Gloomy Traders Stumble Through a Market of Broken Charts

Despite extreme gloominess and oversold technical conditions, the market had been unable to bounce a little on Thursday morning. There doesn’t appear to be panic selling, but there aren’t many bids to soak up the selling.

Breadth is very poor, with around 1,700 gainers to 6,300 decliners. New 12-month lows continue to expand and are hitting over 1,400 names so far today.

Technical conditions are this current market’s most incredible difficulty. The charts are badly broken, but have yet to test the lows hit in June. The closer we get to testing the June lows, the more they are a magnet. Buyers will stand aside until they are tested. Why buy when the indices are in such a precarious position?

The easy justification for buying this market is that “everyone is bearish.” This sort of contrary thinking greatly appeals to many investors, but is very glib and vague justification. The theory is that if “everyone” is bearish, then most of the selling pressure is gone, and it won’t take much buying for stocks to pop.

The problem is that talking bearishly and acting bearishly are very different things. No one is positive about this market, but there has been very little capitulation, and actual flows into equities and exchange-traded funds have remained relatively strong. This is one of the reasons that volatility indexes have remained relatively sedate despite the market pressure.

The risk of additional selling and liquidation is very high despite the American Association of Individual Investors
bears being at 60% for only the fifth time in history. There is plenty of negativity, but it has not been reflected in the selling.

My best advice is to relax and maintain high cash positions. It is very easy to get caught up in the game of trying to catch an oversold bounce in a terrible market, but it may not be worth the time and effort. Don’t be fooled by contrarians who tell you that negativity is so extreme that we have to bounce soon. That is not the case.

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