Kahn from Barrons:
A Bailout Law Won't Drive Off the Bear
By MICHAEL KAHN | MORE ARTICLES BY AUTHOR
No matter what the final word from Washington may be, there are still too many technical negatives in this market to support more than a "bailout bounce."
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WHEN THE DOW JONES INDUSTRIAL AVERAGE plunged 777 points Monday, some analysts were calling it a final washout that sets a bottom and clears the decks for the next bull market. After all, a record drop on absolutely horrible breadth, elevated trading volume and panicky sentiment indicators come together at major market bottoms.
Indeed, many indicators about which I write here concurred.
Monday registered a "90% downside day" where more than 90% of all stocks fell and more than 90% of the volume was attributed to falling issues. It is an indication that selling intensity was huge and such days are often preludes to major bottoms.
Lowry's Reports, an institutional advisory in Florida that originated this research, further states that these downside days by themselves do not tell us it is time to buy. What is needed is a 90% upside day to mark intense buying and that is still missing.
Exciting as Tuesday's 485-point recovery may have been, it was not accompanied by overwhelmingly positive breadth and volume.
I have to move to a marine analogy to simplify the meaning here. When a tsunami is about to hit land, the first thing it does is suck all the water near the shore out to sea. That's the washout in the market.
When the wave finally hits, the rush back in is an unmistakable surge of force that cannot be stopped. In the case of the markets, all of the power of the wave is unleashed on the positive side.
Of course, a real tsunami is destructive, and I do not want to make light of its power to kill people and ruin property. But in the markets, the flood is one of demand and a bottom is usually the result.
Tuesday did not satisfy this requirement. Volume was merely "above average" and not really heavy, let alone extraordinary. Advancing issues beat decliners by a good margin, but an amazing 10% of all stocks traded on the New York Stock Exchange tagged new 52-week lows. That is not a flood of demand, and the rising tide certainly did not raise all boats.
Looking at more traditional indicators, the relative strength index that measures market momentum did not reach oversold territory Monday. Such a reading would be another indication that bears were getting exhausted, but it did not happen.
Further, even though there have been some dramatic selloffs recently, net market movement over the past two weeks has been nearly zero. Monday's low was less than 100 Dow-points lower than the Sept. 18 low -- hardly something that can be called "falling off a cliff" and the final capitulation of the bulls.
These two go in the bear column. Let's also add the fact that the falling trend from one year ago remains intact.
I mentioned sentiment being fearful earlier and certainly the Chicago Board Options Exchange volatility index, aka the VIX, registered some extremely high readings this week. Dubbed the "fear index," when the VIX reaches extreme highs it often marks a bottom of some kind.
Finally, something for the bull column.
But can we truly believe the VIX, which is based on options premiums? After all, investors are no longer allowed to sell more than 1000 stocks short thanks to a temporary ban. One of the few places to hedge a portfolio is in the options market, and that may be changing the VIX in ways we just cannot know at this point.
Anecdotally, I don't see the "get me out at any price" fear in the mainstream and financial media. Investors are fearful, but I don't think they are truly as panicked as we might believe.
So, the scales seem to be tipped for the bears, keeping capital preservation tops on my list of investment activities. The final word from Washington could change things in a hurry, but from the technical evidence we have, this bear market is not over.
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Michael Kahn, author of three books on technical analysis, former Chief Technical Analyst
