MLR - PMP 10/2/14

Published : October 2 2014 at 9:14 ET

Major averages continue their downtrend on mixed volume, higher on the NASDAQ Composite, lower on the S&P 500. The number of distribution days has been substantial. Indeed, market technicals are looking ill at this juncture, with moving averages being violated and so on, but technicals have looked sickly near prior lows a number of times since January 2013.

Still, just because the market has found a shallow floor since January 2013 does not mean the market can't fall much further. Volatility has and may continue to increase so as concerns market timing, the safety of the sidelines is sometimes the best place to be. Indeed, even though QE has limited corrections to just 6.1% on the S&P 500 since January 2013, such corrections are usually met with both increased upside and downside volatility near the lows of the market correction. Note how market bounces off lows can be quite powerful.

As to how close to a floor we may be, certain indicators that have a fairly good track record of nailing market lows even in this QE environment have triggered. The put/call ratio spiked above 1.0 earlier this week, and a ratio around 1.1 has coincided with the prior market lows of April 11 and August 1 of this year. April 11 marked the low on the S&P 500 while the NASDAQ Composite fell another 1.3% to its absolute low before bouncing and eventually reaching new highs. Then on August 1, the put/call spike was four days before the absolute low on the S&P 500 where the S&P 500 fell another 1.1% before bouncing to eventual new highs, while the NASDAQ Composite fell another 0.7% before bouncing and eventually reaching new highs.

Further, since January 2013, whenever the Hulbert Nasdaq Newsletter Sentiment Index, or HNNSI, has spiked closer to or below 0%, a measure of extreme pessimism among NASDAQ market timers, the market has found a floor within a couple of days and bounced hard. Since January 2013, the HNNSI has spiked closer to to 0% four times and below 0% three times, and each time, the market has quickly found its floor. The HNNSI currently sits below 0%.

However, should the market continue lower beyond what it has done since January 2013, or should the market bounce in weak fashion and rollover again, this could be the sign of a major market top and the end of the great QE-manipulated bull that began in 2009.

Short-sale targets TSLA and LNKD made lower lows yesterday, but this morning TSLA is bouncing off the top of its prior cup-with-handle on news of a product announcement on October 9th. The upside stop here remains the 50-day moving average in the 254-255 level, and this is also the optimal place to attempt to short the stock. Chasing stocks on the downside once they've begun to break down is not as effective in a QE-distorted market, and our preferred method is to short target stocks on rallies into logical areas of overhead resistance.

This information is provided by Virtue of Selfish Investing, LLC (VoSI) is issued solely for informational purposes and does not constitute an offer to sell or a solicitation of an offer to buy securities. Information contained herein is based on sources which we believe to be reliable but is not guaranteed by us as being accurate and does not purport to be a complete statement or summary of available data. VoSI reports are intended to alert VoSI members to technical developments in certain securities that may or may not be actionable, only, and are not intended as recommendations. Past performance is not a guarantee, nor is it necessarily indicative, of future results. Opinions expressed herein are statements of our judgment as of the publication date and are subject to change without notice. Entities including but not limited to VoSI, its members, officers, directors, employees, customers, agents, and affiliates may have a position, long or short, in the securities referred to herein, and/or other related securities, and may increase or decrease such position or take a contra position. Additional information is available upon written request. This publication is for clients of Virtue of Selfish Investing, LLC. Reproduction without written permission is strictly prohibited and will be prosecuted to the full extent of the law. ©2016 Virtue of Selfish Investing, LLC. All rights reserved.