Sector Investing

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Yesterday was a 90% downside day. I had only two stocks up on a screen of about 300 that I watch yesterday. The data can be followed here. Keep in mind we are watching both volume and number of issues:

http://finance.yahoo.com/marketupdate/overview

I do not believe that there has been any other 90% downside days prior to yesterday though for a very long time.

Also while many people would suggest that a 90% downside day washes out the market and leaves it free to rise that may not be true. There can be bunches of 90% downside days before a market bottoms. How do you know the selling is over?

Usually you don't. What I look for is lower highs for the VIX, really negative sentiment like in the Investors Intelligence Poll and improving market breadth. Look at the BPNDX chart here and you will see that the number of stocks with a point and figure buy signal was actually higher at the last couple of major bottoms than when the VIX was hitting its highest highs:



We are so far from truly washed out here that it is funny. The market could go much lower before we see a 90% upside day. That might mean we have bottomed. Why should the market continue higher? The P/E of the S&P 500 is rising. That means that earnings are not rising fast enough to suggest that risk is low for fundamental buyers. I'll be looking eventually for that 90% upside day.

Even two 80% upside days in close succession can signal the all clear for buyers to step back in once sentiment has been so negative that market breadth is improving even as we hit lower lows.

Yesterday was an ugly day but we are barely more than 5% of recent highs for the INDU. This is my chart that I have shared for several years here. You'll note that while we are at the end of my projected rise for the market that if I am right it will be luck as much as anything else. Keep in mind that I do get lucky from time to time:



RtS