It’s amazing the shifts that take place on days where the market moves like it did yesterday. Those that were calling a top a few weeks ago and then went silent were resurrected with their chest pounding announcements for the Dow to drop to zero….view this as entertainment and not as analysis. They are CNBC and other news sites to draw viewers not to personally make you money. While some technical damage was done yesterday it needs to be kept in context of the bigger picture. I stand by my believe that the risk lies to the downside but we still must be smart.
I’ve discussed the sentiment data that showcased the extreme amount of bullishness that has plagued the market (here here here and here). Typically we see sentiment top out before equities do, and so it seems we can check that box. With each post warning caution I would end it with saying we must watch price and let it dictate our actions. This has been critical since we’ve marched higher in the face of the sentiment warning flags.
Tops are a process. We appear to be seeing further weakness this morning which is exactly what equity bears want to see – but not for the reasons you may think. The market ‘needs’ to go down for those that are on the sideline waiting to “buy the dip” to get excited. This gives the last group of buyers an opportunity to get long and we could very well see this happen a few times. What I’m looking for are signs of market internals cracking with each attempt to recover from the weakness.
You cannot manhandle Mr. Market. He’ll beat you every time. We saw yesterday a near 20% move in the $VIX. This took it to an overbought level on various measurements, this doesn’t mean it must drop but it could signal a breather is necessary. If you’ve been doing the potty dance waiting for stocks to dive don’t get too excited yet. Watch the market leaders, keep an eye on transports, financials, and cyclicals. When these begin to crack, and not before, is when traders will likely begin to get worried.
Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+.