The Herd Leaves the Market to the 'Bots

The WSJ noted two odd phenomena in this market: small investors have largely bailed out, and (perhaps as a consequence) individual stocks in the S&P 500 have been tracking the index itself to a degree not seen since the 1987 crash (see chart, courtesy WSJ). There is a good discussion over at TradersNarrative. 

The average correlation is 44% (since 1980), but is now 81%, higher than in the crash of 2008 (79%) and approaching the all-time high in 1987 (83%). The conclusion from the correlation: fear drives investors to treat the market as a homogenous entity. Adding in the exodus of retail traders, this time the implication is the market has been left for the index 'bots. 

For traders, two things to watch:

1. Breadth indicators may no longer be useful .. this perhaps explains why this market has been floating on diminishing volume: the sellers are leaving faster than the buyers. 
2. Leading indicators may now be coincident .. this explains why new highs/lows and the A/D line no longer give early warning, but all topped together with the market in April. 

Carl Futia notes how the exodus of retail means rampant bearishness, which is a bullish sign. Perhaps, if they participate and not abandon the market. When they take short positions, it often allows the market to drive higher on squeezes. When they simply leave, the market is vulnerable. 

The STU commented on this tonight as well: the high correlation is an extreme example of herding behavior. Despite our vaunted individualism, Man is a herd animal. EWI has been on an All-The-Same-Market argument since the Greenspan Bubble got recognized in 2004. From 2004-2008 all markets went up as the USD went down. After the 2008 crash that linkage broke, but since the Hope Rally we have seen an all-one-market return. 

My take is the floor can drop out of this market rapidly, as we saw with the Flash Crash, as it is floating on arbitrage and program trading, not real conviction. The STU thinks we have about ended the second countertrend rally:

• the first was after the Flash Crash, and got us back to Sp1175
• the second has been over the past few weeks and run up from Sp1010 to 1081 today

The second retrace has gone 62% of the fall from Sp1131 to 1010, and could be considered complete, since in their count this is a wave ii, and wave 2s normally go 50-62%. 

Mother Market will pick the path that frustrates bull and bear alike. My speculation is that we continue to rise back towards the Sp1150 level into August, with Aug4 a key date; then the floor drops. This rise will embolden the bulls and scatter the bearish herd into a loss of conviction. The wave count would shift to a large irregular flat. Put simple, we would still be in the first retracement after the flash crash:

• wave A went from 1041 to 1131 (90 pts)
• wave B fell back down to 1010 - a lower low than where A started 
• wave C is what we are in, and C=A at Sp1100 and C=1.6x A at 1155

If we get much past Sp1086, this alt count gains in likelihood; if we break the 78% retrace of STU's nested 1-2 i-ii at 1106, that count should be abandoned. Although the STU has not posited an alt count, this one should be considered. 

Neely considers us in a corrective wave since the April high, breaking as a triangle B wave (the Jan drop is an X wave and the rise from Feb5 to Apr26 is wave A). A C wave would follow but it need not break the April high. Hence Neely's count might lead to a similar result, albeit a bit slower in time. 

Comments

[Roger D.]

Why Doomsday, of course,silly you,lol.

[Trader 123]

Roger,

Pardon me, but did you ever answer the question presented to you earlier about how "underwater" are you in your current short position (on a percentage basis) and where your stop-loss is?

[Mr. Panic]

Ticker Senser sentiment figures yesterday were 50% bulls 7%bears (carl Futia is one of the sites observed-----this poll measures blogger sentiment) According to Mark Hulbert, advisors are overly bearish. Looking at the charts, everything looks overextended while stretched out to the 50day and 200 day averages. Would a confident bear enter positions here? Seems like a lot of bearish anxiety right now.
5day Trin hit .68 yesterday, a sell signal. Today's trin at the moment is still low. ISEE equity only ratios are bizarrely low for a big upday and well below the range from the past week. There were bizarre ratios back on April 22,23.
I have been looking for a new high for the euro this week (actually yesterday) and thought there was no way it could do it last night (late last night) and just saw Roger's chart. Now just have to sit tight....possibly until July 15 since there are few IPOs due then including the Ag Bank of China but 60min charts are supremely overbought.

[Mamma Boom Boom]

Doomsday! Very good, that's correct.

You win an all expense paid trip to cow-chip county Kentucky.

[Roger D.]

Mamma,

The setup is in place. One day,any day now,and surprise,surprise,down the limit.

"The Russian Roulette market"

http://www.screencast.com/users/parisgnome/folders/Default/media/f5392d52-52e6-41b1-9845-ebcb2f2b2c0b

[Mamma Boom Boom]

>Mamma,

The setup is in place. One day,any day now,and surprise,surprise,down the limit.

"The Russian Roulette market"<

DG, he did it again!

[Mr. Panic]

$Vix has a fat hollow red (possible reversal bar) today and currently near the high of the day with the stock market at its high. The Helge charts show a big drop in after-hours but those charts have been horribly off. Intel gapped up to its 50day average and has remained pinned there. Are its potentially strong earnings priced in already?

[Michael]

Huge BLOW-OUT numbers from INTEL!

Gross Margins were 67% and 3 points higher than the midpoint of the company's expected guidance.

Bears in for MORE pain tomorrow!

[Roger D.]

The futures closed weak and if it's not finished,i'll eat this chart,lol.

Any surprise will be to the downside.

http://www.screencast.com/users/parisgnome/folders/Default/media/6569a03c-8dcb-413c-8304-86db8817fab4

[upstart]

Carl Futia's bullish Elliott Wave count...As he himself says, too much subjectivity in Elliott counts. Why can't the recent decline be wave A of a triangle as easily as anything else? This would ultimately be bullish, of course, but be entirely different than looking for a new high for the rally anytime soon.

[Wave Rust]

most indices getting bought on any intraday pullback

tomorrow should get a chunk back down but it will get bought also.

this always happens on bull runs

as time passes and spx 1010 gets farther and farther away, the bears get weaker and weaker and much more scared.

spx 1010 becomes the shoreline for the bears caught in a vicious rip current taking them further and further out to sea.

lots of bobbing bears right now.

sure looks bullish for at least a few weeks ,,,, well, at least until the bears bob out of sight.

spx 1155 is the next target after a day or two of pullback.

got a hedge? :)

wave rust

[Wave Rust]

es is trading above 1098 up 8 pts. ,,,, on intel earnings?

no sand bar for bobbing bears.

no coast guard rescue either.

buy the dips, people.

anybody have a bull market wave count?

anyone?

wave rust

[yelnick]

wave, the bull market count makes the Hope Rally a five-wave impulse and the current correction a three-wave flat that ended at 1010, a 38% retrace of the Hope Rally. To accept it, you have to get past the lack of alternation in waves 2 (June) and 4 (January) and the many overlapping formations in what should have been impulsive waves 1-3-5. One possible cure is to count wave 2 not from the June high but the May interim high, and make it an expanded/irregular flat, whereas the Jan-Feb5 drop is a zigzag. Curiously I have not seen the impulse-up proponents use this structure. What remains is the difficult wave 3 structure from Jul to Jan, especially the many overlapping waves from late Aug to Dec. One possibility is to have the choppy period in Sep/Oct be a fourth wave running triangle with an upwards slope - EWI's skewed triangle. Regardless, it is very hard to count that wave as impulsive. Its internals do not match an impulse, just as the whole Hope Rally does not.

If this is the count, we should have a wave 3 up forming. So far off the 1010 bottom we have not seen the sort of gaps up that would characterize such a wave form.

I think the expanded/irregular flat wave 2 of my post fits better.

Or, the Neely count, which makes waves 2 and 4 in the bullish count X waves, and puts us in the third corrective formation. EWI ended the third corrective wave in April, but perhaps it is not over. Wave A went Feb5-Apr26, wave B we may still be in or it could have ended at 1010, and then we would be in wave C. It could breach the April highs.

[yelnick]

MHD, I agree that the nested wave ii correcting the drop from 1131 to 1010 is likely dead. As to whether your count works better than the flat I suggest, my question for you is this: if we say wave 1 down ended at 1010, does that repair the structure down to make it look more like a five-wave impulse? A problem with that is what becomes wave 4 - the bounce back to 1131 - overlaps wave 1 down, the Flash Crash. I believe even if you normalize the Flash Crash to take out the 11 minute bots-gone-wild, or end wave 1 at the settling-down moment a day later, it still overlaps.

For charts that normalize, see this post:

http://yelnick.typepad.com/yelnick/2010/05/fallout-from-the-crash-stocks.html

Hence for your approach to work, the drop should fit a leading diagonal, a 53535 pattern which converges. I discussed that in this post:

http://yelnick.typepad.com/yelnick/2010/06/psyching-the-market-the-leading-diagonal-pattern.html

The concept was (a) the rapid drop should fade and (b) we drift down to no more than Sp970-1000. Which is about what happened.

[JT]

"The futures closed weak and if it's not finished,i'll eat this chart,lol.

Any surprise will be to the downside." - Roger

What kind of drugs are you on???

The S&P Futures are going to the moon right now!

[Dave]

Hi Yelnick,

I am curious to know what your opinion is on the much talked about topic of a double dip improbability based on the fact the yeild curve won't invert this time around? Is there a precedent you can cite where the economy went into a resession with a positive yeild curve? Anyone else have an answer.

[DG]

DG, he did it again!

Posted by: Mamma Boom Boom | Tuesday, July 13, 2010 at 12:55 PM

The guy absolutely is beyond help. He needs something like EW Anonymous to wean him off the obvious adrenaline highs he gets from calling for a crash. I hope the program is free because there's no way he'll have any money left to pay for rehab at this pace.

Yes, I know he isn't really trading with real money, hence his "devil may care" attitude toward actually being right.

[Roger D.]

JT,

There's a very good explanation on what's going on. The truth is I don't know for sure ,but here's my educated guess. This is a super cycle top and this is a topping process. By this chart of MCD we will probably finish sometime in the next day or 2,maybe Friday. I look for either a double top or a new high here for MCD. Once we finish I would expect a very fast decline to start. We will not crash on the 1st wave down,but probably will on the 2nd wave. MCD has one more wave up which will make 7 waves total.

This top will be so significant I doubt we will see these prices again for many,many years.

You know if I'm wrong so be it and I hope I am.

Roger D.

http://www.screencast.com/users/parisgnome/folders/Default/media/5191bf01-98d3-4432-8728-7a5378e155fb

[Roger D.]

Just a thought on the above MCD chart this current wave is a "c" wave,actually all the properties of a 3rd wave,which it can't be.

[MHD]

The bears must ask themselves how Intel had their best quarter ever in this bad economy. I'm starting to question my bearish long term view.
I'm guessing tomorrow will be a bad day for the bear as the bull has already told the bear there will be no lube:)

[MHD]

Zerohedge and Karl Denninger have nothing to say about Intel so their earnings must be legit. I use those sites to sniff out the BS. Should be a rough day for Rodger D. and the bears.

[yelnick]

Dave, you asked:

> what your opinion is on the much talked about topic of a double dip improbability based on the fact the yeild curve won't invert this time around? Is there a precedent you can cite where the economy went into a resession with a positive yeild curve?

The yield curve short end is being held down artificially by the Fed. The last time this happened for a long duration was in the 1930s. SeekingAlpha has a chart from January 2007 when the curve ran negative (good timing!): http://seekingalpha.com/article/23870-an-80-year-yield-curve-history-and-its-implications

The yield curve bent positive after 1929 and was above 0 for most of the time we were falling hard into the 1933 bottom - the Fed held the short rate down except during the sovereign debt crisis in 1931 when the Fed raised short term rates to prevent gold flowing out of the US. Even as we came out of the bottom, we fell back down in 1938 when the yield curve was positive.

The Cleveland Fed put out a report on this just recently: http://www.clevelandfed.org/research/trends/2010/0710/02monpol.cfm . They do not expect a double dip - but they are tracking experience post the Great Depression. Since we are in the fourth credit collapse in US history (1837, 1873, 1929 and 2008) the best precedent would come from those prior eras, not the in-between times.

The curve is flattening right now: http://www.businessweek.com/news/2010-07-03/treasury-two-year-yield-drops-to-record-low-on-slowdown-concern.html

The Fed holds the short term rates down, but now the mid term rates are dropping to record lows, and the longer term rates are lessening. Not a promising sign.

[Ashish]

The kind of business activity I witness here in India, where people and businesses are reaching out to each other, it does seem the recovery has more legs to go.

[Dave]

Thanks Yelnick!

[David]

Nobody seams to be paying attention to the bond market is saying. If I'm in a new bull market why are bonds so strong?

As I mentioned earlier I've been ion bonds since 2006. I see no reason to leave. Especially if we are playing out the Japan scenario. What would TLT be priced at if we too went to 1.5% on a 10 year note?

[yelnick]

Aramis, the week of Aug2 is a turn window under several methods, but that is not my primary reason. The internals of a wave C under my Big Tease count run out about then. The current wave 4 (if that is what we are in) should meander until the end of this coming week, then we have a final wave 5 at the turn of the month.