Turnaround Tuesday the Other Way???

Market Action:
Three Tuesday’s in a row the market has had some fireworks.  This week’s Tuesday trading was decidedly negative with the Dow trading down 242 points.  The other major indexes were down similar percentages (around 2%).

The market started on the wrong foot with the early morning news from LEND (Accredited Home Lenders Holdings) that said they were basically following in the footsteps of the recently de-listed NEW (New Century Financial).  When LEND opened for trading, it opened with a 50% reduction in price and then fell some more to close at a 65% loss.  Speaking of NEW, it has a new ticker because it is off the NYSE.  The ticker is NEWC.  What does that sound like?  NUKE???  (The credit for this gem goes to Elliottwave.com.)

Today these subprime mortgage losses bled over to some of the financial names such as Washington Mutual, Morgan Stanley, Merrill Lynch, Goldman Sachs, and others, all having multiple point losses in their stocks.  (Goldman Sachs wants to get deeper into the subprime-lending business according to the WSJ.)

Meanwhile, the semi-conductor stocks were trying to buck the trend in the early going but couldn’t resist the downturn by the end of the day.  Their losses were not as severe as the broader market and certainly not as much as the financials.  Looking at the indexes, the SOX (Philadelphia Semi-Conductor Index) was down 1.66% while the Bank Index was down an outsized 3.26%.  The broker’s index was down 4.42% and the gold mining index (HUI) was down 3.89%.  The one index that was up, of course, was the Volatility Index (VIX) and that was up 29.6%.

Reader Comment:
My thanks to a reader (CM) who sent us an article on the ISE Sentiment Index, something we have never heard of before today.  This index is similar to the put call ratio from the Chicago Board of Options Exchange (CBOE) except its kind of the opposite since it’s the call put ratio with a twist.  The title of the article is “Contrarians are smiling” by Mark Hulbert.  It’s on the MarketWatch.com site which you should be able to find for more info.  The point of the put call ratio is that it is normally considered a contrary indicator because if there are more puts purchased more people are bearish, which of course means that stocks should rally—speaking in the contrary.  

Our take on the put call ratio is that it can be particularly difficult to use effectively which is why we normally don’t mention it.  The CBOE indicates a put call ratio for regular stock options and another for index options and then the combination of the two.  The index options could be considered the “smart” money and if this index goes out of line, we probably should pay attention and Not consider it a contrarian index.  Actually, such has been the case in that index recently.  The put call ratio has spiked and may well indicate a time to sell.  Or, if Mark Hulbert is correct, it is a time to buy because it is a contrary index.  Anyway, thanks for pointing out the article.  We enjoyed it.

Opinion/Analysis:
The stock market decided to try a different direction on Tuesday than we expected.  With the break this morning and going into the afternoon, it seems the market wants to go down now.  While that may change Wednesday, for now, we think the weight of the evidence supports continued weakness over the next several weeks.

First, we saw volume swell to nearly 2 billion shares on Tuesday when it had been around 1.5 billion shares during the past week when the market was advancing.  Also, during that advance, the 5 day upside volume peaked on Monday over 1 billion shares, a number sometimes associated with a peak.  And, the pattern of prices does seem to indicate a potential for some more selling.

There is one short term glitch in that plan and that is this week’s option expiration, which happens to include the futures expiration (quad witch).  Sometimes when the market has been going in one direction into the Wednesday of the expiration, it turns and finishes out the week in the other direction.  We don’t want to assume this will automatically happen but there is that possibility.

Either way, we think the market over the next couple of months will be down and we are positioned for that.  Any near term advance will allow us to buy some more puts and move that put call ratio up.

Late Addition:
Erick just posted a question/comment in the comments about the Asian markets.  We did notice that Japan was down about 3% on yen concerns, not to mention the NYSE got hit pretty hard.  The Nikkei Dow is made up of 225 stocks so a little more than the Dow 30 to answer the question.  Still, these numbers are big moves for the broader market, too.  Not too many stocks get to miss out on a move like that.  In our S & P 500, there were only 12 stocks up on Tuesday, for example.  Thanks, Erick.

Dow Industrials:  12,075.96  -242.66
VIX: 18.13   (up 30%)
HUI:  318.72   (down almost 4%)
QQQQ:  42.37
QQQRR:  2.28 bid   (up 33% since Friday’s purchase)
RYVNX:   18.09
RYAIX:  22.22
RYCWX:  38.01
TLT:  90.29
BEGBX:  13.86