Not only is the bottoming process for markets that collapse as this one did in March fairly standard, as I have been showing you for over a week now, but the sentiment that goes along with it is typical, too.
We entered March 23 with the indicators lined up for a rally last week. We were oversold. The put/call ratios were high. The number of stocks making new lows were no longer expanding. And breadth had begun to show improvement. Instead of seeing folks positive we saw questions about the validity of technical analysis. Yet technical analysis worked this time, didn't it?
Now that the markets have rallied 20% and have not immediately collapsed thereafter, I am now inundated with questions about how we can possibly have a retest. Mostly because, you know, the Fed has our back. Well OK, the Fed told us they had our back last week, and many weren't interested in buying for a rally. But now that we're up -- and haven't given it back yet -- I am asked about how we can possibly retest with the Fed lending a helping hand.
I am not a Fed watcher nor do I track it that closely, but I do know that TARP was passed in October of 2008 when the S&P was around 950 and the S&P bottomed at 670 in March. The Fed had our back then, didn't it? It still did not stop the market from testing and retesting.
What's even more interesting is that Quantitative Easing (round 1) was announced on Nov. 25, 2008. We looked at that time frame last week. Here is the chart again, because you might recall I found this time frame interesting as we had that big 25% decline in November followed by a 20% rally that lasted about a week, followed by a lot of up and down in December, but it ultimately peaked in early January and headed back down again. I noted that the 20% rally sounded familiar.
The Fed had our back then too, right?
I am a firm believer that markets need to work things out over time. I am a believer that time heals markets, not price. I believe price changes sentiment, but it doesn't heal anything, it just makes you feel better. It's one reason I use bar charts and not point and figure charts. P&F charts give you price, but not time. Bar charts can stretch out for months on end, going nowhere as shares change hands from weak to strong.
As for Tuesday's market, the breadth was better than the indexes, as net breadth was negative 330 on the New York Stock Exchange. That means the indicators haven't changed again. We're still a little bit overbought in the short term. The Intermediate term is not yet overbought. I have been of the mind that it's too soon for a retest, but if we did get one now, I do think we'd see positive divergences show up.