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Is
Now
The Time To Buy? Here's Why It May Be |
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 With
another wild week behind us, it seems as if the evidence for an upside
rebound is mounting up. So, if you were on the sidelines waiting for a
better environment, I really think it's time to start looking again. Today
I'll update the key things I see, and the key things I'm still looking
for (as I don't feel we're out of the woods just yet).
Before
that though, I want to encourage you to check out the blog entries from
this past week - just click
here. There's a lot of new stuff I just didn't have room to squeeze
into this edition.....things like earnings news, chart updates, and a quick
thought on why I believe the Fed's decision on Friday - to cut the overnight
rate - is indeed actually bullish. (Hint: I don't think there's
an immediate economic impact - there's a different reason.)
On
with the show.
You
know all the little things we've been recently looking at as hints of a
mini-capitulation? I promise it wasn't just some random collection of theories.
Though they're not precisely-synchronized, they're all inter-related....and
they've worked extremely well over time. I want to revisit each of the
major ones today, starting with the VIX.
 We
first visited the CBOE Volatility Index (or VIX) on August
1st, when it was at 23.52. At the time it was a new multi-year high,
accented by a pointy peak. I interpreted it as a bullish hint. Who would
have guessed three weeks later the VIX would be able to soar to a high
of 37.50....the highest reading since October of 2002? It was one
of the biggest and fastest moves we've ever seen from the VIX.
So,
we're either entering a whole new era of bearish volatility, or the VIX
has hit its limit. In my opinion, the latter scenario is likely.
After peaking at 37.50 on Thursday, it actually closed at 30.83 - near
its low. That's a pretty strong reversal pattern, enhanced by an even lower
range and closing level on Friday. The market obliged with a mirror image
of the same pattern.
We
also looked at the ISE Sentiment Index on August
1st. In a nutshell, it measures investors' bullish or bearish opinion
based on option (put and call) positions held via the ISE Exchange. What
we're looking for are extreme readings that tend to occur right before
market reversals.
This
is where it gets interesting. You would think with the VIX and the ISE
Sentiment indices both being options-based opinion indicators, they'd move
similarly. But, the ISE Index didn't hit new lows last week when
the VIX hit new highs.
The
really
weird part is, the ISE Sentiment index didn't even reach levels below
its prior week's low, even though the market was getting crushed.
Translation: Last week, investors were doing one thing (selling)
but saying another. With their options....they 'said' the fear had
already peaked a week earlier. (Yes, expiration was last week, which could
have skewed these tools a little. But, most all the options-based indicators
were and are at wild levels that can't entirely be chalked up to expiration.)
And
finally, if you thought 800+ new NYSE lows on July 26th was crazy
(as we also looked at on
August 1st), try 1132. That was how many new lows we
saw last Thursday. It was also the most we'd seen since May of 2004, and
before that, July of 2002. It was even more than we saw after September
11th, 2001. In fact, the only time we've seen more was September of 1998,
when the total came in at 1183.
Now
let me ask you, does it really make sense that more than 1/4 of the
NYSE's stocks hit new lows just weeks after the market (except the NASDAQ)
hit all-time highs? Did things really get that bad that quickly?
I don't think so, which is why I'm still inclined to think this dip is
(or was) way overblown.
For
a full-screen shot of all these indicators, click
here. It's a real eye-opener. (If the new window doesn't blow it up
to full-size, move your mouse cursor over the image and then click the
'enlarge' button that shows up at the bottom right. Some web browsers may
show the full-size version automatically though.)
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The
'But', & the Bottom Line |
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Despite
the foundation being laid, and the rebound we saw late in the week,
I still see a couple of potential tripwires.
Last
week was actually one of the most volatile weeks we've seen in years, if
measured by the distance between highs and lows. The Russell 3000 traded
over a span 57 points, while the Dow covered a whopping 821 points. That
was 6.8% and 6.3% of their respective price levels, which is just huge.
And, though the indices still closed in the red, they ended the week
pointed upward. The S&P 500 regained a total of 5.5% between Thursday's
low and Friday's close....almost the week's entire range. That may well
be the sign of a pivot.
 Yet,
most
of the indices still aren't even back above their 10 day moving average
lines. The worry is simply the strength seen late last week was merely
the result of early last week's weakness. The flipside is, you have to
start somewhere, which sometimes is going to mean you start under
the short-term averages. If every investor always waited for a sure thing
(or at least a more sure thing), a lot of gains would end up being
left on the table.
Another
thing I'm a little concerned about is the gap we saw between Thursday's
high and Friday's low for the NASDAQ and the Russell 2000. In general,
the market doesn't like untidy charts, which means we may see a vacuum
effect and go back and fill in the space. The sooner the better (if it
really is an issue), but bear in mind there are plenty of daily gaps that
have gone unfilled over the years. So, it's not an outright requirement.
However,
I have to go back to the skewed VIX, ISE Index, and new low levels. We
see the indices under their 10 day lines relatively frequently. We rarely
(as
in every few years) see sentiment at these extreme readings. When we do
though, it's very often a great buying opportunity.
I can't
tell you what to do, but I think I'll play the odds. Like I said in a recent
blog entry though, I'm not doing it all in one shot. I'll probably accumulate
on the way up as long as things keep heading that way, and then hopefully
be fully invested if and when the final key moving averages are breached.
By
the way, be sure to keep an eye out for this coming Monday's edition. I
said in last Monday's edition (Five
Investment Mega-Trends) I'd have a blog entry soon about some specific
stocks I thought would benefit the most from those trends. I still plan
on having that done soon, so we'll look at it then. And, now that the wind
looks like it's going to be at our back for a while, there are a couple
of our small caps I think are ripe for the pickin' as well.
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