The Insurance Is Paying Off

On Wednesday morning, I mentioned I added a short position to hedge against the market taking a short-term drop.  We had that bad jobs number Wednesday and today we had the government’s official numbers (as official as they can get).  They weren’t pretty.  Throughout the day the market tried to shrug off the bad news but wasn’t able to when it was all said and done.  Now, the volume was weak today just like it’s been all week.  But, we could still see further downside as we’re still overbought.  So, the TWM that I purchased on Wednesday paid off big time today as the Nasdaq and small cap stocks were down the most.  TWM finished the day up over 7%.  Just since Wednesday, the gain has been over 10%.

I watch a lot of oscillators to determine if the market is set for a pullback.  One of my favorites is watching the percentage of stocks above various moving averages.  The chart below is the percentage of stocks above their 40-day moving average.  The green line is the percentage of stocks and the purple line is the S&P 500.  As you can see, this oscillator goes from 20% to about 80%.  Back in October, it was around 1% which is extremely low.  That means almost every stock on the NYSE was trading below its 40-day moving average.  Now, almost every stock is trading above its 40-day moving average.  The last four times we have gone to 80% or so, the market has pulled back and the rally was over.  The problem this time is that you can see the purple line (the S&P 500) is still near the bottom but the oscillator is all the way at the top.  If there is some good news here, the stocks that are above their 40-day moving average can’t be that much above.  So, a little correction right now may get this oscillator to fall pretty quickly.  But, for now we may be in for a few more down days.  If you haven’t reduced your equity exposure by purchasing inverse ETFs, then you might consider selling some of your positions.  For me, I don’t have a problem doing a little of both.  Have a nice weekend.

The Percentage of stocks abover their 50-day moving average

The Percentage of stocks abover their 40-day moving average


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January 2009
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