels are being
overcome by selling as supply outstrips demand.
For equity bulls that only buy stocks, don't go to sleep. You
should be building a list of stocks that are trading against the
broader market and are not creating sell signals on their point
and figure charts. These are the stocks where demand is still in
control and sponsorship remains strong. When the MARKET gets its
"defibulator shock treatment" the stocks that have held up and
shown good relative strength vs the broader market will most
likely be next rounds winners.
Have a great weekend!
Jeff Bailey
