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The day is not over yet. But the technicals of the market do not look as bad as some fear. Right now the major indexes are up from 0.35% to 0.6%. If they can close at these levels or better today, the bottoming signs will become more obvious.
Please read the following article if you believe in technical indicators to certain a degree. Mr. Schaeffer frequently offers contrarian views. I like to read his articles.
______________________________________________________________
Monday Morning Outlook (8/13/07)
By Bernie Schaeffer
With all of the doom-and-gloom headlines in response to Thursday\'s drop ?the Dow Jones Industrial Average\'s (DJIA - 13,239.5) second-worst single-day performance in 2007 ?you\'d be hard-pressed to remember that by the time the curtain drew on Friday\'s trading, all of the major indices were higher for the week. The Dow edged up 0.4%, the S&P 500 Index (SPX - 1,453.64) closed 1.4% higher on the week, and the Nasdaq Composite (COMP - 2,544.9) rose 1.3% on a week-over-week basis.
Most impressive was the beleaguered Russell 2000 Index (RUT - 788.78), up 0.5% in Friday\'s trading and 4.4% higher for the week, enough to put it barely in positive territory for the year (by all of 0.14%).
The iShares Russell 2000 Index Fund (IWM: sentiment, chart, options) was the first to get trashed by the hedge funds and was likely negatively impacted by many forced liquidations in the riskier stocks the hedge funds liked to play from the long side. It\'s therefore logical that the small-cap arena would be the first to recover once the liquidation storm passes. If this is in fact the case (and last week\'s behavior would certainly suggest as much), it would challenge the widespread consensus that the so-called safe stocks (blue-chips, mega-caps) are the best place to be should the market right itself and then turn around. The Russell appears to me to be best positioned to lead a rebound, as opposed to its blue-chip cousins.
The IWM found support last week from its 20-month moving average at the 76.50 level, which has proven to be supportive since mid-2003. This long-term support should help the index hold up as it wages a short-term battle with overhead resistance at its 20-day trendline. Additionally, the exchange-traded fund\'s weekly relative-strength measure versus the SPX is sitting at a critical level, right at the 50% correction between its third-quarter 2004 nadir and its first-quarter 2006 top.
The IWM also posted record volume last week that was more than double the March 2 pullback week and over 40% higher than the previous week. In my book, these huge volume numbers certainly have the potential to have been climactic.
It is coming down to technical crunch time for the SPX as well, which is perched a hair above its 10-month moving average. The index has not suffered a monthly close south of this trendline since April 2005. The index is also right at the 1,450 mark, which was the site of the SPX\'s late-February peak. In other words, this market has by no means flipped yet from bull to bear status.
Turning to the all-important sentiment backdrop, the International Securities Exchange\'s (ISE) sentiment index is nearing a historical extreme. This index is a measure of equity, index and ETF call volume that is purchased (to open) versus put volume that is purchased (to open) for transactions executed on the ISE. In other words, it is a pure measure of the actions and intentions of those who are buying options with a directional view. The smoothed 10-day moving average of this ISE index is nearing the area touched at its March 2007 lows, which is the same region hit before the October 2006 rally. On a single-session basis, the August 7 reading of 51 (which indicates 2 puts purchased for every call purchased) was a record low.
Elsewhere, our old friend the CBOE Market Volatility Index (VIX) continued to rise sharply last week. On Friday, the fear barometer hit 29.84, doubling its July low. As I noted in last Monday\'s column: a trip to the 30 level would be equivalent to the VIX rise that occurred before the February-March decline ultimately bottomed, and I postulated that we may need to get to VIX 30 or thereabouts before a true bottom could be in place.
If the volatility spike we\'ve seen in recent weeks turns out to be similar in magnitude to those of the 2006 pullback and the February/March correction from earlier this year, one could argue that last week marked a short- to intermediate-term volatility high, meaning a potential return to lower volatility in the coming weeks. If this works out to be the case, it would nicely dovetail with the SPX and IWM tests of technical support. In addition, we saw last week the world central banks, including the Fed, injecting liquidity into the system to help restore order in the credit markets.
Not only is VIX behavior comparable to other pullbacks in this bull market, but the broad-market price action looks familiar as well. If we have, in fact, reached a bottom, the price action would be very similar to past corrective bottoms. In March 2007 and June 2006, the S&P put in a bottom, enjoyed a fleeting rally, and ultimately retested the bottom before beginning a full-fledged recovery. Specifically, on June 14, 2006, the S&P hit a low of 1,219.29 and bounced, only to pull back to 1,236.86 on July 18, 2006 before resuming its rally. On March 6, 2007, the S&P hit a low of 1,374.06 and briefly bounced before putting in an ultimate bottom of 1,363.98 on March 14, 2007. Turning to the current pullback, the S&P hit a low of 1,427.39 on August 6, 2007, bounced and tagged a second low on August 10 of 1,429.74. The current situation suggests that we may be in the midst of a retest that\'s a precursor to a major rally.
This is not to foolishly suggest that there are no risks in this market and that we are immune from further scary downdrafts brought about by events that have yet to unfold. But when the market continues to hold at key support levels and various barometers of investor fear are registering at very powerful levels it is very often the case that a bottom will ensue in the not too distant future and that the rally off that bottom will be very powerful. Put another way, in order to make big money you need to be willing to assume some risk when it seems appropriate to do so and to take some positions that will make you swallow hard.
This week, we\'ve got positive seasonality on our side with options expiring. Since January 2006, 13 of 19 expiration weeks have been in the black, with the SPX tacking on 2.8% during August 2006 expiration. Retail sales, the PPI, the CPI, and housing starts will give investors plenty to chew on even while earnings season focuses on the retail sector. Wal-Mart Stores (WMT), Home Depot (HD), J.C. Penney (JCP), and Kohl\'s (KSS) are all slated to take their turns next week. As far as non-retailing names, there isn\'t much in the way of closely-watched stocks, with the exceptions of Computer Sciences (CSC) and Hewlett-Packard (HPQ), both of which report on Thursday.
And now a few sectors of note...
With all of the doom-and-gloom headlines in response to Thursday\'s drop ?the Dow Jones Industrial Average\'s (DJIA - 13,239.5) second-worst single-day performance in 2007 ?you\'d be hard-pressed to remember that by the time the curtain drew on Friday\'s trading, all of the major indices were higher for the week. The Dow edged up 0.4%, the S&P 500 Index (SPX - 1,453.64) closed 1.4% higher on the week, and the Nasdaq Composite (COMP - 2,544.9) rose 1.3% on a week-over-week basis.
Most impressive was the beleaguered Russell 2000 Index (RUT - 788.78), up 0.5% in Friday\'s trading and 4.4% higher for the week, enough to put it barely in positive territory for the year (by all of 0.14%).
The iShares Russell 2000 Index Fund (IWM: sentiment, chart, options) was the first to get trashed by the hedge funds and was likely negatively impacted by many forced liquidations in the riskier stocks the hedge funds liked to play from the long side. It\'s therefore logical that the small-cap arena would be the first to recover once the liquidation storm passes. If this is in fact the case (and last week\'s behavior would certainly suggest as much), it would challenge the widespread consensus that the so-called safe stocks (blue-chips, mega-caps) are the best place to be should the market right itself and then turn around. The Russell appears to me to be best positioned to lead a rebound, as opposed to its blue-chip cousins.
The IWM found support last week from its 20-month moving average at the 76.50 level, which has proven to be supportive since mid-2003. This long-term support should help the index hold up as it wages a short-term battle with overhead resistance at its 20-day trendline. Additionally, the exchange-traded fund\'s weekly relative-strength measure versus the SPX is sitting at a critical level, right at the 50% correction between its third-quarter 2004 nadir and its first-quarter 2006 top.
The IWM also posted record volume last week that was more than double the March 2 pullback week and over 40% higher than the previous week. In my book, these huge volume numbers certainly have the potential to have been climactic.
It is coming down to technical crunch time for the SPX as well, which is perched a hair above its 10-month moving average. The index has not suffered a monthly close south of this trendline since April 2005. The index is also right at the 1,450 mark, which was the site of the SPX\'s late-February peak. In other words, this market has by no means flipped yet from bull to bear status.
Turning to the all-important sentiment backdrop, the International Securities Exchange\'s (ISE) sentiment index is nearing a historical extreme. This index is a measure of equity, index and ETF call volume that is purchased (to open) versus put volume that is purchased (to open) for transactions executed on the ISE. In other words, it is a pure measure of the actions and intentions of those who are buying options with a directional view. The smoothed 10-day moving average of this ISE index is nearing the area touched at its March 2007 lows, which is the same region hit before the October 2006 rally. On a single-session basis, the August 7 reading of 51 (which indicates 2 puts purchased for every call purchased) was a record low.
Elsewhere, our old friend the CBOE Market Volatility Index (VIX) continued to rise sharply last week. On Friday, the fear barometer hit 29.84, doubling its July low. As I noted in last Monday\'s column: a trip to the 30 level would be equivalent to the VIX rise that occurred before the February-March decline ultimately bottomed, and I postulated that we may need to get to VIX 30 or thereabouts before a true bottom could be in place.
If the volatility spike we\'ve seen in recent weeks turns out to be similar in magnitude to those of the 2006 pullback and the February/March correction from earlier this year, one could argue that last week marked a short- to intermediate-term volatility high, meaning a potential return to lower volatility in the coming weeks. If this works out to be the case, it would nicely dovetail with the SPX and IWM tests of technical support. In addition, we saw last week the world central banks, including the Fed, injecting liquidity into the system to help restore order in the credit markets.
Not only is VIX behavior comparable to other pullbacks in this bull market, but the broad-market price action looks familiar as well. If we have, in fact, reached a bottom, the price action would be very similar to past corrective bottoms. In March 2007 and June 2006, the S&P put in a bottom, enjoyed a fleeting rally, and ultimately retested the bottom before beginning a full-fledged recovery. Specifically, on June 14, 2006, the S&P hit a low of 1,219.29 and bounced, only to pull back to 1,236.86 on July 18, 2006 before resuming its rally. On March 6, 2007, the S&P hit a low of 1,374.06 and briefly bounced before putting in an ultimate bottom of 1,363.98 on March 14, 2007. Turning to the current pullback, the S&P hit a low of 1,427.39 on August 6, 2007, bounced and tagged a second low on August 10 of 1,429.74. The current situation suggests that we may be in the midst of a retest that\'s a precursor to a major rally.
This is not to foolishly suggest that there are no risks in this market and that we are immune from further scary downdrafts brought about by events that have yet to unfold. But when the market continues to hold at key support levels and various barometers of investor fear are registering at very powerful levels it is very often the case that a bottom will ensue in the not too distant future and that the rally off that bottom will be very powerful. Put another way, in order to make big money you need to be willing to assume some risk when it seems appropriate to do so and to take some positions that will make you swallow hard.
This week, we\'ve got positive seasonality on our side with options expiring. Since January 2006, 13 of 19 expiration weeks have been in the black, with the SPX tacking on 2.8% during August 2006 expiration. Retail sales, the PPI, the CPI, and housing starts will give investors plenty to chew on even while earnings season focuses on the retail sector. Wal-Mart Stores (WMT), Home Depot (HD), J.C. Penney (JCP), and Kohl\'s (KSS) are all slated to take their turns next week. As far as non-retailing names, there isn\'t much in the way of closely-watched stocks, with the exceptions of Computer Sciences (CSC) and Hewlett-Packard (HPQ), both of which report on Thursday.
And now a few sectors of note...
Please read the following article if you believe in technical indicators to certain a degree. Mr. Schaeffer frequently offers contrarian views. I like to read his articles.
______________________________________________________________
Monday Morning Outlook (8/13/07)
By Bernie Schaeffer
With all of the doom-and-gloom headlines in response to Thursday\'s drop ?the Dow Jones Industrial Average\'s (DJIA - 13,239.5) second-worst single-day performance in 2007 ?you\'d be hard-pressed to remember that by the time the curtain drew on Friday\'s trading, all of the major indices were higher for the week. The Dow edged up 0.4%, the S&P 500 Index (SPX - 1,453.64) closed 1.4% higher on the week, and the Nasdaq Composite (COMP - 2,544.9) rose 1.3% on a week-over-week basis.
Most impressive was the beleaguered Russell 2000 Index (RUT - 788.78), up 0.5% in Friday\'s trading and 4.4% higher for the week, enough to put it barely in positive territory for the year (by all of 0.14%).
The iShares Russell 2000 Index Fund (IWM: sentiment, chart, options) was the first to get trashed by the hedge funds and was likely negatively impacted by many forced liquidations in the riskier stocks the hedge funds liked to play from the long side. It\'s therefore logical that the small-cap arena would be the first to recover once the liquidation storm passes. If this is in fact the case (and last week\'s behavior would certainly suggest as much), it would challenge the widespread consensus that the so-called safe stocks (blue-chips, mega-caps) are the best place to be should the market right itself and then turn around. The Russell appears to me to be best positioned to lead a rebound, as opposed to its blue-chip cousins.
The IWM found support last week from its 20-month moving average at the 76.50 level, which has proven to be supportive since mid-2003. This long-term support should help the index hold up as it wages a short-term battle with overhead resistance at its 20-day trendline. Additionally, the exchange-traded fund\'s weekly relative-strength measure versus the SPX is sitting at a critical level, right at the 50% correction between its third-quarter 2004 nadir and its first-quarter 2006 top.
The IWM also posted record volume last week that was more than double the March 2 pullback week and over 40% higher than the previous week. In my book, these huge volume numbers certainly have the potential to have been climactic.
It is coming down to technical crunch time for the SPX as well, which is perched a hair above its 10-month moving average. The index has not suffered a monthly close south of this trendline since April 2005. The index is also right at the 1,450 mark, which was the site of the SPX\'s late-February peak. In other words, this market has by no means flipped yet from bull to bear status.
Turning to the all-important sentiment backdrop, the International Securities Exchange\'s (ISE) sentiment index is nearing a historical extreme. This index is a measure of equity, index and ETF call volume that is purchased (to open) versus put volume that is purchased (to open) for transactions executed on the ISE. In other words, it is a pure measure of the actions and intentions of those who are buying options with a directional view. The smoothed 10-day moving average of this ISE index is nearing the area touched at its March 2007 lows, which is the same region hit before the October 2006 rally. On a single-session basis, the August 7 reading of 51 (which indicates 2 puts purchased for every call purchased) was a record low.
Elsewhere, our old friend the CBOE Market Volatility Index (VIX) continued to rise sharply last week. On Friday, the fear barometer hit 29.84, doubling its July low. As I noted in last Monday\'s column: a trip to the 30 level would be equivalent to the VIX rise that occurred before the February-March decline ultimately bottomed, and I postulated that we may need to get to VIX 30 or thereabouts before a true bottom could be in place.
If the volatility spike we\'ve seen in recent weeks turns out to be similar in magnitude to those of the 2006 pullback and the February/March correction from earlier this year, one could argue that last week marked a short- to intermediate-term volatility high, meaning a potential return to lower volatility in the coming weeks. If this works out to be the case, it would nicely dovetail with the SPX and IWM tests of technical support. In addition, we saw last week the world central banks, including the Fed, injecting liquidity into the system to help restore order in the credit markets.
Not only is VIX behavior comparable to other pullbacks in this bull market, but the broad-market price action looks familiar as well. If we have, in fact, reached a bottom, the price action would be very similar to past corrective bottoms. In March 2007 and June 2006, the S&P put in a bottom, enjoyed a fleeting rally, and ultimately retested the bottom before beginning a full-fledged recovery. Specifically, on June 14, 2006, the S&P hit a low of 1,219.29 and bounced, only to pull back to 1,236.86 on July 18, 2006 before resuming its rally. On March 6, 2007, the S&P hit a low of 1,374.06 and briefly bounced before putting in an ultimate bottom of 1,363.98 on March 14, 2007. Turning to the current pullback, the S&P hit a low of 1,427.39 on August 6, 2007, bounced and tagged a second low on August 10 of 1,429.74. The current situation suggests that we may be in the midst of a retest that\'s a precursor to a major rally.
This is not to foolishly suggest that there are no risks in this market and that we are immune from further scary downdrafts brought about by events that have yet to unfold. But when the market continues to hold at key support levels and various barometers of investor fear are registering at very powerful levels it is very often the case that a bottom will ensue in the not too distant future and that the rally off that bottom will be very powerful. Put another way, in order to make big money you need to be willing to assume some risk when it seems appropriate to do so and to take some positions that will make you swallow hard.
This week, we\'ve got positive seasonality on our side with options expiring. Since January 2006, 13 of 19 expiration weeks have been in the black, with the SPX tacking on 2.8% during August 2006 expiration. Retail sales, the PPI, the CPI, and housing starts will give investors plenty to chew on even while earnings season focuses on the retail sector. Wal-Mart Stores (WMT), Home Depot (HD), J.C. Penney (JCP), and Kohl\'s (KSS) are all slated to take their turns next week. As far as non-retailing names, there isn\'t much in the way of closely-watched stocks, with the exceptions of Computer Sciences (CSC) and Hewlett-Packard (HPQ), both of which report on Thursday.
And now a few sectors of note...
With all of the doom-and-gloom headlines in response to Thursday\'s drop ?the Dow Jones Industrial Average\'s (DJIA - 13,239.5) second-worst single-day performance in 2007 ?you\'d be hard-pressed to remember that by the time the curtain drew on Friday\'s trading, all of the major indices were higher for the week. The Dow edged up 0.4%, the S&P 500 Index (SPX - 1,453.64) closed 1.4% higher on the week, and the Nasdaq Composite (COMP - 2,544.9) rose 1.3% on a week-over-week basis.
Most impressive was the beleaguered Russell 2000 Index (RUT - 788.78), up 0.5% in Friday\'s trading and 4.4% higher for the week, enough to put it barely in positive territory for the year (by all of 0.14%).
The iShares Russell 2000 Index Fund (IWM: sentiment, chart, options) was the first to get trashed by the hedge funds and was likely negatively impacted by many forced liquidations in the riskier stocks the hedge funds liked to play from the long side. It\'s therefore logical that the small-cap arena would be the first to recover once the liquidation storm passes. If this is in fact the case (and last week\'s behavior would certainly suggest as much), it would challenge the widespread consensus that the so-called safe stocks (blue-chips, mega-caps) are the best place to be should the market right itself and then turn around. The Russell appears to me to be best positioned to lead a rebound, as opposed to its blue-chip cousins.
The IWM found support last week from its 20-month moving average at the 76.50 level, which has proven to be supportive since mid-2003. This long-term support should help the index hold up as it wages a short-term battle with overhead resistance at its 20-day trendline. Additionally, the exchange-traded fund\'s weekly relative-strength measure versus the SPX is sitting at a critical level, right at the 50% correction between its third-quarter 2004 nadir and its first-quarter 2006 top.
The IWM also posted record volume last week that was more than double the March 2 pullback week and over 40% higher than the previous week. In my book, these huge volume numbers certainly have the potential to have been climactic.
It is coming down to technical crunch time for the SPX as well, which is perched a hair above its 10-month moving average. The index has not suffered a monthly close south of this trendline since April 2005. The index is also right at the 1,450 mark, which was the site of the SPX\'s late-February peak. In other words, this market has by no means flipped yet from bull to bear status.
Turning to the all-important sentiment backdrop, the International Securities Exchange\'s (ISE) sentiment index is nearing a historical extreme. This index is a measure of equity, index and ETF call volume that is purchased (to open) versus put volume that is purchased (to open) for transactions executed on the ISE. In other words, it is a pure measure of the actions and intentions of those who are buying options with a directional view. The smoothed 10-day moving average of this ISE index is nearing the area touched at its March 2007 lows, which is the same region hit before the October 2006 rally. On a single-session basis, the August 7 reading of 51 (which indicates 2 puts purchased for every call purchased) was a record low.
Elsewhere, our old friend the CBOE Market Volatility Index (VIX) continued to rise sharply last week. On Friday, the fear barometer hit 29.84, doubling its July low. As I noted in last Monday\'s column: a trip to the 30 level would be equivalent to the VIX rise that occurred before the February-March decline ultimately bottomed, and I postulated that we may need to get to VIX 30 or thereabouts before a true bottom could be in place.
If the volatility spike we\'ve seen in recent weeks turns out to be similar in magnitude to those of the 2006 pullback and the February/March correction from earlier this year, one could argue that last week marked a short- to intermediate-term volatility high, meaning a potential return to lower volatility in the coming weeks. If this works out to be the case, it would nicely dovetail with the SPX and IWM tests of technical support. In addition, we saw last week the world central banks, including the Fed, injecting liquidity into the system to help restore order in the credit markets.
Not only is VIX behavior comparable to other pullbacks in this bull market, but the broad-market price action looks familiar as well. If we have, in fact, reached a bottom, the price action would be very similar to past corrective bottoms. In March 2007 and June 2006, the S&P put in a bottom, enjoyed a fleeting rally, and ultimately retested the bottom before beginning a full-fledged recovery. Specifically, on June 14, 2006, the S&P hit a low of 1,219.29 and bounced, only to pull back to 1,236.86 on July 18, 2006 before resuming its rally. On March 6, 2007, the S&P hit a low of 1,374.06 and briefly bounced before putting in an ultimate bottom of 1,363.98 on March 14, 2007. Turning to the current pullback, the S&P hit a low of 1,427.39 on August 6, 2007, bounced and tagged a second low on August 10 of 1,429.74. The current situation suggests that we may be in the midst of a retest that\'s a precursor to a major rally.
This is not to foolishly suggest that there are no risks in this market and that we are immune from further scary downdrafts brought about by events that have yet to unfold. But when the market continues to hold at key support levels and various barometers of investor fear are registering at very powerful levels it is very often the case that a bottom will ensue in the not too distant future and that the rally off that bottom will be very powerful. Put another way, in order to make big money you need to be willing to assume some risk when it seems appropriate to do so and to take some positions that will make you swallow hard.
This week, we\'ve got positive seasonality on our side with options expiring. Since January 2006, 13 of 19 expiration weeks have been in the black, with the SPX tacking on 2.8% during August 2006 expiration. Retail sales, the PPI, the CPI, and housing starts will give investors plenty to chew on even while earnings season focuses on the retail sector. Wal-Mart Stores (WMT), Home Depot (HD), J.C. Penney (JCP), and Kohl\'s (KSS) are all slated to take their turns next week. As far as non-retailing names, there isn\'t much in the way of closely-watched stocks, with the exceptions of Computer Sciences (CSC) and Hewlett-Packard (HPQ), both of which report on Thursday.
And now a few sectors of note...
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