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mortiz

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There are several fear tools suggesting some sort of price bottom is getting closer, but there is still a problem in the liquidity department (measured by market breadth) as well as price momentum. There is a plethora of sources for the price momentum and breadth problems (great sources right on this board), so this post is going to address some indicators that may not be as widely available, first some investor/trader psychological indicators.

First is a longer term chart of the CBOE equity put-call ratios using 20 day and 60 day moving averages to illustrate the prolonged high level of relative put activity.  Both CBOE equity put-call (PC) moving averages are at 11+ year extremes... of course they can go higher, and usually roll over prior to a price bottom, which has yet to occur.



The CBOE only accounts for less than a third of the total equity options volume, but the all-exchange equity options PC ratio is sending the same signal as the CBOE.



When the index and ETF options volume is thrown in with the CBOE equity options volume, surprisingly, the PC ratio is not yet to historical extremes. Often, the more important price bottoms coincide with lower highs in this data series, but the total CBOE PC ratio need to roll over indicating the more savvy players are positioning for the upside.

 

Looking at the weekly buy-to-open (BTO) equity PC ratios, as reported by the OCC, we are starting to see more aggressive put activity with the smaller equity options traders.  The smallest traders, one to ten contracts per transaction, recorded their highest level of relative put opening positions last week in five years at 0.83.  This group's BTO PC ratio is still significantly lower than during the 2002-2003 bottoming process, so there may be more work to do in getting further capitulation from the smallest traders.



The retail equity options players trading 11 to 49 contracts per transaction BTO PC ratio took a sharp spike upward last week.  This group's BTO PC ratio is closely challenging their 2002-2003 highs, thus plenty of downside protection positioning is evident here.



After setting an all-time BTO PC ratio high last week, the largest retail equity options players, those trading over 50 contracts per transaction, noticeably throttled back on their opening put positions last week, which is often a good sign for the bullish case.... at least under reasonable conditions with respect to market liquidity, which is currently questionable.



For those familiar with the composite (index and equity options) ISEE index, which measures the retail BTO call-put ratio of trades on the ISE exchange, the next chart is an all-exchange weekly version of the ISEE index.  In March 2007, this expanded version hit a new low, which has recently been challenged indicating the retail players on all options exchanges have had a hearty appetite for opening new, long put positions.



Not all sentiment indicators are at or near historic pessimistic levels, the options volatility (VXO)-volume (OEX) "power" indicator is only recently starting to at least achieve neutral territory, and I expect it will reach the buy zone in the coming week.  The power indicator is something I made up, and measure daily OEX options volume versus its 30 day MA and the daily VXO versus its 30 day MA.  Ratios are created and multiplied, then smoothed.

This tool gave an excellent warning of trouble brewing a week or two ago, but has more work to reach levels for buy signals.



Most are familiar with Jason Goepfert's liquidity premium (LP) indicator which compares detrended index volume with its associated detrended ETF volume.  First is the QQQQ-NDX LP version, staring to move toward the buy zone, but has more work to do.



The SPY-SPX LP version has also refused to generate a buy signal for quite sometime.  However, in the past few days this LP variant is picking up momentum toward the buy zone.



A few money flow tools, beginning with the Dow CLX McClellan Summation Index (McSum).  CLX is the climax indicator originally developed by Joe Granville, and then refined by Don Wolanchuk (affectionately known as da_cheif). This is a longer term view of the Dow CLX McSum, note thus far, this intermediate term measure of the Dow components' accumulation-distribution has not reach negative extremes.

Also note, the positive extreme this indicator reached in May 2007... I only have 11 or 12 years of the Dow CLX data, but when CLX McSum extremes surface as seen almost a year ago, the Dow has gone on to new price highs once the consolidating/corrective process is finished.



The NDX CLX McSum has predictably been weaker than the Dow component CLX McSum.  However, the NDX CLX McSum did find support at the trend line drawn from the summer of 2002 and summer of 2006 lows, which is encouraging for the bulls if it can remain above the trend line in the coming weeks.



The next chart is the AD McSum of the Russell 4000 (R4K), which are the highest quality 4000 US common stocks as determined by the Russell folks.  Unfortunately, I have only been deriving this group's data since early 2004, so I do not have any comparative data from the 2002-2003 bottom.  In January 2008, the R4K AD McSum violated its August 2007 low, thus ensuring there would be a lower price low coming and is exactly what we got.  This current decline in the R4K AD McSum must be contained by the -1000 level or more price downside would be a very high probability.



The R4K AD McClellan Oscillator (MCO) did not violate its January 2008 low early last week, rallied right to its zero line, and retreated.  The January MCO low will need to hold for any hope of a more sustainable price rally in the coming weeks.



Shifting the focus to weekly AD data, next is the NYSE common stock only AD MCO, which we derive comparing the price change of each NYA component Friday over Friday... thus these are "true" weekly AD indicators. The NYSE common stock only weekly AD MCO did creep up last week, but note it has spent significant time below zero over the past many months.




Next is the weekly NYSE AD McSum, challenging its 2002-2003 lows.




With the liquidity problems the market is experiencing we likely have more work to do before a solid price bottom is in place, but sentiment is certainly reaching levels of historic extremes.

FWIW

Randy

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Reply with quote  #2 
I am with you on the sentiment bottom Mortiz. I really do not care about liquidity. Remember how plentiful liquidity was in March-May 2007, when I was crying bloody top here and nobody listened?

So, IMHO we are forming a good bottom that will last for months.

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