Selling dry-up or selling-climax

Indeed, selling dry-up or selling-climax?! Interestingly, Lowry’s Buying Power Index dropped to its lowest level in 10 years (June 1995) last week, prompting Lowry’s to note, “Such decisively negative patterns are not typical of those found during normal correction in bull markets.”

— Jeffery Saut, Raymond James

The market has either carved out a long term bottom or it has started a new bear market cycle.  All signs – sentiment, valuation and price momentum – point to the market putting in a sustainable bottom at these levels. 

However, bear markets typically ignore these oversold factors and continue downward.  If the market rolls back over and breaks the recent lows, it should be regarded as a sign the bear is back.

But the positives are too numerous to ignore.  First, the NASDAQ is moving higher ahead of the S&P 500 and NYSE which is a sign of strength. 

The NASDAQ reached extreme oversold conditions.  The 10 moving average has turned higher from low levels.

The NYSE Summation index has started turning higher from the -500 level.  This level hasn’t been seen since April 2005, May 2004 and before that, in October 2002.

NASDAQ vs NYSE volume, at almost 1 to 1, has reached levels that usually indicate major bottoms.  The last time the 10 and 21 moving averages of NASDAQ/NYSE volume were at these levels was in October 2002 and March 2003. 

Sentiment has also reached a negative extreme.  The 21 day total CBOE put/call ratio has reached 1.0x which only occurs at or close to major market bottoms.

And as I discussed in an earlier column, stocks are relatively inexpensive given the strong earnings over the past three years.

The main negatives are that several important trend lines were breached during the last decline.  A rally that doesn’t recapture these lines will turn the trendlines into resistance.

Also, several other areas of long term support are being tested currently.  If these levels break, the market will most likely re-test the bottom end of the channels.