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The Upside of the Market’s Bearish Mondays

You know what might be the best thing for the stock market today? A big fat dip. Seriously.

No, I haven’t flipped out … at least not yet anyway. I was just reviewing some market-related things this weekend, and was reminded of something I mentioned in mid-October that I somehow put on the shelf since then. In short, Monday’s have been a habitually rough day for the overall stock market over the course of the last several weeks.

As of October 19th, six of the prior eight Mondays had been bearish; four of them were downright disastrous. Since October 19th, five out of seven Mondays have been bearish, with one of them being disastrous. Granted, we’re in a bear market so we’re bound to get more bearish days than bullish days. Statistically speaking though, we’ve seen more than a fair share of losses specifically on Mondays. (All the Mondays on the nearby chart of the S&P 500 have been marked with a red arrow.)

But don’t we have a bullish trade on? Why would we want to see a pullback?

That’s a fair question, and here’s my honest answer … I don’t mind taking one step back in order to take two steps forward. My only goal is to buy low and sell how, and if that’s what the market gives me, then I’ll take it. The two-steps-forward and one-step-backwards pattern isn’t sexy, but if it works, then it works. It’s sustainable.

What’s not sustainable (and what worries me) is three or four really good - consecutive -days for stocks. We saw it happen in late October, and again in late November. Both times though, the market paid the price for providing too much profit-taking potential.

The last four trading days haven’t been exactly “wildly bullish”, but the three winning days and one losing day - after Monday’s debacle - still sent the S&P 500 up by 7.3%. That may well be pushing the limits of sustainability. So, perhaps a slight cooling may actually be a healthy thing. Given our recent history with Mondays, maybe today’s the day it makes the most sense to give a little ground … to bleed off any unhealthy euphoria.

In other words, a rough day today isn’t a bearish omen.

On that note, I think it merits being explicit about this … I’m not saying today will be bearish - I’m just pointing out the odds and pattern. What I am saying, however, is the bulls need to control their pace at this delicate time. This really could be the beginning of at least a near-term move higher, but moderation is the key. A slight ‘give’ sometime this week, followed by a recovery, could be just the ticket.

The Chart’s Bigger Picture

Monday tendencies not withstanding, there are some other things on the chart worth a look.

As much as I’m a fan of strong fundamentals, to be honest, I get at least as much good information from charts. See, just because a company’s books look solid doesn’t mean its stock always moves higher. It should, but it doesn’t. At least with a chart I have a reasonable idea about what the odds of a rise or fall may be. Obviously the ‘read’ isn’t always right, but neither is the assumption that great companies always make for great stocks.

With this in mind, I wanted to point out a couple of bullish aspects of the S&P 500’s chart, as well as highlight something that’s almost bullish, despite knowing fundamentals are still ugly right now.

As simple as moving averages are, they’re still powerful tools. Personally, I think their power comes from their simplicity. More importantly though, I use them as indicators because they tend to work better than not.

Anyway, you may want to note the S&P 500 crawled back above its 20 day moving average line (green, entwined with the S&P 500) on Friday. That’s not a significantly big deal - we’ve seen it happen two other times since late September, and both of those times ended up being nothing more than set-ups for more selling. However, the slope of the lines’ descent is shallowing, and this move back above the 20 day line came considerably easier than the last one did. That’s a hint the selling pressure is dissipating. (And yes, a weak Monday will indeed mean the market slips back under the 20 day line temporarily.)

Similarly, the VIX finally appears willing to back off of recent all-time highs. I can’t get into a discussion right now about why the VIX is so important - there’s not enough time or room. If you’re interested though, click here to go to a detailed take. For now, let’s just say a falling VIX is good for stocks, and a rising VIX is bad for stocks …. an over-simplified but effective explanation.

Anyway, though the VIX has inched lower the last few days, I have to wonder if the lower Bollinger band (blue) is yet-again going to be a reversal point. If so, then this brief burst of bullishness is doomed. If instead the VIX brushes the lower band, and then just keeps gently pushing it lower, then stocks have a real shot at sustaining a rally.

And there’s that word again … sustainability, which segues nicely into my third and final observation about this chart.

One of my commonly cited reasons for a lack of sustainability for any of the market’s recent rallies was simply the lack of buyers behind the effort. There have to be more buyers than sellers for the market to rise, and it can’t just be a one-day effort … there have to be more buyers than sellers over a measurable period of time to get the market out of its rut. We’ve had neither of those things for a while now - and the market has accordingly gone nowhere.

However, the volume tide may finally be turning. Take a look at the volume bars right under the VIX - there are more green bullish bars than red bearish bars, and those green volume bars are a little taller than they were in October and November. It’s still not what I would call ideal fore the bulls yet; those green bars should be gradually rising as time passes. But, it’s getting better.

At the bottom of the chart I’ve added one of my favorite volume tools - an accumulation-distribution line (the lone green line). It’s basically showing the same information the volume bars are showing me, but I like the A-D line’s simplicity …rising is bullish, and falling is bearish.

The point today is simply this - things really are at least a little different with this move than they were with similar rallies over the prior two months. We’re not out of the woods yet, but this is our best shot so far.

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