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BofA's Head Technician Calls For Market Correction

Tyler Durden's picture





 

BofA's chief technical research analyst Mary Ann Bartels has released a note in which she demonstrates the bullish and bearish technicals currently in the market (although with the only thing mattering anymore is when and how big any given Fed permanent open market operation will be, we question the utility of technicals even). While Bartels is still holding on the a call for a "deeper equity market correction" while noting the obvious ("The equity market this year has frustrated both the bulls and the bears, and this is likely to continue into year-end, in our view") she points out that the broader market signals are mixed. She points out that "most short-term indicators have generated a sell signal and Net Tab is not oversold. We still need to break and hold above S&P 500 1150 to invalidate a potential head and shoulders distribution top. A test of the July low (1010) is still not ruled out. A break above1150 would point to a test of the April high of 1220." Today's action shows just how hard the market is trying to breach the upside resistance and disprove all the economic fundamentals that unequivocally point to an ongoing and accelerating deterioration in the economy. Below are the key charts supporting Bartels' call.

First, observations on volume:

On-balance-volume measures positive and negative volume flow and is used as a gauge of accumulation and distribution. Similar to the S&P 500, NYSE consolidated tape on-balance-volume is testing key resistance. This resistance is at the February low and June high and a break above this area is required to improve the pattern for volume.

On the recent shift in AAII sentiment, which as we pointed out previously has gone from a contrarian bullish indicator to contrarian bearish.

Since February 2006, the upper boundary for the ratio AAII US Investor Sentiment Bullish Readings to AAII US Investor Sentiment Bearish Sentiment (AAII Bull/Bear ratio) has been 2.00-2.50. Readings within this range have suggested that individual investors have become too bullish on the US equity market. Last week’s reading of 2.10 is within this range and a potential contrarian bearish sign for the US equity market.

On the complacency suggested by the recent put/call ratio

The 5-day CBOE put/call ratio is trending lower and approaching the late July/early August levels that proved to be  contrarian bearish for the US equity market. A falling put/call ratio suggests investors are becoming more complacent.

Inflows into leveraged short ETF are contrarian bullish

The risk is these ETF investors are too bearish & the rally continues An increase in assets of leveraged short US equity  ETFs over the last one to two weeks suggests that traders in leveraged US equity ETFs have become too bearish. These investors have increased their short exposure as the market has rallied. This is a contrarian bullish signal that suggests that the rally from late August is set up to continue.

However, as it has been long demonstrated that for the most part these are natural hedges to other underlying positions, we are not sure how much one can extract based on this kind of information.

Hedge fund net long/short exposure

Long/short hedge funds have reduced market exposure to about 18% net long vs. the historical average net long market position of 35-40%. A risk to our call for a deeper market correction is that long/short hedge funds increase their market exposure back to the historical average. In our view, this would support the market and reduce the risk of a deeper correction.

What large spec CFTC COT data indicates

The risk to our call for a deeper equity market correction is that large specs cover their shorts and provide a floor for the market. Large speculators slightly covered shorts in S&P 500 futures to a net short of approximately $12.8bn notional  from about $13.1bn notional previously. Readings are neutral.

On bullish MACD

Weekly MACD, an intermediate-term trend/momentum indicator, generated a buy signal as of 10 September 2010. This is a potential market positive.

Ratio of Stocks vs Bonds

The February low, June high, and August high are the lines in the sand for stocks vs. bonds. Above this resistance suggests the potential for a more sustainable period of outperformance for stocks relative to bonds. The stocks vs. bonds ratio remains below the February low, which is key resistance.

Bad news from fins

The Financial sector is still not providing market leadership and this is negative for the overall US equity market. Within the financials, the banks, regional banks, and securities broker-dealers remain weak relative to the broader US equity market. Stronger areas within the sector are REITs and insurance. A lack of leadership from banks, regional banks, and broker-dealers is a headwind against a sustainable breakout for the US equity market.

Offset by slightly better news from tech (i.e. China)

The good news is that Technology held a relative chart support vs. the S&P 500. Since Technology is the largest sector within the S&P 500, this is a potential market positive. But, Technology still has significant overhead resistance on the relative price chart that must be cleared to establish a stronger leadership trend. We continue to like Technology from a longer-term perspective, but on a tactical basis, the sector has not provided market leadership since topping out vs. the S&P 500 in December 2009.

And now for what is really imporant: free money, courtesy of helicopter Ben:

After a period of negative growth for MZM money supply, the 13-week annualized rate of change for MZM turned positive  in late June. In our view, this is a supporting factor for the US equity market. From December 2009 into April 2010, MZM
money supply saw the worst contraction on a 13-week rate of change annualized basis since the 1980s. YoY growth for MZM reached -9.29% on 19 April 2010, exceeding the prior lows from May 1988 and May 1994 of -6.87% and -6.47%, respectively. As of 06 September 2010, the YoY growth rate on an annualized 13-week rate of change basis was 6.8%.  This improvement from the April lows is supportive for the US equity market.

And here are the top 100 stocks either overbought or oversold based on BofA's OBOS relative price momentum model.

At the end of the day, all of this is moot. The only question that matters: in an environment of ever lower volume and participation, the daily flooding of the market by the Fed's now almost daily POMOs which is by and far the biggest marginal mover, will keep pushing stocks higher until all connections with reality break and the whole thing plunges.

h/t Ken

 


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Mon, 09/20/2010 - 13:42 | Link to Comment Id fight Gandhi
Id fight Gandhi's picture

Whats the point, tech doesn't matter, fundamentals don't. I've been in the industry for 10 years and they aren't hiring back.

Might as well say fuck it and work a blue collar Job (which I would since my family has been in construction for years) but can't get work there either.

Mon, 09/20/2010 - 14:55 | Link to Comment Boilermaker
Boilermaker's picture

You must have missed Obama's "Town Hall" on CNBC today, otherwise you wouldn't be this gloomy.

Have you considered investing your unemployment check in REITS? 

Mon, 09/20/2010 - 13:43 | Link to Comment Translational Lift
Translational Lift's picture

Hell....she's trying to use fundamentals to justify the market.  Doesen't she know that the market is controlled by POMO and hopium....

Mon, 09/20/2010 - 14:30 | Link to Comment crosey
crosey's picture

She has to produce something or she'll be fired.  Can't just sit around and do nothing.

Mon, 09/20/2010 - 13:44 | Link to Comment Saxxon
Saxxon's picture

Can't short this; just breaking out of the high side of a several-month-long channel, elections coming up.  Patience.

Mon, 09/20/2010 - 13:54 | Link to Comment augmister
augmister's picture

+1 !

Mon, 09/20/2010 - 14:10 | Link to Comment pat53
pat53's picture

1150 is next stop, probably by Friday

Mon, 09/20/2010 - 13:51 | Link to Comment TradingJoe
TradingJoe's picture

The answers is that all connection is already lost to everything, main street & fundamentals, unemployment and inflation/buying power etc. Just paid my car maintenance bill, get this, labour is more expensive then parts....can you dig! I expect nothing else but total collapse once this farce is over, there is nothing Benjie can do, he can print the shit out of them presses but it won't help, eventually it will all be over, for most of the system. 1930's will look like a mild general rehearsal! Make as much as you can and LEAVE or ...Else!

Mon, 09/20/2010 - 13:52 | Link to Comment augmister
augmister's picture

The Fed owns this casino stock market and the house never looses....They will continue to run this thing up.... until they cannot.  Like anyone is going to be surprised when the whole thing unwinds?   Hoard your FRNs and when the bough breaks and the cradle falls, you will have the opportunity of a lifetime buying PM as the market will take everything down with it. 

 

What is the difference between the economic collapse and the Second Coming?   The collapse will happen sooner than later!

Mon, 09/20/2010 - 13:52 | Link to Comment goldmiddelfinger
goldmiddelfinger's picture

450mm shares at 2pm

Mon, 09/20/2010 - 13:53 | Link to Comment Chippewa Partners
Chippewa Partners's picture

The salesmen at Merrill  need reasons to generate commish.  Bartels has them.

Mon, 09/20/2010 - 13:53 | Link to Comment HelluvaEngineer
HelluvaEngineer's picture

Summary: this could go either way.  Here are a bunch of charts.

Mon, 09/20/2010 - 14:06 | Link to Comment Saxxon
Saxxon's picture

+1

Mon, 09/20/2010 - 21:42 | Link to Comment StychoKiller
StychoKiller's picture

With robots shuckin' and jivin' all the live-long day, how can anyone rely on technical analysis?  All it takes is for one software change to get the robots to stampede for the exit to bring down the house of cards.

Robot(s):  "By your command!"

 

Mon, 09/20/2010 - 13:57 | Link to Comment homersimpson
homersimpson's picture

In other words, she has no control of the Fed, so her opinion is worthless at this time.

Mon, 09/20/2010 - 14:12 | Link to Comment NOTW777
NOTW777's picture

it appears there is a may 13 gap @ 1157.44

Mon, 09/20/2010 - 14:12 | Link to Comment bugs_
bugs_'s picture

A very detailed analysis.  Um...hey Mary Ann, how is Gilligan doing btw?

Tue, 09/21/2010 - 00:58 | Link to Comment PiratePiggy
PiratePiggy's picture

Busy starting a new fad called Rap. Rapping at "the sands". "Ahead" of his time. Honest. Check it out.  Debbie Harry eat your heart out, Rapture was a copy cat of our little buddy.

 

http://www.youtube.com/watch?v=aTSrde9IJ9g

 

 

Mon, 09/20/2010 - 14:20 | Link to Comment Double down
Double down's picture

Make work sales job.  People do not care anymore, the function of this piece is to keep people engaged. 

Good luck with that.

 

Mon, 09/20/2010 - 14:34 | Link to Comment Threeggg
Threeggg's picture

Cramer just said   "BUY" on CNBC

look for a bloodbath soon !

Says the "Only" thing that matters is the ticker and that shows the vote of confidence from the people.

What about POMO ?

LOL

Mon, 09/20/2010 - 14:36 | Link to Comment plocequ1
plocequ1's picture

There is no correction today. Bear trap. Rally on. My Google is up 19 on its way to 9,000. I am a Bear in denial until the game is up. Listen to Alex jones and stop relying on charts.  We are all screwed. Enjoy the rally while you can.

Mon, 09/20/2010 - 14:41 | Link to Comment AnonymousMonetarist
AnonymousMonetarist's picture

The market is going to go up or down?

Brilliant!

 

Mon, 09/20/2010 - 14:55 | Link to Comment dot_bust
dot_bust's picture

My idea of a market correction would involve letting the big banks fail and dissolving their primary means of economic control--the Federal Reserve. I've been telling my friends that the big banks are the Federal Reserve.

They're shocked to hear that. They didn't understand that the Fed, the main power structure, is just the U.S. banks. I explained to them that the U.S. banks comprise the board of directors of the Fed. When will the public learn of this? Who will tell them?

Mon, 09/20/2010 - 15:20 | Link to Comment Sam Clemons
Sam Clemons's picture

I've thought of making a graphic showing how "money" is created and moved through the economy to serve the very purpose of showing the Fed is just a cartel of private banks and that everyone pays taxes to pay the interest on the debt they bought with created money.  Maybe a graphic would help people understand?

Mon, 09/20/2010 - 15:30 | Link to Comment dot_bust
dot_bust's picture

That's an awesome idea! I like it a lot.

Mon, 09/20/2010 - 15:36 | Link to Comment AnonymousMonetarist
Mon, 09/20/2010 - 15:38 | Link to Comment AnonymousMonetarist
AnonymousMonetarist's picture

dup

Mon, 09/20/2010 - 15:20 | Link to Comment Dismal Scientist
Dismal Scientist's picture

The mantra you learn is 'Don't Fight The Fed'. It is what it is, and all the bleating in the world will not save you throwing away your hard earned fiat in pointless shorting. But since PMs are going up too, and all ZHers are long (including me), then whats the issue ?

Oh, you want common sense, fair market practices and justice for all to be established ? OK, now I get it. Good luck with that...

Mon, 09/20/2010 - 15:32 | Link to Comment Lord Peter Pipsqueak
Lord Peter Pipsqueak's picture

To quote the great Yogi Berra -its that deja vu moment all over again,it looks like a repeat of the vertical lift off in February,a Fed fuelled monster short covering fake rally - a reversal when it looked like the market was tanking,it started at the beginning of September and the Nasdaq is now up 13%.And you get technicians coming out with stuff like this?

To me it looks like JPM/GS have prior knowledge of QE11 and are front running it.Sorry Mary,you won't find any of this stuff in a book or on a chart,the charts are meaningless now.Looks like Dow 40,000 is the intention,another lifesaver for Wall St,pity a loaf of bread is going to cost $10 when it gets there.

 

Mon, 09/20/2010 - 17:10 | Link to Comment jkruffin
jkruffin's picture

Very Interesting READ!!!!  We already know most of this, but at least there are some others out there trying to tell it:

The “signs” of recovery, so breathlessly trumpeted by the politicians who want it to be true, is not generating the new jobs we need. The resumption of unemployment benefits will help those who were cut off but not all who need them. Foreclosures are rising, and government programs to stop them are not working.

It is unlikely that the current policies can remedy any of this and it is certain that extending tax cuts for the rich will not create jobs. There is no jobs bill about to be enacted. Many of the industries blue collar workers toiled in are going or gone. Bailed out General Motors just spent $3.5 Billion dollars to buy a new lending company to get those subprime loans restarted to move cars off the lot. Is this moving “backwards” or not?

Unemployment is worse than we know. The Daily Finance site reports that the firm TechnoMetrica which monitors the stats is finding the real figures shocking.

“The June poll turned up 27.8% of households with at least one member who's unemployed and looking for a job, while the latest poll conducted in the second week of July showed 28.6% in that situation. That translates to an unemployment rate of over 22%, says Mayur, who has started questioning the accuracy of the Labor Department's jobless numbers.”

The site adds, “For years, many economists have pointed to evidence that the government data undercounts the unemployed. Economist Helen Ginsburg, co-founder of advocacy group National Jobs For All Coalition, and John Williams of the newsletter Shadow Government Statistics have been questioning these numbers for years.

In fact, Austan Goolsbee, who is now part of the White House Council of Economic Advisers, wrote in a 2003 New York Times piece titled "The Unemployment Myth," that the government had "cooked the books" by not correctly counting all the people it should, thereby keeping the unemployment rate artificially low.”

Those books are apparently still being cooked. The Administration now admits there will no movement in the rate until 2012.

What may be more serious is the erosion of the middle class that well underway, Business insider cites these statistics:

•    83 percent of all U.S. stocks are in the hands of 1 percent of the people. ?•   61 percent of Americans "always or usually" live paycheck to paycheck, which was up from 49 percent in 2008 and 43 percent in 2007.?•    66 percent of the income growth between 2001 and 2007 went to the top 1% of all Americans.?•    36 percent of Americans say that they don't contribute anything to retirement savings.?•    A staggering 43 percent of Americans have less than $10,000 saved up for retirement.?•    24 percent of American workers say that they have postponed their planned retirement age in the past year.?•    Over 1.4 million Americans filed for personal bankruptcy in 2009, which represented a 32 percent increase over 2008.?•    Only the top 5 percent of U.S. households have earned enough additional income to match the rise in housing costs since 1975

Mon, 10/04/2010 - 04:38 | Link to Comment Herry12
Herry12's picture

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