Washed-out and undervalued? Or, just oversold? That’s the big question for equity bulls and bears. Some notable veterans [Buffett, Hussman, and Grantham for example] believe the former is the case although they ultimately accept more downside as a possibility [um, who doesn’t?].

Major indexes are down over 40% from their peak which is typical for bear market declines; indexes are much oversold [VIX, weekly RSIs to name two are at extreme readings]; investment advisors are overwhelmingly bearish; the commodity market bloodbath is severe; financial giants have been routed, merged or run out of existence; some US automakers may fold; unprecedented global government actions have been controversial but spectacular and most likely inflationary ultimately; there are still major derivative unwinds to take place [LEH derivatives should settle tomorrow]; credit is still tight although improving selectively; earnings and economic data continue to decline; a record $65 billion was withdrawn from mutual funds and over $40 billion from hedge funds just this quarter; news headlines remain grim and so forth.

That’s quite a negative litany.

So then, is all the bad news out and stocks washed out?

Sometimes that’s the way it works.

At the very least we should get a rally to relieve oversold conditions. And, that’s what we’re getting today on a last half hour jam job.

If you’re a bearish and sitting in cash like us this is the kind of action you want since oversold conditions get worked off meaning you can reshort with greater confidence later.

But, we’re no different then other technician since we’ll go in the direction our systems indicate rather than our opinions whether bullish or bearish.

Volume is comparatively light and shorts were squeezed late. Breadth was as good as you might expect.




Below is a 10 minute chart of SPY. You’ll readily note the volume differences over the past three trading days. Some would argue the heavier volume is options related but daily chart reflects the difference well. From the Thursday low to the high on Friday we moved 12%. And today we reached slightly above Friday’s intraday high.











Since I didn’t post for subscribers this weekend let me add something that was missed. Tom DeMark Indicators are widely used by institutional investors. They’re quite complex and I won’t bother you with detailed explanations. But, any good indicator is only as good as how it’s integrated with other criteria. Since we use primarily “weekly” charts we tend to focus on using it with those.

This means we rely on his “weekly sequential” interpretations which seem to work well when using “9” set-up counts. If we were still short, DeMark Indicator counts currently at an “8” with the balance of this week and next need to reach and complete a “9”. This means we could rally all the way to the top of the gap before we exited or a little over $110. This isn’t acceptable. Below is an internal chart of this condition on SPY. I might also add this is the same appearance that exists on most major market indexes in addition to many other popular sectors.





Another big factor today was the decline in the TED Spread. This gave traders a sense that credit was starting to loosen. On the other hand corporate spreads continue to widen as investors still seek Treasury bonds and some believe raising FDIC deposit insurance hurts bond markets competitively.
































































































AXP announced better than expected earnings after the bell and no doubt this news was leaked to traders early. This may have accounted for the late day rally. Some of their good news earnings came from incorporating gains from MasterCard and Visa settlements. As of now I’m not clear on the breakdown and effect.

Finally, this article [subscription required] from this past weekend edition of the WSJ about noted economist Anna Schwartz is a must read. And, according to a news story in the Guardian Wall Street banks will use 10% of government bailout package [I think I’m gonna hurl] for bonuses.

The bright sides of things are that oversold conditions are easing. Does that mean you should start buying? Not for us. My greatest fear remains trading ranges which eat traders alive and spit them out.

Have a pleasant evening.