Wednesday, August 17, 2011

Market is Sick, Worn-out and Overvalued

One look at the general direction of trading today gives the impression that this is a market running completely on fumes, exhausted from last week's frenzied action and unsure about the immediate future.

Despite three of the four major averages finishing in the green, today's high open and low close are classic technical signals of a market in despair. The volume has subsided, but the VIX is still very high, over 30, and the complacency of trading today was something of a surprise, considering the still-shaky economic conditions in both the US and Europe, though it does seem that outside of the usual gang of day-traders and algo followers most of the retail investors have taken a wait-and-see attitude.

To that point, it was reported today by the ICI (Investment Company Institute) that mutual fund outflows totaled $40 billion in the past week. From the report, "Investors pulled a net $40.3 billion out of those funds in the week ended Aug. 10, the largest weekly withdrawal since early October 2008, soon after the collapse of Lehman Brothers."

Equity funds were the biggest losers, as investors shed $30 billion worth of exposure to common stocks.

Adding to the negatives was the July PPI number, at a modest 0.2% increase, though core PPI, which excludes energy and food, was up 0.4%, for an annual run rate of nearly 5 percent on a wholesale level. While oil and gas prices haven't exactly come down to reasonable levels, food prices have stabilized, though the core reading shows inflation showing up in other areas.

Bonds edged higher, with the 10-year dropping six basis points to a yield of 2.16% and the 30-year shedding 9 bips, to yield 3.56%. Investors are still looking to safety over risk, and that was evident today in Treasuries and precious metals.

This little pause in the action will last until the next crisis scenario erupts - about a week or two, maybe - and then equity markets will retest the lows set in place last week. From a technical standpoint, a retest of recent lows is almost always warranted before a move higher, so, down we must go in short order.

Dow 11,410.21, +4.28 (0.04%)
NASDAQ 2,511.48, -11.97 (0.47%)
S&P 500 1,193.88, +1.12 (0.09%)
NYSE Composite 7,418.94, +24.45 (0.33%)

Advancers led decliners on the day, though the NASDAQ saw more losers than winners. Overall, the gainers were 3624, to 2909 on the downside. New highs numbered only eight (8), with 58 new lows. The NYSE was nearly evenly split, with 13 new highs and 14 new lows. The combined total of 21 new highs and 72 new lows reinforces the indication for stocks to eventually recede.

Volume was back to moribund levels, as investors have headed for the hills.

NASDAQ Volume 1,919,593,000
NYSE Volume 4,351,417,000

WTI crude oil priced 93 cents higher, at $87.58, despite a government report that showed a significant surplus of the slimy stuff in the most recent week. Gold stopped at another new record of $1,793.80 per ounce, up $8.80 on the day and silver went happily along, picking up 53 cents, to $40.35 the ounce.

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