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MLR - General market commentary November 21, 2011

The general market has been trendless, driven by headline news du jour. Today's news event regarding the Supercommittee unable to come to agreement on reducing the deficit caused the market to gap lower at the open.

While more downside momentum builds among leading stocks which have broken down, and the number of distribution days which continues to increase, the last few times the market had sudden drops were then met with positive headline news causing the markets to either gap up, or rise on a low volume rally. The narrowing price band in the NASDAQ Composite and S&P 500 from October 27 to November 15 led some to logically believe that a tightening price structure could result in a new uptrend. Such was not the case as is the nature of frustratingly noisy, trendless markets.

Given today's gap down in this volatile environment, our Market Direction Model is guarded against just switching to a sell as its rules account for such environments. In addition, there are only 3 ½ days of trading this week due to the shortened holiday week. Historically, Wednesdays before Thanksgiving and the half-day Fridays the day after are more likely to be low volume up days for the market. This would give a more favorable entry point to switch to a sell signal. Further, key names such as AMZN (down a number of days in a row, undercutting a mini-support area around 190), AAPL (at 200dma support), and CRM (undercutting 110 level then bouncing) show higher likelihood of a weak bounce. On this basis, the model is currently looking for a weak bounce in leading stocks and major indices into the end of the week. Of course, should we see further breakdown in leading names and major indices on big volume from current levels, this would also cause the model to switch to a sell signal ahead of any weak bounce.

As concerns ETFs (and not stocks since certain key stocks can buck a trednless environment), it's good to remember that the sidelines are a safe place when the market is trendless as the odds are much higher that one will be whipsawed out of their ETF position at a loss. The sidelines are also a safe place when the market is dropping. While most are losing, an investor on the sidelines is protecting their capital. Of course, the model has managed to switch to a sell signal ahead of big drops in the market as shown here https://www.virtueofselfishinvesting.com/results to capture big gains in a hurry since in recent years, when there is a big % drop in the general market, it takes the general market much less time to drop than it takes to rise by that same amount.

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