Looking for A Gold Lining Behind Dark Market Clouds

The gold market has been an interesting one of late. Even as other precious metals have swooned along with commodities as a whole, gold has managed to hold its own. When commodities were in favor during a period of inflation concerns, gold managed to benefit. Now, with economic weakness and the need for extensive government intervention to save the financial system, gold benefits from concerns over the value of the U.S. dollar.

The chart above shows the SPDR Gold Trust ETF (GLD) from 2006 to the present (blue line). The pink line is a 50-day moving average of volume in GLD. GLD is an interesting vehicle in that it is a way for the non-futures trading investment public to benefit from movements in the metal without the requirements of physical ownership and storage. What we see is that trader and investor interest in GLD has skyrocketed since the summer of 2007, which is also when we saw stocks make their bull market highs.

One interesting dynamic that could play into a longer-term bullish picture for gold is the fact that many countries hold very little of their reserves in the form of gold. The United States, for example, holds about 78% of its reserves as gold; Germany holds 66%. Japan, on the other hand, holds only 2% of its reserves as gold; China limits gold to 1% of reserves; India, 3%; Russia, 2%; Brazil 1%; and South Korea just .2%. So, if these countries aren't holding gold, how are they storing their reserves? Many of them are heavily weighted toward U.S. Treasury instruments. Should these countries decide to aggressively diversify their reserves out of concerns for the U.S. dollar, gold--and the shares of gold mining firms--could be primary beneficiaries.
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Hindsight Bias and Regret in Trading

"I should have caught the move"

"I knew that was going to happen"

"If only I had followed my signal"

When markets become unusually volatile, they make unusually large moves. To the short-term trader or the active portfolio manager, such moves look like phenomenal opportunity. This creates a kind of dissonance when their results do not reflect such opportunity. This dissonance is often expressed as regret: the word "should" becomes a prominent part of traders' thinking.

Underneath this regret is what behavioral finance researchers call "hindsight bias": the exaggerated sense of predictability in retrospect. Very often, traders will have reasons in mind why the market might rise and they can identify reasons why it might fall. The evidence from research, charts, fundamentals, and indicators often paints a mixed picture. In retrospect, however, traders will look back on market outcomes and selectively pick out the evidence that would have predicted the market's movements. They minimize the ambiguity that occurred at the time and convince themselves that they knew all along what the market was going to do.

It's easy to see how hindsight bias and regret go hand in hand. If you convince yourself that you saw the market move in advance and you see that you didn't participate in the move, the dissonance between what your profitability should be and what it is leaves plenty of room for self-recrimination. Out of this regret, traders often feel pressure to make up for the "missed opportunity", leading to overtrading.

A psychodynamic psychologist would view hindsight bias as a kind of defense: it protects traders from the anxieties of ambiguity and unpredictability and reinforces an illusion of control. A number of behavioral finance investigations have shown traders charts composed of random price movements; invariably traders find meaningful patterns in the randomness. For them, the anxiety may not be the market going up or down; the anxiety is not knowing what the market will do.

It takes a strong psychological constitution to tolerate such ambiguity and uncertainty. And yet, it is precisely the embrace of the market's uncertainties that allows us to be alert to risk and implement proper risk management. Hindsight bias appears to be a natural response to an updating of information regarding events; it's part of how we make sense of our world. As Richard Peterson notes in his book "Inside the Investor's Brain", research from Paul Slovic finds that the best antidote to hindsight bias is a hard, purposeful look at "counterfactuals". Once a market event occurs, considering the array of alternative outcomes and their implications helps moderate hindsight bias and associated regret.

Given the limits of what we know and what is ultimately unknowable, not all movement is opportunity. The key to trading success is finding the patience to capitalize on those things you do know and the wisdom to accept what is uncertain.
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Corporate Bonds: When Safe Asset Classes Become Risky

We hear about "credit crisis" and "risk aversion", but I thought I would make those issues much more concrete for readers. This is not some volatile stock or sector, and it's not a bank. This is a chart of LQD, the iShares Investment Grade Corporate Bond Fund. Note that it's not a junk bond ETF; rather, its holdings are considered investment grade. With the current credit crunch, however, there are increasing fears that companies will not be able to sustain interest payments on bonds. This has created a dramatic selloff, in which LQD has lost 20% (!) of its value in the last three weeks. When you consider the individual retirement accounts, pension funds, and other prudent investment accounts tied to what has been a relatively safe asset class, you can appreciate the turmoil that is spreading from Washington and Wall St. to individual households.

And junk bonds? One knowledgeable source is raising the specter of double-digit defaults, given the high leverage of the issuers. The i-Shares High Yield Corporate Bond Fund (HYG) is down over 20% since May, a stunning drop, but lately no worse than the performance of LQD. It appears that investors are running from corporates altogether, dumping the good with the bad.
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Indicator Update for September 29th

Last week's indicator review found weakness prior to the sharp burst of buying that greeted initial news of a government rescue plan. Since that time, wrangling over the plan and doubts about its efficacy in the face of growing bank failures have led to further market and indicator weakness. As noted earlier, sectors are largely in a range bound mode and money flows have remained negative. This supports the point from last week that the buying we've seen has largely represented sector reallocation and short covering rather than a sustained commitment to equities.

With the week's selling, the Cumulative Demand/Supply Index (top chart) fell from a very modestly overbought level to a very modestly oversold one. This is also consistent with a range bound market. When markets put in an important bottom, the Cumulative DSI normally moves sharply and steadily higher. The inability of stocks to sustain positive momentum--which is what the DSI measures--suggests that we may still be waiting for such a bottom.

We also saw weakness in the new 65-day highs minus lows (middle chart), with over 1000 stocks making fresh 65-day lows on Friday. I will be watching this indicator very closely for divergences or confirmations on tests of recent market lows; as long as the number of stocks making new lows is expanding, I am not taking long trades for anything other than a very short-term, intraday position.

Note, too, that the Cumulative NYSE TICK line (bottom chart) has also been hovering in a range, not far off its recent lows. (This is also true of the advance-decline line specific to NYSE and SPX stocks). The messages from the Cumulative TICK, money flow, and DSI measures are unanimous: we are not yet at the point where we are sustaining buying, which is what we need to see to put in a durable market bottom.

To be sure, the divergences noted in recent posts--most evident in the new high/low figures--remain; the list of stocks making fresh annual lows has been shrinking during 2008. While this is necessary for a market bottom, it is not--in itself--sufficient. Until we see increased buying among institutions, as measured by NYSE TICK, money flows, and broad strength in the other indicators, it is premature to conclude that the bear is ready to hibernate.
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Money Flow Reversals: One Reason This Market Has Been So Tricky

Readers of this blog know that I keep tabs on an indicator called "money flow", which measures the dollars moving into and out of individual stocks. Each trade is tracked for whether it occurs on an uptick or downtick. If the former, the dollar price of the transaction times the volume is added to a daily cumulative total. If the latter, the dollar price of the transaction times the volume is subtracted from the cumulative total. The final figure at the end of each day reflects the dollar volume (or "money flow") that has moved into the stock (if the total is positive) or out of it (if the total is negative). My research takes the 30 Dow Jones Industrial stocks and calculates the money flow each day for each one and then sums the daily figures to provide a money flow measure for the entire index.

I just took the figures from 2008 and examined all two-day occasions in which net money flows across the thirty Dow stocks were positive (N = 44). Two days later, the Dow Jones Industrial Average (DIA) was down by an average of -.69% (14 up, 30 down). Across all other occasions, the Dow averaged a two-day loss of -.01% (64 up, 74 down).

So far this year, bouts of buying have been met with significant selling in the short term. That has made trading this market quite tricky, particularly if you're trying to identify and follow trends. With Friday's money flow numbers solidly positive, sustained buying on Monday on the heels of any rescue plan news would once again set up a positive two-day money flow period. The market's ability to follow up on any such strength will provide us with useful information about whether bulls find much rescue in the plan.
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Gamblers and Entrepreneurs: A Further Look at Financial Risk-Taking

In the second post in this series (here is the first post), we took a look at personality traits that are associated with risk-taking, particularly in the financial domain. This final installment in the series will examine some of the conclusions of that research.

One of the most important conclusions of the research is that financial risk-taking is negatively correlated with both "deliberation" and "self-discipline". In other words, the risk taker tends to be action-oriented and, as the investigators found, sensation-seeking. Risk takers tend to not be overly analytical and deliberative about the risks they're taking. The findings also suggest that risk takers are not highly disciplined and rule-governed. Interestingly, however, the researchers report that financial risk taking is also negatively correlated with "impulsiveness". What are we to make of these seemingly contradictory findings?

Good research leads to new hypotheses; it doesn't just provide data regarding old ones. This is a great case in point. My hypothesis, were I to follow up this line of investigation, is that the category of financial risk-takers is actually mixing together two types of decision-makers;

1) Impulsive Sensation-Seekers - These are the undisciplined gamblers who trade because they like the action and risk. They are not prone to deliberation and have little interest in aesthetics or ideas. I would predict that these market participants would be unusually prone to blow ups and negative returns over time.

2) Entrepreneurial Idea-Generators - The research found that one of the two trait facets associated with financial risk assumption was "ideas". The entrepreneurial trader is one who derives particular interest and satisfaction from idea generation (developing views on markets, building trading systems) and, out of a commitment to those ideas, is willing to assume risk. We would expect these participants to be more disciplined and, to the degree that they are actually skilled in their idea-building, more successful in their trading and investment outcomes.

This is why, in the recent post, I emphasized that "financial risk-taking is aided by the ability to generate novel ideas." The entrepreneur is not going to be satisfied by applying old ideas; nor will he or she want to simply mimic the holy grails offered by self-appointed gurus. Rather, it is novelty--the ability to see markets uniquely and creatively--that lies at the heart of the entrepreneur's ability to generate the ideas that inspire risk-taking.

This distinction between the "gambler" and the "entrepreneur" helps explain why the capacity for risk-taking is associated both with great blowups and with great career success among traders and portfolio managers. Depression is negatively associated with risk-taking, because depressed individuals can neither muster the drive to gamble nor the optimism to generate and back one's own ideas. Discipline and risk management are important components of trading success, but if the entrepreneurial hypothesis is correct, the ultimate source of success among market participants is the ability to see what others don't and act decisively upon those perceptions.
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Money Flow Update for September 27th

In the last review of money flow for the Dow Jones 30 stocks, we found a bounce in dollars entering the stock market, but also "more evidence of sector rotation than across-the-board buying". As we can see from the chart above of the four-day money flows for the Dow stocks (pink line), we have indeed bounced into positive territory over the past week, although only Friday showed significant dollar inflows into stocks. Note that, to this point, bounces into positive money flow (i.e., above the zero line, showing that more dollars are flowing into than out of stocks) have been limited in duration and have been occurring at successively lower price levels. That is precisely what we'd expect to see in a bear market. There is nothing so far in the present bounce that deviates from that pattern.

During the past week, only 12 of the 30 Dow stocks showed positive dollar inflows. Once again, this suggests that buying is probably more related to sector rotation than across-the-board bullishness. Notable dollar inflows were seen among WMT, JPM, HPQ, CAT, and C. Stocks showing sizable outflows on the week included AIG, AXP, DD, GE, HD, JNJ, KO, MSFT, PFE, and XOM. I will need to see positive inflows among a broader array of stocks to conclude that we've put in an important market bottom; thus far, buying has been relatively brief and selective.
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Sector Update for September 27th

The last sector review found more evidence of mixed performance and sector rotation. Here are the Technical Strength figures for the sectors as of the close on Friday. Recall that Technical Strength is a proprietary measure of trending that quantifies how well a price series follows an upward or downward path. Scores between +100 and -100 suggest little trending behavior; perfect trending behavior for each sector would be +500 or -500.

MATERIALS: -80
INDUSTRIAL: -220
CONSUMER DISCRETIONARY: 0
CONSUMER STAPLES: -40
ENERGY: +20
HEALTH CARE: +20
FINANCIAL: +220
TECHNOLOGY: 0

Notice that the majority of sectors are trading in a trendless manner. We appear to be in a holding pattern, awaiting the details of the government's rescue package. We see some weakness in Industrial issues in anticipation of recession and some strength in Financial stocks, perhaps partly due to the ban on short selling. The S&P futures are trading in a wide three-day range; it appears that we are setting up for a significant range breakout.
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Stock Market Sentiment On the Wane

A tip of the hat to Decision Point for this nice graphic of investor sentiment, as measured by the American Association of Individual Investors. (Here's the link to the free trial information; it ends on October 5th). Note how the proportion of bulls to bears (bottom pane) has steadily declined from 2004 to the present. That ratio is particularly low at present, as you can see by clicking on the chart and observing the values below the green line. Given the wrangling and finger-pointing in Washington, it is not at all clear that any rescue plan will be sufficient to rescue investor sentiment.

PS - Looking for weekend reading? Here are some of my articles in PDF.
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Ideas and Inspirations at the End of a Volatile Week

* More On Risk Taking - My recent post focused on personality factors that are associated with risk-taking in financial situations. Studies also show that brain mechanisms and endocrine levels are associated with risk-seeking and risk-aversion. What is on a trader's mind at the time of decision making seems to affect the nature of the decision.

* Perspectives on the Financial Rescue Package - How the government responds to the credit crisis affecting the financial system will impact markets for quite a time to come. Charles Kirk offers a number of valuable links that will bring readers up to date; many of the impacts on markets are chronicled by Abnormal Returns. Trader Mike provides a number of worthwhile updates, including how everything is now affected by financial stocks and why this has been a difficult trading environment. As Dash of Insight notes, the political process is making passage of a plan difficult. Daily Options Report offers some good and tough questions about the rescue; Ray Barros questions the wishful thinking behind the rescue.

* Should We Stop Using Stops? - CXO Advisory reviews research on the effectiveness of stop loss mechanisms in trading.

* Overbought and Oversold - Bespoke offers a nice look, sector by sector, at whether stocks are overbought or oversold.
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Day and Night Sessions: This Bear Isn't Nocturnal

I sat down with a young day trader before the market open and asked his strategy for the morning session. "I'm bearish," he explained. "The markets have all been down overnight."

"Do you know what the correlation is between the overnight change in the market from close to open and the change in the day session?" I asked innocently. He shook his head, seemingly surprised that someone would actually ask a question pertaining to data. "It's -.08 since 2007," I explained. "What happens overnight is not related to what happens during the day."

Our young trader was unusually naive when it came to his short-term trend following, but the fact remains that many short-term traders find their opinions colored by what happened overnight. In reality, these function as independent markets: what happens overnight is not predictive of what happens during the trading day.

A nice illustration of this independence is captured in the chart above. I created two indexes, both set to a value of 100 at the start of 2007. The first index (blue line) simply adds the SPY points from close to open to a running cumulative total. This is the "Night Market". The second index (pink line) adds the SPY points from open to close to a running total. This is the "Day Market".

Since 2007, the Night Market has gained 9.4 SPY points (the rough equivalent of 94 S&P 500 Index futures points). During that same time, the Day Market has lost 30.23 SPY points (about 302.3 S&P 500 Index futures points). For all practical purposes, the entire bear market during 2007 has occurred during the trading day; not during overnight trade.

But if these markets are truly independent, might we be able to best predict what will happen during the day by limiting historical investigations to previous day sessions? Could we predict what is likely to happen overnight by running studies on recent night sessions? There's plenty of room for original and interesting research by segmenting market days. More to come...
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Financial Risk Taking and Personality Traits

In my recent post, I reviewed five basic personality traits and their different facets. While there is far more to trading success than having "the right" personality--and there is plenty of reason for believing that different styles of trading call upon different personality traits--it does seem to be the case that personality can contribute to trading success. For example, the propensity to take risk has been found to have personality correlates, with different traits contributing to different risk-related arenas. For example, the trait facet of assertiveness is related to social risk taking, but not to the taking of financial risks. The trait facet of fantasy is related to risk taking in career situations, but not to financial ones.

A careful examination of this research from Nicholson, Fenton-O'Creevy, Soane, and Willman finds that the following trait facets positively contribute to the propensity to take risk:

* Sensation-Seeking - The desire for new experiences;
* Ideas - An interest in new and different ideas;

The following trait facets are inversely correlated with risk-taking:

* Deliberation - The tendency to reflect before acting;
* Straightforwardness - The tendency to address matters directly with people;
* Depression - Feelings of negative self worth and hopelessness;
* Self-Discipline - The tendency to stick to one's responsibilities;
* Impulsiveness - The tendency to make decisions on the spur of the moment
* Aesthetics - An interest in art and beauty.

Across all areas of risk taking--social, career, health, recreation, finance, safety, and social, the trait facets most related to risk-taking in a positive way were sensation seeking and ideas. The facets most negatively related to overall risk-taking were deliberation and compliance (going along with others).

Notice, of course, that the tendency to assume risk is not necessarily an indication of trading and investment success; some of the biggest blowups on Wall St. have been high risk takers. Nonetheless, the ability to take risk is necessary if one is to earn sizable returns. This research suggests two interesting conclusions:

1) There is a tension between financial risk-taking and deliberation/discipline;

2) Financial risk-taking is aided by the ability to generate novel ideas.

My next post in this series will explore each of conclusions and their implications.
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Relative Range Expansion in the S&P 500 Index

I noticed that the average daily range for the S&P 500 Index (SPY) over the past week has been quite elevated compared with its norm. So I took a ratio of the average five-day high-low range and expressed it as a percentage of the average 50-day high low range. During the last week, the average range for SPY has been twice its 50-day average.

Since 2000, we've only seen 43 occasions in which the average five-day range in SPY has exceeded the average 50-day range by 75% or more. Interestingly, those occasions included some major periods of market turmoil--and some major intermediate-term market bottoms, including September, 2001; July, 2002; March, 2007; July/August, 2007; and January, 2008.

Twenty days after the spike in relative range, SPY averaged a 20-day gain of 3.17% (34 up, 9 down), much stronger than the average 20-day loss of -.74% for the remainder of the sample. When the five-day range was less than 75% of the 50-day range since 2000 (N = 333), the next 20 days in SPY have averaged a loss of -1.95%. It appears that relatively quiet markets have offered quite a bit less upside opportunity than markets in turmoil.
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Personality Traits and Trading Success

The research of Costa and McCrae suggests that personality traits fall into five broad categories, with each category displaying a number of facets. Their NEO-PI personality trait inventory labels these categories and facets as follows:

* Neuroticism - Anxiety, Angry Hostility, Depression, Self-Consciousness, Impulsiveness, and Vulnerability;

* Extraversion - Warmth, Gregariousness, Assertiveness, Activity, Excitement-Seeking, Positive Emotions;

* Openness - Fantasy, Aesthetics, Feelings, Actions, Ideas, Values;

* Agreeableness - Trust, Straightforwardness, Altruism, Compliance, Modesty, and Tender-Mindedness;

* Conscientiousness - Competence, Order, Dutifulness, Achievement Striving, Self-Discipline, and Deliberation.

I commonly hear questions about which personality traits distinguish successful traders. My leaning is to question the premise; success in trading is probably far more related to talents, skills, and effort than personality features. That having been said, it's no doubt the case that certain traits tend to help people make best use of their talents and skills in particular vocations.

One interesting case in point came from research that I conducted quite a few years ago. The literature had found that stereotypical masculine sex role traits (assertiveness, achievement-orientation) were more associated with happiness and success than stereotypical feminine sex role traits (caring, warmth, nurturance). I wondered if this was perhaps an artifact: since most research subjects in these studies were hapless Psych 101 students fulfilling their requirements, perhaps the findings were telling us more about what was successful in their academic worlds than in the world in general.

I repeated the studies but used subjects who attended a college of nursing. Sure enough, feminine sex roles were more associated with happiness and success in that population. It's not the personality trait, but the fit between the trait and one's environmental and work demands, that accounts for success. In the military, one set of personality traits might characterize success; in the worlds of sales, trading, or psychotherapy, we'd expect to see different traits come to the fore.

Similarly, different styles of trading--from market making in the pit and scalping to longer-term investing and pairs/spread trading--might be associated with different personality trait correlates of success. The search for a single set of traits to predict success is unlikely to bear fruit. In my next post, I'll offer a short personality self-assessment and discuss how the results might be related to trading success in various financial settings and strategies.

RELATED POST:

Assessing Trader Personality
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Introduction to Trading: Learning How to Trade

Where most efforts at trading education have failed is in their lack of development of a coherent curriculum. Piecemeal presentations of market patterns or indicators doesn't provide the concrete skills needed to generate trade ideas, effectively execute those ideas, and then manage positions as they trade. If we look at the curricula at medical schools, for example, we find several core components:

1) Information - Beginning medical students are immersed in basic sciences to develop a fund of information regarding the body and its health and illness. A competent physician is not just one who knows what to do, but also why to do it. This deep level of knowledge is important when it becomes necessary to make difficult differential diagnoses or to manage unusual reactions and complications following treatment. After all, you wouldn't want a surgeon operating on you if he or she hadn't been grounded in anatomy and physiology. Similarly, traders need to be grounded in the basics of their profession: how markets work, how markets affect one another and are affected by news and sentiment, how positions in market can be expressed across different markets, how risk is managed, etc. Someone who manages a personal portfolio or trades an account without such information is not so different from that surgeon who lacks knowledge of anatomy and physiology.

2) Observation - "See one, do one, teach one" is a mantra in medical education. Before a student treats patients, he or she shadows senior medical students, residents, and attending physicians to gain exposure to different specialty areas of medical practice. In my book Enhancing Trader Performance, I explain how pattern recognition lies at the heart of trading: it is necessary to observe and internalize those patterns before one develops a "feel" for them that can aid trading decisions. Observing markets in different conditions and observing traders tackle markets via online trading rooms is invaluable in bringing knowledge to life.

3) Simulation - Students practice their ability to take a history and physical by working with simulated patients before they actually go onto the hospital floors or into the clinics. They work on cadavers before they perform surgical procedures on live patients. They also follow patients under the very close supervision of senior colleagues, so that they can practice decision-making under safe conditions. Much of the second half of medical education is a learning by doing in progressively realistic, independent situations. Similarly, traders can begin learning how to enter and manage positions by practicing their skills on a simulation platform before putting their capital at risk--and by trading very small size before tackling larger risk.

4) Supervised Practice - Eventually medical students need to work on live patients and eventually they need to be responsible for their own patients. At each level of education, however, there is supervision and consultation, so that mistakes can be detected and avoided and risk to patients can be minimized. After the first four years of medical education are completed, there is a supervised process of practice called residency, in which the skills specific to a specialty area are developed. This typically lasts another three or four years. A student is not deemed ready to be a board-certified specialist until there have been many years of increasingly independent practice. Trading is no different: there are skills specific to specialized markets and trading styles; mentorship requires guidance from those who are steeped in each specialty area (scalping, portfolio management, market making, options, currencies, etc.).

Many of the problems traders experience in markets is the result of trying to short-circuit this learning process. Many times, this short-circuiting is the result of education vendors who know nothing of research/practice in education and curricular design. The challenge for new and developing traders is to locate and utilize the resources they need to structure their own learning processes. One goal of this "Introduction to Trading" e-book, as well as the book on self-coaching, is to help traders with this process.
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Panic Isn't Paying

We've had panicky selling in stocks on Thursday morning, only to be sharply reversed in the afternoon. We had panicky stock buying on Friday, only to be reversed in today's trade. Now we're seeing a panicky inflation trade, selling U.S. dollars and buying gold, oil, and basic materials shares This is a market that has been punishing panic, and the latest panic is that the government's rescue plan will flood us with cheap dollars and rising prices. Meanwhile, financial institutions hoard cash and restrict lending, a clearly deflationary dynamic. It wasn't so long ago that markets were pricing in a Fed tightening; until the day of the Fed meetng we were then pricing in a rate cut. Both hopes were dashed. In a time when fears run strong, scenarios tend toward the extreme. The market, so far, is doing a fine job of punishing such extremity.
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Indicator Update for September 22nd

In the last indicator review, I stressed a dual perspective: increasing short-term weakness among the indicators, but continued divergences relative to the July lows. By Tuesday, this duality was so striking that I indicated, "I'm trading like a bear, but watching for investment opportunities like a bull." Indeed, we continued to trade lower into Thursday morning--all the while maintaining the divergences--until a dramatic burst of buying, sparked by news of a government rescue plan for troubled banks, moved the markets sharply higher.

As a result of the buying burst, the Cumulative Demand/Supply Index (which has been my best intermediate-term timing measure; top chart) moved from an oversold level below -30 to a modestly positive level. New 65 day highs minus lows (middle chart) turned dramatically positive with the rise after also failing to confirm its July lows. With over 2000 stocks across the NYSE, ASE, and NASDAQ making fresh 20-day highs on Friday, it was clear that a large number of issues participated in the market strength.

This broad participation was also evident in the positive money flow numbers for Thursday and Friday, as well as the reversal of weakness in the Cumulative NYSE TICK (bottom chart). Buyers clearly held the upper hand in the wake of the announcement of the rescue. In spite of that, sector performance was uneven, suggesting that much of the movement may have been frantic short covering and sector reallocation. I will be watching the daily Cumulative TICK and money flow numbers carefully to assess whether or not buying continues and validates that we have put in an important intermediate-term low. My best estimate at this juncture is that we have done just that and that we should be looking for higher prices into the first quarter of 2009, per the cycle analysis recently posted. Failure to expand the number of stocks registering fresh new highs, failure to maintain a positive sloping Cumulative TICK, and failure to broaden technical strength among the market sectors would weigh against this expectation; confirmations from these indicators would be supportive.
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Money Flow Update for September 21st

The last update on dollars flowing into and out of the stock market found that flows were consistently negative, suggesting that bounces represented short covering and sector rotation, rather than a fresh influx of buying. Since that time, we saw funds flow sharply out of the Dow Industrial stocks early this past week before turning positive on Thursday and Friday. As the four-day moving average of money flow from the above chart shows (pink line), moves into positive territory have been short-lived during the recent market decline. We now need to see if the influx of buying from Thursday and Friday can be sustained.

Note that the four-day average money flow is still in negative territory. While the buying from the last two days was impressive, it was not as pronounced as the degree of selling from early in the week. Over the past week, 16 of the Dow stocks show dollar inflows, 14 show outflows. This fits with the sector performance data I recently presented: there continues to be more evidence of sector rotation than across-the-board buying. This will need to change, I suspect, to sustain a bull market move.

P.S. - Stocks with notably positive money flows this past week include AA, CAT, DD, GE, HPQ, JNJ, JPM, MCD, MMM, PG, UTX, and VZ. Notable outflows were seen at MSFT, XOM, WMT, MRK, KO, IBM, BA, and C.
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Market and Sector Perspectives for a Sunday

* Good News, Bad News - Following the recent posts on market cycles, I mapped out (chart above) how I've been viewing the current cycle, given the divergences noted in earlier posts. With the surge of buying in the markets the past two days, it is likely that the recent lows represent price lows for the current cycle, implying higher market prices well into 2009 (given the rough proportionality of the duration of the period from the momentum high to the price lows and the period from those lows to the next cycle high). That's the good news. The bad news is that, at the larger time frame, we made a momentum peak in 1999/2000 and a price peak in October, 2007, implying that we have yet to make momentum and price lows on this larger time frame--and that those lows are likely to take out the 2002-2003 lows.

* Sector Comeback - What a difference a couple of days make! Here are the Technical Strength readings by sector as of Friday's close:

MATERIALS: +260
INDUSTRIAL: +80
CONSUMER DISCRETIONARY: +140
CONSUMER STAPLES: -160
ENERGY: +160
HEALTH CARE: -60
FINANCIAL: +260
TECHNOLOGY: -100

Note that there is still evidence of considerable sector rotation, as money left the relative safe havens (consumer staples, health care) and went into the rescued financial sector. Note also that we are very far from being overbought, despite the sharp rise of the last couple of days.

* Money Finally Flowing Into the Market? - The big question is: how much of the rise late in the week was mass short covering and how much represented fresh buying interest? Money flow data from the Wall St. Journal found significant positive money flows into the Dow stocks and the major S&P sectors on Friday. More on that topic in the indicator review to be posted Monday AM.

* Watch for Themes Going Forward - How will the recent turmoil and the proposed government action play out in the various markets? Some things I'll be watching going forward:

* Signs of risk-taking or risk-aversion: How do emerging market equities behave relative to U.S. stocks?

* Interest rates and Commodities: Hard to imagine tightening moves any time soon, given the vulnerability of the economy, but will long rates and commodities begin to price in further inflation?

* Confidence in U.S. Dollar - If the U.S. government is taking on dodgy debt, will investors want to hold U.S. dollars, and will inflation expectations weigh on the dollar?

* Trader and Investor Sentiment - Will the recent government action boost sentiment among stock market participants or will we begin to see doubts that the rescue can work?

Hard to believe there won't be repercussions from the government's expansion of debt, including missed opportunities to reform social security and health care and limited room to raise spending on other priorities, cut taxes, or tackle new military challenges.
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Tracking NYSE TICK and Other Ideas for a Volatile Week

Tricky TICK - Several readers have noted that the cumulative NYSE TICK was persistently positive during the day on Friday, yet the S&P 500 Index could not surmount its opening levels. One particularly observant reader wondered if the abolition of naked short-selling among financial firms might affect TICK. Given that they are among the most actively traded issues of late, they certainly would be expected to impact TICK more than infrequently traded issues. Note how the five-minute TICK values (chart above) consistently stayed above the blue zero line for much of the session. Interestingly, the Dow TICK (TIKI) displayed a similar pattern, especially in AM trading--we didn't get a -20 reading for over an hour of trading. Just as the removal of the uptick rule changed the distribution of TICK in the summer of 2007, I suspect we are seeing an upward shift of average TICK levels with reduced short selling. I'll follow the distribution of TICK going forward and will revert to relative TICK readings (comparing current readings to a lookback average) as a way of adjusting for this shift.

* New Trading Community - I recently received an email from the developers of the Inner8 site, which is developing a community of traders to share trade ideas and analytics based on community recommendations. Readers interested in taking a test drive can use the free access code: 2pccs.

* Perspectives on the Volatile Market - Great post from Trader Mike on picking your spots when short selling. Charles Kirk links a number of informative articles on the government rescue plan and its implications. Abnormal Returns chronicles perspectives on the move to end short selling and the impact of the Fed on option sellers.

* Quick Hits - Banks at the mercy of the stock market; Why the Treasury and Fed had to act when they did; Why the rescue is a bad idea; My Demand/Supply measure of short-term stock momentum hit an upside record level on Friday; Wonder why it seems as though permabear sites are screaming loudest against the rescue plan; Homebuilder shares hit their highest levels since May on Friday after holding well above their July lows on the recent decline.
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An Introduction to Trading: Stock Market Cycles Across Timeframes

In this next installment of the "Introduction to Trading" e-book (see this link for all prior segments), we'll examine examples of the aperiodic stock market cycles that form the first leg of our conceptual framework. Readers are strongly advised to read this prior portion of the book before going forward, so that they will understand the basic concepts behind cycle structure.

First let's take a look at a long time frame (top chart). We made a momentum high in the Dow Jones Industrial Average (DJIA) in October, 1965 when we saw 160 stocks (out of the approximately 1400 that traded at that time) make fresh 52-week highs. That momentum high represented the point of maximum upside momentum from the long-term bull market that sprang from the momentum lows of the early 1930s all the way to the secondary lows of the late 1940s. From the momentum high in 1965, we made subsequent price highs in 1966, 1968, and 1972 before the market plunged to momentum lows in 1974 and eventual secondary lows in 1982. The entire sequence of a momentum high in 1966; secondary high in 1972; momentum low in 1974; and secondary low in 1982 represents a single cyclical structure.

Now let's drill down a bit (bottom chart). From the Dow lows in March/April, 1980, we marched higher to a momentum high in November, 1980 and secondary highs in March, 1981. We then dropped to a momentum low in September, 1981 and secondary lows in March, June, and August, 1982. That sequence of a momentum high in November, 1980; secondary highs in March, 1981; momentum low in September, 1981; and secondary lows in summer, 1982 represents another cyclical structure--one nested within the cycle described in the earlier paragraph.

These are historical examples that I pulled from my database, using archived data for advancing vs. declining stocks and stocks making new 52-week highs and lows. Let's take a look at several important implications of this cyclical structure:

1) The shape of a cycle is partly determined by the cyclical structures within which it is embedded. If we're in a long-term downward phase of a cycle, the downward phase of an embedded shorter-term cycle will be exaggerated. During longer-term periods of topping and bottoming, we'll see shorter-term cycles that are more symmetrical in the amplitude of their rises and declines.

2) There is a rough proportionality between the duration of the move from a momentum high to secondary price lows and the duration of the next bull market rise. Thus, we had a momentum peak in 1965 and a final, secondary low in 1982; that led us to an important long-term bull market momentum peak in 1999. Similarly, we hit a momentum peak in late 1980 and secondary lows in March-August, 1982; that led us to an important cyclical bull peak in early 1984. This rough proportionality, first laid out (to my knowledge) by Terry Laundry, is not precise to the day or week, but is a helpful guideline for broad investment timing.

3) One's trading strategy should be adjusted for the phase of the market cycle being traded. As markets are gaining momentum, a trend-following strategy (buying dips in an uptrend; selling bounces in a downtrend) will be most successful. Once we have passed a momentum peak, countertrend trading (fading strength when buying dries up; fading weakness when selling dries up) will be most successful. Price alone is not sufficient as a basis for trading decisions: you have to know whether markets are gaining or losing participation as prices move to new highs or lows.

4) No cyclical structures are perfect. Secondary highs and lows are often fresh price highs and lows, but not always. Take the example of October, 1987--a dramatic momentum low on panic selling. That drop left a huge price tail intraday that was never taken out during the secondary price lows that occurred in 1988. Similarly, not all indexes will make fresh price highs at secondary highs: it's precisely such divergences that help us identify secondary highs.

5) Note, too, that there can be multiple secondary highs or lows. As a rule, I've found that the longer the duration of the distribution process (the time between momentum highs (lows) and secondary highs (lows), the greater the trending move following the distribution. Some of the best bull markets, for example, have followed declines in which we had clearly defined secondary lows well spaced apart (see the lows of 1982, late 1990; late 1998); some of the best bear market have followed rises in which there was an extended period of topping (the highs of 1999-2001). In general, markets take longer to top than to bottom.

6) Different data are helpful in distinguishing momentum and secondary extremes for cycles at different time frames. Weekly data are helpful (advance/decline, new highs/lows, oscillators) for longer-term cycles; daily data for intermediate-term cycles; and intraday data for short-term cycles. I use very short-term data, such as NYSE TICK and Market Delta for short-term cyclical moves; end-of-day data to find divergences for intermediate-term moves.

It takes a fair amount of time studying short, intermediate, and long-term cycles to become sensitive to their variations and nestings. This is not a mystical numerical system and investors/traders who try to utilize this for precise timing will be disappointed. Rather, we're constructing a conceptual system that tells us two things: 1) how the current time frame relates to the next larger one; and 2) how the market's gaining and losing of strength and weakness is related to expectable price action going forward.

In my next post, we'll take a few examples closer to our current time period.
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Questions In The Aftermath of the Bank Rescue

As details emerge regarding the government's proposed plan to assume toxic bank debt and backstop the mortgage and money markets, the estimates of the cost are quite high. How does such a massive assumption of debt affect perceptions of the dollar and the creditworthiness of the U.S.? How will it affect government borrowing going forward (and thereby interest rates)? How will it affect inflation? How will it compete for investment dollars with corporate borrowing? How will all of these affect economic growth in the U.S.? It's interesting to see that, with stocks soaring today, gold is moving higher (top chart); the euro is moving higher vis a vis the U.S. dollar (middle chart); and 10-year Treasury rates are soaring. Time to hedge U.S. dollar exposure?
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Anatomy of a Market Turnaround: Tracking Intermarket Themes

With the midday turnaround in the S&P 500 futures (top chart), note how we also saw a plunge in gold (second chart), a fall in the euro vs. the U.S. dollar (third chart), and a fall in the price of short-term Treasuries (bottom chart). Gold had represented a safe haven during the market decline; the U.S. dollar was under pressure during the decline due to failing financial firms; and short-term Treasury instruments served their role in a flight to safety during the decline. The simultaneous unwinding of these themes was a strong indication that market sentiment had shifted in a fundamental way.
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Decision Point: Free Trial for TraderFeed Readers

There aren't many market services that I recommend without reservation--and there aren't many that I've subscribed to for many years running. One exception that readers will recognize is the Decision Point site. Carl Swenlin has built the site into a premier source of market information, with a wealth of indicator, sector, and index charts, as well as charts tracking gold, the U.S. dollar, bonds, sentiment, and much more.

When I mentioned to Carl that I'd be saying nice things about his site, he generously agreed to provide readers with a free trial subscription good through October 5th. To access the subscription, simply use the following:

User ID: table
Password: 63coat

Where I find Decision Point most helpful is in its unique collection of indicators. These include:

* Stocks making new highs and new lows broken down by index

* Unweighted market and sector indexes

* Percentage of stocks above their moving averages, broken down by index and sector

* Long-term historical charts of indexes and indicators such as the McClellan Oscillator

* Chart books of ETFs that show what's hot and what's not

I'm not commercially affiliated with Decision Point and was not asked by Mr. Swenlin for this post. Rather, I'm using the opportunity to highlight a service that I personally have found to be useful and run with integrity. My thanks to Carl for graciously allowing me to post selected Decision Point charts on the blog site. Now readers can take a spin and follow the charts for themselves!
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Quick Note on a Weak Market

As readers of this blog know, I use historical studies of market action to identify possible directional edges going forward. This morning we see a number of positive edges, from the reduced number of new lows on Wednesday relative to Tuesday (Rennie Yang's Market Tells service has a nice perspective on that) to the elevated negative sentiment to the non-confirmations I've discussed in recent posts. Readers also know that I consider it useful to identify when markets fail to act on their historical precedents. When markets *should* move directionally based on historical precedent and don't, *that* is also useful information. Something is different in the current market that is outweighing those historical dynamics.

While a number of historical indications of rally potential have been present, the market "tape"--the NYSE TICK, the advance-decline numbers, the money flows--has been tilted to the bears. With important support at the Tuesday and Wednesday lows, it's time for market bulls to put up. We need to see a meaningful rally off these oversold levels or the downside could get sharp and ugly. This is a time to be flexible, to be attuned to the market tape, and--above all--to balance the pursuit of opportunity with the prudence of risk management.
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A Few Stock Market Perspectives

In our top chart, we see the S&P 500 large cap index (top pane), with the ratio between the weighted version of the S&P 500 Index and the unweighted version in the bottom pane. Note that, since January, the unweighted version has been showing relative strength compared with the weighted version. Interestingly, that January low was also the point at which the greatest number of S&P 500 stocks made 52-week lows. Since that time, weakness has been greater in the largest of the large cap stocks, weighing down the weighted version of the index. Another reflection of this dynamic is that the advance-decline line specific to the S&P 500 stocks has not yet broken beneath its July low. Just as the smallest of the large caps have outperformed the mega-caps, we've also seen relative outperformance among the S&P 600 small caps, as noted in a recent post.

The bottom chart takes a look at the ProShares Ultra Long S&P 500 ETF (SSO) and the Ultra Short S&P 500 ETF (SDS). These have become popular speculative vehicles for both hedging and directional trade, given that they move roughly twice as much as their underlying index. For this reason, total volume between SSO and SDS (pink line) is a nice indicator of speculative fervor--and we can see how this, like VIX, tends to rise when the market has been weak (blue line). Wednesday's volume between the two hit a record, showing tremendous speculative activity (which I interpret as aggressive shorting and fearful hedging). Note how total volume between the Ultra ETFs has also tended to be muted at relative market peaks.

Finally, thanks to the MoneyShow folks for making my talk at the Las Vegas Forex Expo available as a webcast. In these turbulent market times, the topic of coaching oneself seems particularly relevant.
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Mid-Week Views of a Bearish Market

* Getting Short When You Can - Short sellers kept it up until the very end of the trading session; after midnight, we're back to restricting naked short sales.

* Risk Aversion Gone Wild - The yield on 3-month T-bills dropped to .04, as investors sought a safe haven. The same desire for a safe haven launched gold (GLD) over 10%. Note how the U.S. dollar is once again under pressure; if the government assumes the bad debt of banks, it stops looking so creditworthy itself. Meanwhile, long-dated muni bonds hit a record spread vs. Treasury bonds.

* Continued Weakness - Across the NYSE, NASDAQ, and ASE on Wednesday, we had 361 new 20-day highs against 3631 lows. 52-week lows among the three exchanges dropped to 1999 from 2225 on Tuesday.

* What Went Wrong - Kirk reviews articles on Wall St.'s woes and makes the case against bailouts.

* A New RTC? Lots of buzz about the government taking over bad bank debt; Abnormal Returns finds links and other perspectives on the credit dilemma.

* Emerging Woes - As bad as we have it, China and Russia's markets have had it worse; Trader Mike updates his links.

* The Trauma of Loss - Stuart Schneiderman offers thoughtful views on dealing with catastrophic losses.

* Looking for Support - Market Rewind offers an interesting perspective on SPX support.
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Behavioral Finance and Trading: The Dangers of Anchoring

An excellent article from Investopedia summarizes the phenomenon of anchoring and how it affects financial decision making. (See the links at the bottom of that article for other posts on behavioral biases that influence trading and investment). Anchoring occurs when we become stuck to a particular reference point as a basis for making judgments and decisions. A very simple example that is common among traders is anchoring to an entry point after entering a position. Many traders will refuse to take a loss, instead waiting for the market to return to that entry point to allow them to scratch the trade. I've seen traders refuse to exit a bad position that moved to within ticks of their entry, fixed on exiting at the anchored point of entry. The result is that they often end up taking much larger losses when sheer pain becomes their stop-loss mechanism.

Salience plays an important role in anchoring: we are most likely to anchor decisions to criteria that capture our attention. For that reason, traders commonly anchor to high points and low points in market movements, including obvious points of support and resistance. Traders will gravitate to these points for the placement of their stops, as well as their entries for breakout trades. A useful behavioral rule is to assume that markets, in probing to establish value, will gravitate toward the price points of highest salience: those anchored by the largest numbers of traders.

At times, this probing can seem almost malicious, as if the market is trying to take out the largest number of stops and trigger the largest number of orders possible. One trader recently put it this way to me: the market will tend to move to the price region with the greatest volume of resting orders. If you think about how algorithms would need to be programmed to exit short-term trades, this makes sense. Furthermore, it would make sense for those resting orders to be placed just beyond those highly salient anchor points.

This makes anchoring a dangerous behavioral bias. If you anchor to a support or resistance level to enter a breakout trade, you may be completely unaware of the demand or supply that rests below or above those anchor levels. Similarly, if you place a stop near an obvious region of high or low prices, you may increase the odds that normal market probes will take out those levels in the search for value. In choppy markets, it pays to adopt a bit of a paranoid mindset: how could markets frustrate the greatest number of market participants. Usually they will do so by taking advantage of common behavioral biases, such as anchoring.

RELEVANT POSTS:

Attribution and Bias in Financial Decisions

Inside the Trader's Brain
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Divergences Continue in the Stock Market

Hats off once again to the Decision Point site for their excellent coverage of indexes and indicators. While the woes of financial firms and the health of the financial system have dominated media headlines, we've been making fresh annual lows in the S&P 500 large cap index (top chart, top pane). Interestingly, the advance-decline line specific to the S&P 500 stocks (top chart, bottom pane) remains above its July lows, suggesting that a large share of the index's weakness is attributable to a relatively small subset of stocks and sectors.

When we look at the S&P 600 small cap stocks (bottom chart, top pane), we can see that they have not followed the large caps to new bear market lows. Similarly, the advance-decline line specific to the 600 small caps (bottom chart, bottom pane) is well off its July lows.

I continue to observe that the market is not as unhealthy as the headlines would lead us to believe. Fear is certainly present: Put option volume among equities has been at multiweek highs for two days running, handily exceeding call option volume. The VIX has moved nicely north of 30. Among the S&P 500 stocks, however, 92 made annual lows on Tuesday, up from 150 in July. Among the 600 small caps, only 33 made 52-week lows on Tuesday, up from over 100 in July.

And there's those fuzzy indicators: Traffic on the blog is way up, reflecting trader uncertainty and desire for information. I just fielded my fourth media interview request in two days. During quiet and bullish market periods, I don't get four requests in a month. Like I said in my recent post, I'm trading like a bear, but watching for investment opportunities like a bull.
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A Few Thoughts About the Current Stock Market Weakness

1) Fear is on the rise - The traffic on my blog has been a very good indicator of trader worry over the past two years; we're seeing an elevation consistent with levels seen during recent intermediate-term bottoming processes. Equity put volume hit its highest level since mid-July, as did the equity put/call ratio. The latter is at levels that have been seen during recent intermediate-term bottoms.

2) A lot of stocks are not making new lows - We made fresh bear market price lows in the NYSE Composite Index and the S&P 500 Index on Monday. In spite of that, only 210 common stocks made fresh 52-week lows in the NYSE Composite universe, versus about 450 in July and over 700 in January. Of the 500 S&P large cap stocks, only 43 made new annual lows. And of the 400 midcaps and 600 small caps in the S&P indexes, only 31 and 20 respectively made fresh 52-week lows on Monday. All of these represent far fewer new lows than registered in July.

3) A lot of financial stocks are not making new lows - Yes, the Banking Index ($BKX) was very weak today. But it closed at about 65, well off its July lows of 46.52. We also saw a harrowing decline among the S&P financial stocks (XLF), closing at 19.09, down nearly 10% on the day. Still, we sit well above July's low of 16.77. Many financial issues are being taken out and shot, but many may have already put in their bottoms.

4) The housing stocks are not making new lows - The homebuilder's index ($HGX) was down nearly 5-1/2% on Monday, closing at 128.95. While uncomfortable, that is very well above July's low of 93.75. Could it be that this sector has seen its lows and is anticipating a rebound ahead?

5) We're oversold - My Cumulative Demand/Supply Index measure fell below -27 on Monday, moving it into oversold territory. When the Cumulative DSI has fallen below -25 since July, 2003, the next 30 days in the S&P 500 Index (SPY) have averaged a gain of 2.42%, with 96 occasions up and only 19 down. Across all other market occasions, the average 30-day gain has been .49% (704 up, 462 down). This fits well with the average 30-day gains following occasions when we've had more than 3000 stocks making fresh 20-day lows.

5) I'm not buying yet - A valuable piece of advice from my days living down south was to "dance with the one that brung you." I've learned to not try to anticipate bottoms, but rather identify where one might be in place as quickly as possible. As long as traders and investors are hitting bids and driving the Cumulative NYSE TICK lower--and as long as we're not seeing positive money flows into stocks--I'm keeping powder dry. Those indicators have treated me well over the years, so I'll keep dancing with them. And I do recall looking for lows in October, 1987 when a single day's timing made a 20% performance difference: If the news is bad enough, we may wash out yet and take the majority of stocks and sectors to new lows. So far, however, I'm comfortable trading the downside and looking for opportunities to invest in the upside.

6) Afterthoughts - Had a nice phone conversation with Jon Markman last night; he referenced Paul Desmond of Lowry's Reports in observing that selling does not make a market bottom; buying does. Great point. We only get a bottom when large market participants perceive price to represent value. Not there yet. Here's Markman's latest take on the market...Thanks to Trader Radio for having me on the air yesterday AM; here's the link to the show.
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Tracking A False Breakout and an Abundance of Stocks Making New Lows

If you trace the Twitter comments for the day, you'll see how the day's weakness emerged. We got a breakout move above the preopening range in the December ES futures (top chart), with stocks making their peak around 10 AM CT. Note, however, that this peak was not confirmed by the financial sector (bottom chart), which was calling the theme for the day. As the financial stocks weakened and the Cumulative TICK turned decidedly downward, we reversed the morning price strength, fell back into the AM range, and then retraced the entire range and more. All in all, it was an excellent example of a failed breakout trade, with the market unable to sustain the move above the preopening range.

On a related note, I see we made over 3200 new 20-day lows on the session--a very weak figure. In fact, since September, 2002, we've only had 18 days in which 20-day lows have exceeded 3000. Thirty days later, the S&P 500 Index was up 15 of those 18 times, for an average gain of 3.26%. By contrast, the average thirty-day gain for the remainder of the occasions in the sample has been .88%. I'll be posting more indicator data via Twitter prior to Tuesday's open.
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Live Market Updates This AM

I'll be posting market and news updates this AM via the Twitter application. Interested traders can subscribe free of charge via RSS or can simply track the last five posts under the heading "Twitter Trader" on the right hand column of the blog. The recent indicator update reflects my general view on the market: I'm keeping an eye on a possible bottoming process, but also keeping powder dry in the face of weakening indicators. Over time, I'll be using Twitter increasingly to update short-to-intermediate term market views based on the indicators. Thanks as always for your interest.
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Indicator Update for September 15th

Last week's indicator update noted increasing market weakness, but also divergences relative to July's lows. That theme continued this past week, as we maintained a modestly oversold condition in the Cumulative Demand/Supply Indicator (top chart) and expanded the number of stocks making new 65-day lows vs. highs (middle chart), but kept new lows well above the levels recorded in mid-July. Similarly, the Cumulative NYSE TICK continued to weaken during the week (bottom chart), but remained above its July lows.

Interestingly, though we are not far off 52-week lows in the NYSE Composite Index, a number of S&P sectors show surprising strength, including the financials. This strength is reflected in the advance-decline line specific to the common stocks in the NYSE Composite Index, which remains above its July lows. Still, with all of these intimations of divergences, the fact remains that money does not appear to be flowing into stocks; the bouts of buying that we've seen appear to be short-covering and sector reallocations, not fresh capital moving into equities. Combined with the weak NYSE TICK, it thus appears that sellers continue to maintain the upper hand in this market.

As my weekend Twitter posts have noted, this morning's market is poised to open very sharply lower on the heels of news regarding LEH's bankruptcy and a forced merger of MER. We'll thus be testing the mid-July lows in the S&P 500 Index and put some of those seeming divergences to the test. Equity put/call ratios are not yet at levels normally associated with market panic; nor have we seen the 30+ VIX levels that have typified recent intermediate-term bottoms. Note, too, that the Cumulative DSI (top chart) is not yet at oversold levels normally associated with intermediate-term bottoms. If we can hit those levels and retain the aforementioned divergences, I will be looking at the July/August period as a single bottoming process. I'll need to see buyers become more aggressive--in the NYSE TICK and money flow--to act on such a scenario, however.
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Money Flow Update for September 14th

My last review of money flow among the 30 Dow Jones Industrial stocks found that funds have been flowing out of those large cap names. (An explanation of how money flow is computed can be found here.) Note that the four-day moving average of money flow continues below the zero line and has been sloping downward in recent sessions. Despite some sharp bounces following weakness last week, it appears that these bounces represent short covering rather than a sustained commitment of new funds to stocks. Until we see some sustained inflows into shares, I suspect it's premature to celebrate an end to the bear market. More on this topic in Monday morning's indicator review.
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