Post options week starts with a thud

It’s your weekly dose of TSP Talk.

Stocks were pummeled yesterday as the Dow shed 200-points and the major indices lost between 3% and 4% on the day. The S&P 500 is now back in the red for 2009 (although the C-fund is still up slightly).

Monday’s sell-off gave us some confirmation that our belief was a correct, that last week’s rally on Thursday and Friday, may have been artificially positive because of the options expiration.

Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

Despite some of the positives showing up in the market over the last several weeks, we were seeing several cracks in the bullish case from the overhead resistance which looked very similar to the many peaks of the 2000-2002 bear market rallies, to breakdowns in wedge patters, to the sell signals in the PMO and MACD indicators, plus overly bullishness coming from the put / call ratios and sentiment surveys. It was an easy call to stay defensive.

The tough part was being bullish leading up to this point (I missed the rally) so let’s hope if you were smart enough, or lucky enough, to make some money over the last several weeks / months, that you are able to hold on to those gains if we do head south.

I have talked about the below pattern in the NYSE overbought / oversold indicator a few times before, but the recent overbought condition had lasted so long that it is still relevant today. Basically, we have seen pattern of extended overbought conditions end rather poorly during this bear market.

Chart provided courtesy of www.decisionpoint.com, analysis by TSP Talk

Until last week, this indicator has seen only brief stints below the neutral line during this bear market rally. Finally, after three plus months, we are starting to see some oversold readings. Nothing extreme yet, but low enough that a bull market might be rallying off of these levels. But during a bear market, however, things can get much more oversold, as you can see above.

Bottom line: The market just might be starting a new leg down, but the May lows have not been taken out yet so it is too early to tell. As I mentioned yesterday, it could be this week that we get the answer.

That’s all for today. Thanks for reading. This market commentary is updated daily on www.tsptalk.com.

Tom Crowley
TSP Talk