Friday, May 7, 2010

Black Thursday - a buying opportunity

By now you all have probably heard of yesterday's stock market fireworks in the U.S. markets. At around 2:20 pm the S&P started a hair-raising plunge that took the average down 7% in 30 minutes. The cash S&P 500 hit a low of 1065. Then the market pulled a dramatic U-turn and rallied 7% in the next 30 minutes, recovering nearly all of its losses. Nonetheless, this average closed down on the day by more than 3% from Wednesday's close.

What's next?

I think the situation now is very similar to the one that developed in early February. Take a look at the top chart. You can see that at yesterday's low the cash S&P 500 was trading a little below its rising 200 day moving average and a lot below its rising 50 day moving average. This is a classic buying opportunity for the aggressive contrarian as I explained in chapter 11 of my book.

Today's headline in the New York Times (image of today's front page is above) confirms this. This is the first time since the February low that the stock market has received a bearish headline mention in the Times.

Since the aggressive contrarian has maintained an above average commitment to the stock market from the 690 level in March of 2009 no additional action is called for. I think yesterday's Black Thursday will appear in retrospect as a huge buying opportunity. I expect the S&P to trade over the 1300 level during the next several months.


  1. I won't disagree that there could be a bounce off these levels following the action yesterday, but simply because EVERYBODY is bullish and that nobody believes in the market's warning.

    Rationalizing/dismissing what happened is not a contrarian move.

    It means that it's all but a contrarian move to remain long in this market. It doesn't mean you'll lose money on the short term (next few sessions).

  2. I don't believe that everybody is bullish. I get Laszlo Birinyi's monthly newsletter and he likes to analyze a lot of the soft market data including sentiment. His most recent conclusion based upon a lot of market history is that traders, investors, and the media are all way too bearish for this stage of an economic recovery. Although I'm purely a systems trader and don't use this kind of info to make trading decisions, I agree with Carl at this point.

  3. This week's news headlines (Greece riots, GS charges, BP oil spill, 1000 point DJI drop, elections in Germany/UK)created the sell off. Many talking heads and their guests repeated said, "what happened in Greece can happen in the USA". If true why did the US $ soar and 10 year Treasury rates drop to near record lows when the US deficits/GDP ratios are very high?? The US can create an near infinite amount of liquidity and keep interest rates at near zero. Greece can't as long as its a member of the EU. Over time the ECB/IMF/FED will buy most of the PIIGS bonds to protect the EU banks, just like the FED bought the toxic MBS. The bonds are hidden from the continuous attacks from hedge funds. IMO, equities will be the next bubble and Carl is right as usual.

  4. Because a single image is worth thousands of words, I'd suggest having a look at this:

    This is the best sentiment indicator I know of, because It's based on actual action, not just surveys...
    See for yourself :-)

  5. Just to be clear: I think Carl has been really impressive since I've started following him about a year ago. I admire him for his calls and take his inputs every day.

    I'm just thinking that for the past several months, he's been right for the wrong reasons...

    It seems like I might be the true contrarian here, since everybody tends to dismiss my inputs and side with Carl who is siding with the crowd at the moment.

  6. pej,

    The put/call ratio is moving/has moved back into neutral territory from the extreme low.

  7. TG4TA.stockman
    I'll update the chart this evening. Worth mentioning though:
    - the chart is the 20 day moving average. It will take some time for it to return to "neutral".
    - I was trying to show that bullishness was extreme, even more extreme than at the TOP of the market in 2007.
    - It will take time to rebalance such extreme sentiment, specially since yesterday drop was dismissed as a "fat finger" event.

  8. well lets hope so and Europe doesnt blow up. If it does...then it doesnt matter what the charts say. Everything is great...until it isnt. Just like 2007-2008.

  9. Jarrod - Although I think this bull has time to run, I'm looking for a major meltdown in Europe a few years down the road. The economic upheaval in the 1907-1909 time frame brought about WWI. The great depression brought about WWII. I've had my doubts since it's inception that the EU/EMU can survive. It's a monetary union without a fiscal one which to me is absurd. But I'm not tied to any eventual outcome - just trading the trends whichever directions they goes.

  10. One of the most important books in my library is Sway.

    With all due respect, I must choose to be a dissenter relative to the past few weeks.

    This is written in an objective manner, not adversarial, with respect for all.

    The reality is that we did not achieve 1220; that 1170 has been tested before 1270, and now 1070 has been tested before 1270.

    I cannot agree that "Carl is right as usual."

    I have the utmost respect for Carl, his technical skills, and this forum he provides.

    His calls have been outstanding; but it was time for profit taking after a 550+ point run is all I am willing to conclude.

    If we were to project a child's height by extrapolating data from their first two years of growth, they wouldn't fit through the doorway by the time they were seven.

    Step by step.