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Big malls and places like Disney give you a map showing you where you are in the mall or resort. My first chart shows us where we are in relation to the market’s recent support/resistance zones. The S&P broke support last Friday, and is now toying with my previously described final support zone. The chart below paints a pretty good picture of where we are. A break of 2540, as I noted on the above blog link, spells trouble. For now, keep calm and carry on.

 

Not everyone is calm, which is a good thing!

In the past, I have mentioned that one of my favorite contrarian indicators is pitting smart money against dumb money. As you’ll note on sentimentrader’ s smart/dumb comparable, the dumb money is clearly selling while the smart guys are buying. In fact, only 26% of dumb money is confident about the market now, whereas 69% of the smart folk are confident about investing in equities. Note on the confidence spread below that clusters of high smart money vs dumb money confidence has lead into a renewal of the bull market in the last few market selloffs. While this is not a longer termed study, I do have some longer dated data that might back such a potential up a bit.

 

Lipper notes that the outflow of mutual fund equity investors (dumb money) is the highest in 15 years. US equity investors have taken some 0.44% out of equity. Since 2002, every time that number has gotten over 0.25% outflow of equity funds, the markets were higher one month later (9 out of 9 occurrences). According to sentimentrader.com, every time there is a 6-month low set in December, markets are higher a month later (8 out of 8 occurrences since 1950). Seems to be some agreement in the data on that.

Finally, Larry McDonald’s “Bear Traps” research notes that world markets are looking to be in a capitulation phase. Larry is probably one of the smarter cookies out there, and his main focus is looking at opportunistic capitulation – he routinely examines world markets, currencies, commodities, bonds…you name it.. for oversold trade opportunities. Larry is no mid or long termed investor, so that must be kept in mind. He’s pretty neartermed in outlook. But his ACG analysis, which I have followed for about 5 years now, is usually pretty good. A vote of confidence towards an oversold bounce (particularly in Europe and emerging markets) by Larry isn’t a bad thing. I will note that he thinks we will see a bounce, then a new down leg bringing NA markets into a genuine bear. Again, he has models that tend to be decent at predicting such events – albeit not accurate all of the time (but, who is?).

 

Conclusion

Watch for a reversal in market movements over a few days. This might signal an oversold bounce trading opportunity with a potential for a few weeks to a month of upside. Again, though, watch for the bounce.

 

12 Comments

  • Keith: Help me understand mutual fund year end distributions, mainly for tax purposes.
    I am of the impression that if I bought an ETF or mutual fund anytime in the first half of Dec and held it past year end that I would get a distribution for tax purposes and it would cover all of that year’s growth or perhaps dividends they earned inside the fund. If true, then that buyer may get stuck with a significant tax hit even if they realized no growth during the month of Dec.
    On the counter side if one sold a strong fund performer during Dec we may not get hit with the tax distribution.
    I understand if the asset grows and then I sell there is a capital gain but I don’t want to get hit with gains or dividend growth for the year that I did not benefit from.
    Can you please comment? Thanks

    Reply
    • Daddyo–this is one of the many reasons why I have, for almost 3 decades, been warning investors against buying mutual funds. To your point–you buy a fund late in the year–they bought (for example) MSFT 3 years ago and it has doubled since, then the manager sells the position. You inherit the capital gain from their (not your) ACB of 3 years ago.
      Often a fund will announce when it will do its distribution, and how much. ETF’s usually do. So you get a heads-up, and can make the right decision regarding your sell timing.

      Reply
  • Is this why I have been reading Keith Richards blog for ages – timely, transparent and of practical investment use. Will you use the 3 day rule once the supports are hit or any other factors to avoid a bear trap. Many thanks.

    Khokon

    Reply
    • Hi Khokan–many thanks for that–and please pass the blog on to your friends–it helps grow the community
      Yes, I am waiting for 3 postive days before spending any of my cash. If the market breaks 2540, I will wait 3 days before selling. Keeping it simple!

      Reply
  • What does it mean for oil now breaching the $50 level? They had an energy guy on BNN today indicating that oil is headed back up to $70 by the 2nd quarter. What is your best guess?

    Reply
    • Given the break in technical support, I’d guess we will see $42-43 (next support) before we see it rising again. Significant Technical resistance will come in at $55 – I would be hesitant to call anything higher until that level was broken…and if that happens, more resistance in the mid $60’s. $70 is a pretty bold call and there is so much overhead supply on the chart before that point I wont hold my breath waiting for that price.

      Reply
  • Good morning Keith,
    I like the idea of the 3 day rule (3 days positive for the markets) yet, I feel like we might miss the best part of the rally. Yesterday (Tuesday) were were green, today looks green, and tomorrow (Thursday) we may have a follow through and be green as well. So, waiting till Friday seems like I have missed some big upside moves.
    As for oil, I think we are in a world of very low oil prices from here on in. Fracking technology has improved dramatically, so extracting oil is very cheap. The world is awash with oil, and the countries that produce it are cash starved, and will keep pumping it out as long as they can make a profit, regardless of how small a profit it is per barrel. The lower the profit they make per/barrel, the more oil they will pump out and sell to offset the lower priced oil. IMO, if the Federal government does not get the pipelines built out west, I think Canada’s oil industry will be in serious trouble, more so than it is today. I just hope, we get the pipelines built and start selling our Canadian oil out to world markets.

    Reply
    • Raymond you are right, in that the 3 day rule is imperfect. But I very much disagree that you will miss most of the rally by waiting 3 days. Yes, you might miss on the first 25-30% of the gain, but as has been proven over the recent 1-2 day jumps that have been followed by a huge downside–it is far better to wait for that 3rd day, and buy higher than to get caught in yet another waterfall decline. Trade Offs–you cant buy at the bottom, or at least I cant.
      Re the pipelines–just ask any Albertan about their take on the competence of the current government to get the pipelines approved.

      Reply
  • As an unsophisticated chart watcher, I most often use the 52 week high as a quick and dirty indication of where the market is on any specific day. Yesterday, the early market was up and when I looked at the 52 week highs on StockCharts, there were 20 in the that 52 week high list. Yipee! But when I looked at the list, most were bond ETFs and only three were actual stocks. And today, there were 18 but again, 14 were bond ETFs. Not what I’m looking for.

    Reply
    • Yes Fred, you would find that the main group of new highs comes from bond instruments, utilities and related, and some real estate plays

      Reply
    • I’m taking my ball and going home! See my comment to Ray–looks like a real possibility, we shall see.

      Reply

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