How Now Brown Cow?

Here's an interesting posting by my favourite market commentators at Financial Sense Online. In today's market wrap, Mr.Martin Goldberg wrote the following piece: Complacency Not Wrung Out

Here is a long snippet of what he wrote.

Put these comments into your consideration before making your next investing/trading decision.

• For a number of reasons, the market is likely to sustain additional losses in the weeks ahead. While the market has been lulled into complacency, Tuesday’s action does not change anything regarding the public’s complacency toward the stock market. Nothing has been wrung out - in fact Tuesday’s action merely reinforces the existence of public complacency. Consider that in terms of historic perspective, there was nothing special about what happened on Tuesday. The magnitude of the drop, only a little over 3% on the S&P 500, was nothing tremendously unusual when taken in historic perspective.
• Yet in spite of this rather benign price action, radio, TV, and newspapers were overwhelmed with news, guidance, counseling, cheerleading, discussing, predicting, and various proselytizing about the stock market. CNBC dedicated a night time show to guide their viewers to not get nervous and sell out at the bottom and to focus on bargain hunting. The stock market was the lead story in many news broadcasts both Tuesday evening as well as Wednesday. I’m told that they broke into the Oprah show with a stock market story on Tuesday. While it is refreshing to see the stock market lead, it is totally inappropriate for the market to become the lead story on action that is rather ordinary when taken in historic perspective.
• The news stories all seemed to have the same tone. That is, “don’t worry folks; you don’t want to sell out at the bottom.” There was also a lot of talk and advice on “bargain hunting.” In addition, TV viewers were able to watch straight-faced comparisons between Tuesday’s action and that of the 1987 and 2000 crashes. While this may make for favorable TV ratings, there is no technical truth to such a premise. Below is a chart of the Dow Jones Industrials before and through the 1987 crash. In this case, a long standing uptrend beginning in mid-May was finally broken in early September. (The top occurred in late August – more than 30 days from the market top.) The broken trend was about one month old when the crash occurred.

• By contrast, Tuesday’s action is likely to be the end of an uptrend instead the end of a downtrend as had occurred in 1987. This is clearly shown in the chart below. Tuesday’s action came only 5 days from a (possible) intermediate term top.
  
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• The chart below is an updated version from last week’s article, entitled “Market Behavior a Formula for Complacency.” It is clear that Tuesday’s action signaled a change in market character. As the market advanced, the volume diminished until the market finally turned. As it headed downward, volume accelerated. The lower Bollinger band, which served as support during the uptrend, was decisively broken on Tuesday. This is evidence that something has changed in the behavior of the stock market since the summer. Trading volume could not be produced during the uptrend, and as a result volume was produced through a break in the uptrend.
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• In addition, Tuesday and Wednesday’s action has produced market behavior not observed in history. Tuesday’s S&P 500 trading volume was the most ever! If not for Tuesday’s volume, Wednesday’s trading volume would have been the most ever. Over 7 billion shares were traded over these 2 trading days. With the market in a 4+ year bull, a change in behavior from diminishing volume to record breaking volume is likely to be signaling a change in price action as well.
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