A Market Dominated By Weak Hands ~ The Risk Averse Alert

Friday, February 22, 2013

A Market Dominated By Weak Hands

Let's continue our focus on the market's underlying technical state. Despite having concluded technical underpinnings are suspect, there's also something to say about the risk-on/risk-off dichotomy Doug Noland speaks of. Yet let's not forget, too, this dynamic principally is operating in a market dominated by weak hands.

Now, we simply cannot ignore the market's notably poor character revealed on two fronts. First is volume. A market climbs a wall of worry, yet when worry prevails shares are increasingly sold. In a bull market this is of no consequence. Shares are snapped up while the market is driven still higher, and this amidst an expanding volume of shares exchanged. Precisely the exact opposite has prevailed since March '09 bottom. Our contention, then, could be the market in a bear rally climbs a crumbling facade. We know the drill, too. Indeed, the mechanisms used only the more speak of a market dominated by weak hands. Truly, strong hands would not be working Chicago as feverishly as weak hands have these past few years. Using both futures and options (the latter particularly in the 2009-2010 period, which dynamic I identified), the overriding methodology was one where trapped, weak hands—possessing a lender of last resort backstop whose sole benefit has bought time before inevitable revulsion sweeps upon the scene—could insist that, suckers and other miscellaneous captive interests who want a piece of garbage weak hands otherwise are swimming in positively must pay up, because the truth of the matter is weak hands must take on more garbage themselves, and as well increase their leverage, if their position is to remain tenable. We might say this is the same game as accompanied Greenspan's "irrational exuberance," but with a much, much different confidence backdrop—shattered.

The second circumstantial matter revealing the market's notably poor character was reviewed again on Wednesday, showing a relatively razor thin NYSE advance-decline differential coinciding with the market's advance since mid-November 2012. Now, one might argue a "risk on" dynamic at work subsequent to this year's first day of trading, which day also was one of only a few over the past several months where the NYSE advance-decline differential could be cited as confirming the market's positive bias. Overall, though, 2013's first trading day positively was an exception. The rule, prior and since, has seen the market being levitated in an exceptionally dubious manner. More than at any time since March '09 bottom has the market's advancing components driving its march higher been notably soft—indeed, entirely suspect. So, again, "risk on" is a fine and dandy conclusion one might make here, but its protagonists surely are weak hands whose buying and selling—both—is exceptionally restrained, and this quite likely out of utter necessity. The dimension of the market's underlying weakness—further substantiating the view that, the market is dominated by weak hands—in fact is revealed an enduring trait by the NYSE advance-decline differential's 200-day moving average...

Good God, that is just pathetic. Now, the NYSE advance-decline differential's declining 200-day moving average has been noted here before. So, here we see the market's continued levitation is only the more a ruse, as ever fewer advancing issues in the aggregate are supporting the market at nominally higher levels. This simply is a recipe for disaster. Indeed, the evidence we have to objectively claim weak hands are dominating the market rather leaves us to fear that, once this epic lender of last resort, time buying ruse can no longer be sustained, panicked selling all too likely could quickly turn into an avalanche.

Per markup I have drawn on the NYSE advance-decline differential's 10-day moving average, green is positive, red is negative, and you more or less can see what this reveals about the market's underlying condition worth noting in each instance.

The red line drawn across the top is one I have noted here several times before. Most recently was late-November 2012 when the NYSE advance-decline differential's 10-day moving average once again was extending up to it. The same had occurred back in April 2010, and the thinking here was the market might be nearing a crash, as happened on May 6, 2010. Well, apparently, something more in the lead-up to such a possibility will presage any upcoming, negative event, particularly were this likely to be deeper and more long lasting than occurred in 2010. So, developments vis-a-vis the 10-day moving average leading to the market's 2011 peak might be worth keeping an eye out for. Already there's reason to think we're late in the game, as the one-sided dimension of the market's advance whose daily underpinnings are entirely suspect, and yet whose 10-day moving average is off the charts, seems to reveal a complacency among weak hands not likely, one would think, to be rewarded. Likewise, the broader band in which the NYSE advance-decline differential's 10-day moving average has fluctuated since the market's October 2011 bottom might be seen revealing a more tenuous conviction accompanying the market's advance, the likes of which is only the more confirmed by the NYSE advance-decline differential's notably muted state coinciding with the market's advance since mid-November 2012.

Finally, some thoughts per "risk on" revealed by the NYSE new 52-week high-low differential since September 2012. I should have commented on this yesterday in presenting this measure's negatively diverging state coincident with the market's advance since mid-November 2012, but it's just as well here. Given decrepit volume, which still is diminishing as the market continues to advance, and given notably suspect underpinnings accompanying this, what should we make of the sudden burst in the NYSE new 52-week high-low differential since September 2012?

Remember, this measure had topped in 2010, and this at a notably muted level, which was only the more suspicious given how broad was the NYSE's decimation in 2008. Going into April 2010 peak we should have seen considerably more NYSE-listed issues hitting new 52-week highs than we did. Furthermore, with the Fed's fantasy per an "exit strategy" dashed around mid-year 2010, and talk of QE2 suddenly the rage (which talk become the walk the day after Election Day 2010—i.e. early November), the NYSE soon rose above its April 2010 peak, and yet still fewer NYSE-listed issues were hitting new 52-week highs. This condition, indeed, persisted to and through the NYSE Composite's 2011 peak. Likewise, right up until September 2012 was this measure continuing to languish, which, itself, really was no anomaly as the NYSE Composite remained below its 2011 peak, so the number of NYSE-listed issues hitting new 52-week highs by all rights were justifiably restrained.

Then, suddenly, in September 2012, with the NYSE Composite still below its 2011 peak, the number of NYSE-listed issues hitting new 52-week highs just exploded upward, far exceeding their April 2010 peak. Now, I can't remember the exact explanation I previously gave this, but I am certain it is harmonious with weak hands who are dominating this market getting their "risk on." Is this not exactly what we should expect just prior to everything coming undone? Does not this measure's negative divergence coincident with the market's advance since mid-November 2012 in fact confirm weak hands are the dominant force here? It's likely we will witness but further negative divergence per this technical measure right up to the moment the lug nuts start falling off the market...

Word on the Street
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