TSP Talk – Where’s the relief?

Good Monday morning. It’s your weekly dose of TSP Talk.

It just seems to be getting worse and worse out there. After the worst year in over 70 years in 2008, some of the worst January and Februarys in history, March starts off with the worst first week it has ever had. Relentless. So when do we get a break?

Six or eight months ago, I would have been jumping into stocks based on the extreme readings of many of the indicators and the severity of the recent decline. But I have been hurt a few times since then trying to time a relief rally and while we will eventually see a rally, the severity of the bear market has been such that the rules have changed.

Is my bearishness an indication of an impending rally? Very possibly. But yes, it IS different this time. There are no real solutions being thrown around, and earnings are such an unknown in the coming quarters, that it is not even possible to know if today’s low prices are actually low enough.

The S&P 500 continues its relentless decline after support was broken quite easily last week. The break in support now sets up some serious resistance levels overhead; levels which some are hoping we at least test so they can sell at a higher price.

If you remember, I had said one way to play a potential double bottom was to buy at the support level, but sell if if breaks and can not get back above within a few days. That’s what happened last week and there are folks who are now stuck in stocks waiting for the bounce to sell into.

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

We talked last week how the AAII Investor Sentiment Survey hit 70% on the bearish percentage. That is the highest reading, perhaps since that survey started, I can’t be sure. But shouldn’t sentiment be at its most bearish ever, considering the market is performing about as bad as it ever has?

Those surveys tell us what people are saying about the market, but the put/call ratio is a sentiment indicator that tells us what people are actually doing with their money, and remarkably, the CBOE and Equity put/call ratios, also considered the “dumb money”, are still showing a bullish bias. Compare the CBOE readings of 1.25 and 1.14 during the October and November lows, to the current 0.91 reading today.

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

Unless there is something amiss with these ratios, these current readings are quite concerning. How can the average investor be acting complacently in this environment? I would be more willing to buy if these folks were panicking, but they are not.
Now that the major indices are below the 50% loss levels, a new group of bulls who thought the 50% retracement level would hold, are now getting nervous and may start to bail. How low can we go? That’s the problem, we don’t know and support is deteriorating.

How many more Bear Sterns, Lehman Brothers, AIG’s, Citigroups, GE’s, GM’s, etc., are out there? Some of them are gone, some are hanging by a thread. What happens if GM goes bankrupt, or GE financial leg takes them down? How will the market react? Is it priced in already?

We WILL get a bounce – that is for sure. But when and how long it will last is anyone’s guess. We could see one with a revision to Mark to Market accounting, or a change in the uptick rule. But these changes will be mere band-aids on a much larger wound.

Until this bear market is over, these rallies need to be sold as picking a bottom in this environment can be financial suicide. Just ask anyone who has tried in the last few months.

That’s all for today. Thanks for reading. These commentary are update daily on TSP Talk.

– Tom Crowley