Not a Great Time for Big Bets

 | Sep 01, 2011 | 4:00 PM EDT  | Comments
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Those of you who have followed my comments for a while know that I'm one of these guys who like to buy the market when most of my indicators are in sync to the upside, when everything supports the bullish case. In other words, I like to buy the market when the ducks are all lined up, uniformly pointing higher.

A few weeks back, when the market was getting killed and sentiment was quite negative and the S&P 500 had just tagged its Fibonacci .382 retracement of the rally off the March 2009 lows, we had such a moment. Now, however, it's quite another matter. The ducks are a mess.

First of all, the market is no longer oversold at all. To the contrary, my favorite overbought/oversold indicator, the McClellan Oscillator, has just scored its most overbought reading of the year at +262.87. In fact, it's the second most overbought reading of the past 12 months. That, to me, is a major red flag. Note that the last time it was in this area, on July 7, the S&P closed at 1353. From that day's high close, the market promptly sold off 250 points, a drop of 18.5% in about a month. So does history really matter? Only if you care about making money in the market.

Sentiment back then was also pretty frothy, especially as measured by the VIX, which that day bottomed at 15.30, a level which hasn't been seen since. From that day's low, the VIX tripled into its recent peak reading of 48. Now, of course, the VIX, currently trading around 31, is well above the July lows, but also a long way from its recent multi-year high close. I'd prefer buying the market when the VIX is back in the 40s, when once again, all is not so right with the world, or at least with traders' views of it. Of course that could be tomorrow.

VIX -- Not So Bullish Now
optionsXpress

So my indicators aren't exactly screaming out "buy!" at this point. But some things are still quite positive. For one, the chart of the S&P Futures now includes a bullish island reversal after the bearish island was blown out late last week. This bullish island was formed on Monday at the 1188.50-1189.50 level and is tied to the gap from Aug. 18. Recall that the market messed around with that gap for a while and almost filled it last Thursday but couldn't quite get the job done. Now, the area of the top of that gap is a bullish underpinning for the market.

Before we get there however, note that there is the remainder (3 points) of Wednesday's gap at 1204.80-1207.80. That's minor support and an initial downside target for a pullback.  

S&P Futures
Lind Waldock

Oh, and there's more. As noted in Tuesday's column, now that the top of the Aug. 18 gap in the SPX at 1193.89 has been exceeded, the next big target is the mid-March low at 1249. So the chart of the SPX points still higher.

S&P 500
OptionsXpress

And then, also adding to the bullish mix, is the bullish island reversal in the Nasdaq-100. Here, as you can see in the chart below, the NDX gapped up big time on Monday, a 26-point gap from the 2162 level, and in the process, the NDX jumped over the gap from Aug. 18. This created a bullish island reversal in this index as well from the 2169 level up to 2182. So this also has bullish implications and points higher. So there's that.

Nasdaq-100
OptionsXpress

If that weren't enough, there is the bullish seasonal factor that we are in the midst of. Beginning-of-month favorable seasonality is in effect, and it's particularly strong tomorrow, as that's the day before the Labor Day weekend, which is historically an up session. The day after Labor Day isn't so great however, with a losing record overall for the past 80 years. Granted, the Tuesday following Labor Day has improved over the past 15 years, but going back to the 1930s, it's not even 50-50.

Bigger picture, the seasonal pattern then gets even worse, as September is the worst month of the year going back to the 1950s. The S&P has recorded an average loss of 0.6%. The Dow has lost an average of 0.9% since the 1950s. True, the past two years, 2009 and 2010, have seen sharp gains in the market during September, up 9% and 4% respectively, but that was after the sharpest selloff since the Great Depression. So it's even a mixed bag on the seasonal front, and a mixed bag overall. Certainly not the time for making big bets.

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