General Market Index (GMI) table

I am coming around to the idea that the market decline may have already put in a bottom. Here are my reasons. First, the Investors Intelligence poll has now reported that there are more bears than bulls, a very rare occurrence. Market sentiment polls are called contrary indicators because when the results reach an extreme, the market often reverses and goes the other way. Too much bearish sentiment is often a precursor to a decline’s end. Second, during the August decline, another contrary indicator, the put/call ratio, reached an extraordinary high of 1.42. That means that people were trading a lot more put options than call options (142 puts for every 100 calls). Put options are bets that an equity will decline,   while call options are bets that it will rise. This extreme bearishness in option traders is another sign of at least a short term bottom. Third, I have often written that when the Worden T2108 indicator goes into single digits, I should back up the truck and buy a large market index ETF like SPY. This is psychologically very difficult to do in the middle of an extreme market decline, but this low level of the T2108 indicates a severely oversold market. This monthly chart shows the complete history of the T2108 indicator since its inception in 1986. There have been only 3 times since 1986 when the market has had a lower reading of T2108 than the 5.99% reading reached last month. The one month in October, 1987, when the market declined 20% in one day was the lowest recording of T2108 ever recorded, 0.47% and in 2008 it reached 1.2%. Last month’s reading of 5.99% was the 4th lowest monthly reading ever recorded.   T2108 measures the percentage of all NYSE stocks that are below their 40 day simple moving average. I interpret it to act as a pendulum of the market and post it each time to the right of this blog page. (It is also incorporated in the Worden software.) I look for market bottoms when T2108 is in single digits. The green line in the chart is drawn at 10%. (Click on chart to enlarge.)

On the other hand, this weekly GMMA chart of the DIA shows it to be at the beginning of a bearish BWR pattern, with all of the shorter term averages (red lines) now trending below the longer term averages (blue) with a white space separating them. I tend to exit the market when this bearish pattern occurs in the major averages. Looking at this chart it is impossible to tell if this decline will end in a few months like it did in 2011 or take over a year like it did in 2008. One never knows in advance when a market decline, once started, will end….

I love weak markets when few stocks hit new yearly highs. It is easier to see the leaders. A stock that can come through a large decline at new highs is evidencing unusual buying interest.   I like to keep such stocks in a separate TC2000 watch list for me to monitor. (I often set an alert in TC2000 to tell me if the stock breaks out.) This is how I found GMCR when it broke above a a green line top to an all-time high in early 2009 after the 2008 bear market ended.   GMCR eventually became a 10 bagger (10x increase).

On Friday, there were only 37 new highs and, after looking at their long term charts,   I selected these 17 stocks to keep in my watch list.   Most are above a recent green line top. I, of course, will not buy anything until I see a new market up-trend and have the wind at my back. One of the stocks on this list, INGN, I wrote about last December because my talented stock buddy, Judy, liked it. Then the stock was at $30.25, last Friday it closed at $54.58,   up 80% from when I wrote about it. (Any of you buy and hold it?) I have asked Judy to research this list for more gems……

The GMI remains at 0 (of 6).

While it is impossible to accurately predict the length of any trend, technical indicators can help to assess the current short and long term trends of the market. The General Market Index (GMI) counts 6 indicators that have helped me over the years   to diagnose the market trend. The GMI is now registering 0 (of 6). I have shown charts before that illustrated the value of my being out of the market during times when the GMI has flashed a Sell signal.   The chart below shows how the QQQ has performed during times when the GMI was saying Buy (Green) versus Sell (red). I do not have an updated chart of the GMI signals. (Click on chart to enlarge.)

While not perfect, the GMI has been a good market indicator for me.   Note that the GMI was on a Sell for most of the 2008 market decline. The GMI has been currently on a Sell since August 24. My short term QQQ trend indicator has signaled a short term down-trend for longer, now in its 18th day (D-18). When will this down-trend end–you know better than to ask…   To be on the safe side I am almost 100% in cash in my trading accounts and the majority of my university pension is out of stock mutual funds and back in money market funds. Nevertheless, my new pension contributions keep buying mutual fund shares as they fall (dollar cost averaging)…….

Pundits have been saying that ETFs are the way to go.   They have lower fees than mutual funds and one can trade them during the market trading day. Sell or buy orders on mutual funds, however,   are executed only after the market closes when the value of the fund portfolio can be accurately calculated. Well, during the Monday 8/24 flash crash I learned the negative consequence of this difference. The ETF basket of holdings is not calculated real time during the day. Orders are executed according to the buy and sell orders that come in and not according to the intrinsic value of the ETF’s holdings. Thus, on Monday, 8/24, when the market opened in a mini flash crash, my conservative (I thought) preferred stock ETF, PFF, which usually trades within a few cents each day, opened up at 38.52, down from the prior close of 39.01.   In the first 10 minutes of trading, PFF traded as low as 32.32, only to close the 10 minutes at 36.81.   PFF closed that day back at 38.26.   Here is the bizarre daily chart of PFF.

This chart says it all about the vulnerability of ETFs during a market crash. PFF, composed of over 300 companies’ preferred stocks, was priced on Monday based on the hysteria of selling that had nothing to do with the intrinsic value of its holdings. Imagine what would have happened if I had placed a market order to sell or had a standing sell stop order in place to protect me against a small decline!   I might have been sold out at a huge loss. This experience is enough to keep me away from most ETFs. At least orders to buy or sell a mutual fund   will be executed based on a computation of that day’s closing values of all of its holdings. If you think my analysis is suspect, read this article from this week’s issue of Barron’s (click on: “The Great ETF Debacle Explained“) that describes this problem….