I just had a flashback to a couple of weeks ago when I heard Maria Bartiromo mention “Sell in May and Go Away“. She said something to the effect of “that’s not working this year, eh?” to some guest. My immediate reaction was that you can’t even ask that question until the beginning of June. And it really can’t be answered until the fall, when you’re supposed to buy ‘em back. I’ll bet she’s changed her tune now. How things have changed since CNBC was on watch for a new high on the Dow just a few days ago. Now they sound like Chicken Little. 
On to today’s bloodbath… I can’t remember the last time I saw trading curbs (collars) kick in on the NYSE. For a change the Nasdaq was the strongest of the major averages, which means it was only down 1.5%. It’s now down 0.43% on the year. The Nasdaq has now had five straight closes under its lower Bollinger Band. It’s not often you see so many entire candles on an index out side the bands. I don’t know how much further the bears can stretch this rubber band before it snaps back.
The S&P 500 dip buyers got their heads handed to them today. It fell hard out of its 2006 trend channel.
The market’s obviously oversold but it’s still not at extreme levels. Here’s one of my favorite overbought/oversold indicators, Worden’s T2108 which is the percentage of NYSE stocks above their 40 day moving averages:
As I‘ve pointed out several times before, when T2108 hits 20, you have to be a buyer (even if you’re just covering shorts) and a seller at 80. T2108 dropped almost 12 points today to close at 25.99. It’s almost there. (For those without TeleChart, the symbol $SPXA50R on StockCharts.com provides a similar read on the market.)
I’m not much of a VIX follower but I’m seeing a lot of people mentioning its rise as a sign of a potential bottom:
Worden had another take on it, as well as some other observations in tonight’s Worden Report (emphasis is mine):
If you are looking for help from the VIX–X or the VXN–X (option volatility indexes), it’s too early to even think about it. It takes a big decline to move these indexes up to levels associated with important bottoms (the only times when they have any value at all). They’re both under 20. In 2002, as the market plunged, the VXN climbed as high as 70, which roughly marked the loss of downside momentum and the building of a bottom area. The VIX rose to 55, which ushered in the capitulation in the SP-500.
But anyway, we don’t even know for sure this is a full-scale bear market. It is for the Nasdaq Brothers, but the SP-500 is not in a Primary Downtrend, and the Dow is not even in a full Intermediate Decline (yet?).
We have some pretty nasty TSV and MoneyStream divergences in the Nasdaq Composite and especially the Nasdaq-100. But there’s nothing conclusively fatal about the indicators underlying the Dow and SP-500.
Today, of course, everything was negative. All of the important averages had declines exceeding 1.5 percent. And breadth was pure havoc. Major Industrial Sectors (0-31), HalfPoint+ Movers (68-1030), the Leadership Index (294-1145), SP-500 (45-455), Nasdaq-100 (13-87), Dow (1-29). I think you get the picture.
This is not the time to sell short. This is the time to let your shorts run. And it is the time to enforce your loss-cut levels mercilessly – for both longs and shorts.
One thing I have to note is that the VIX has been trading at levels a lot lower than the periods Worden pointed out. I see plenty of spikes to levels under 20 that coincided with bottoms over the last 3 years. (I just remembered that I posted Don Worden’s thoughts on the VIX back in 2004 He doesn’t think much of it.)
