Special Risk Capital Management LLC

Rough Markets Continue . . . but June 11, 2011

And there is (nearly) always a “but” (pun not intended).   Yes the markets this week were terrible, we saw a lot of weakness, but not all that much selling.  Hummm.    We can see that the small retail investor is really bummed out about stocks (via the AAII sentiment index of small investors) and the options folks are not that terribly pessimistic (via the VIX index).  My conclusions are that this correction is being driven by a lack of buying and the small guy getting gun-shy.  No panic as of yet.

All of the bad news with the deficit and economic issues certainly don’t paint a very positive picture.  Percisely why it MAY be a good time to pay attention on the buy side.    Am I crazy?  No, it just that the old saying “The markets are designed to take the most amount of money away from the most amount of people” still hold true.  In other words, “if it’s obvious that the market is going down, it’s obviously wrong.”  Now don’t get me wrong; it could be waaay too early to start a buying spree, but there are signs.  Let’s take a look:

The graph below is the percent of stocks in the S&P 1500 (a broader based index) that are under Accumulation (buying pressure), Neutral and Distribution (selling pressure).  In a word: Terrible and getting worse.   click on it to enlarge

But . . . . what we also see is the Direction of Accumulation and Distribution:

Charts used with permission  www.highgrowthstock.com; copyright 2009-11

Notice that the percentage of stocks improving (green) is around 37%; not great but that slice is just now starting to improve / get bigger.  That does NOT mean that we’re out of the woods just yet, but it is a short-term indicator that things maybe starting to improve.  Note that a blip up, then a return to downward selling could very well happen, so we must be patient for confirmation.

Just what will confirmation look like?  Perhaps a nice strong day, broadly across major sectors (like technology and finance), on very high volume (the buyers are back).  Another strong day after such a day would be a positive sign.  But . . . we’re not seeing that yet.  Continued bad news would totally abort such a rally.  The financial issues in Europe (that we don’t hear much about in the US) should be a big concern.  (Why for the US?  Guess who’s banks have issued credit default insurance on this debit?  Guess who is still “too big to fail”?  Now you see that the EU problem will be ours too.)

OK, enough to ponder for another week.  Take care, be watchful and don’t get caught up in the news cycle tooooo much.