I would like to think that Friday's action quieted down the 'bottom is in' folks, but it would probably take more than one down day to deter them. On that note, I want to once again reiterate that I did not know the top was in until months after the fact, and I will not know if the bottom is in until months after the fact.
With that in mind, I would like to share that I listened to a terrific interview this past weekend with Walter Deemer, a now retired but incredibly well-respected and successful technical analyst. Walter had a long and storied career on Wall Street, having arrived on the scene in the early 1960s. He made a comment that I jotted down because I thought it was one of those things that I know we should all have etched on our foreheads.
Walter said - and I am paraphrasing - who cares if you miss the first 10% off the bottom, if it's really a new bull market then that shouldn't matter.
So think about it from the perspective of the bottom callers. Are they so afraid that if they don't get the exact low, something will be wrong with their trades? The first 10% decline in iShares North American Tech-Software ETF (IGV), one of the poster children for ugly charts this year, you missed up to that red arrow on the chart. Notice that that was the first lower low and a break of -10%. It then rallied, giving you a chance to sell higher. Ask yourself: was it no longer worth it to sell after that? It went down another 35% from there. Seemed worth it to me.
Now IGV is up 10% from the low but it has yet to make a higher high. There is resistance all the way up, but until it clears $300 it hasn't managed a higher high.
I would add another rule of thumb. I have noted that bases take months not weeks to form. To that I would add that if it took a year to form the top you can generally expect it will take about as long to form the base. Or if the decline was six months in duration (in this case it was) then you can figure it ought to take at least six months to form a base.
Why? Because tops are distribution, an extended period of time where there is more selling than buying taking place. Bases are periods of accumulation, where there is more buying than selling taking place. If you are to go from weak hands to strong hands, doesn't it make sense that it would take place over time and not in one day or even a few weeks?
As for Friday's action, we got a pullback and sentiment got cautious in a hurry as the put/call ratio shot up to 1.08. I still think we should give the upside one more try this week, preferably before the Fed meeting. And if we get that then we can discuss how August ought to see another pick up in volatility.
