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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