T2108 Update – June 17, 2011

(T2108 measures the percentage of stocks trading above their respective 40-day moving averages [DMAs]. To learn more about it, see my T2108 Resource Page.)

T2108 Status: 21% and neutral (ending 2 days of oversold conditions).
VIX Status: 22; higher than the start of last oversold period (19).
General (Short-term) Trading Call: Hold, assuming trading longs were purchased during oversold period. (See below for more).

Commentary

T2108 rose slightly to 21%, ending the last oversold period at two days in duration (recall that historically 56% of all oversold periods end after 1 or 2 days). The S&P 500 ended the day nearly flat after steadily selling off for most of the day. Overall, this was a very poor follow-through to conditions that looked ripe for a nice oversold bounce or relief rally. Both conservative and aggressive swing traders should have picked up long positions over this two-day long oversold period (see yesterday’s T2108 update for more), but today’s underwhelming showing means that these positions should not be held for long. Hopefully, we get a strong pop on Monday as venting from all the positioning of options expiration.

I will now examine three stocks that I think summarize the strange dichotomy I saw in the market today: Apple (AAPL), Google (GOOG), and Flowserve (FLS). All three highlight the risks and the promise of speculating on oversold conditions. Note well that Friday was an options expiration day featuring “quadruple witching.” Thus, today’s observations likely come with a larger than usual amount of uncertainty.

Apple (AAPL)
AAPL registered a poor performance today. The stock continued the relative underperformance I noted earlier this week. Today, AAPL failed to follow through on its nice bounce from yesterday’s oversold lows. AAPL began the day in promising fashion by gapping up 2 points, but it was a disappointing trip downhill for the rest of the day. AAPL closed with a 1.5% loss, finishing the day below its 200-day moving average (DMA) and at a new 2011 closing low. The NASDAQ also traded below its 200DMA for a new 2011 closing low, but the technology-laden index finished with just a 0.3% loss.

AAPL’s behavior is a very bearish, ominous sign given it is widely held. Nonetheless, in the middle of the slide, I decided to make AAPL one of my plays for an oversold bounce – high risk, high potential reward.

Google (GOOG)
Compared to AAPL’s stomachache, GOOG nearly experienced cardiac arrest. GOOG dropped 3% as the presumed options “pin action” around $500 failed to provide the stock any support. GOOG’s close at $485 puts it at a 9-month low. The stock has lost over 80% of its gains since the August, 2010 lows (also known as the QE2 lows).

I bought some GOOG late in the day after famous money manager Doug Kass tweeted: “picking at google at 489-490 – first time long time. another long rental.” I had been watching it periodically and just assumed it would finally stop sliding at $490. When I saw that level fall, I felt compelled to position for an oversold bounce. I am strictly following the trading rules here and putting all emotion aside. Emotionally, I am horrified by the pernicious selling in GOOG and certainly those emotions were telling me not touch this hot potato with a 10-foot pole.

Flowserve (FLS)
Flowserve provided a vivid example of why it is better to stick with rules than emotions. FLS represents exactly what I look for in an oversold bounce even as the slide preceding the bounce has warning flags written all over it.

FLS has had an awful June. This industrial company lost 19% for the month at yesterday’s sickening lows. FLS has lost 26% from its multi-year highs. Yet, today, FLS managed to bounce as much as 5% on a day so many stocks (mostly tech) experienced severe selling pressure.

I would not have bought such a stock without the T2108 oversold readings. However, I was so surprised by such a strong move when so many other stocks were performing so poorly, I sold the stock early; a moment where I let my emotions get the best of me. The strong slide leading into today’s strong counter-trend reaction was constantly playing on my mind. I even bought a put to add a margin of safety for the trade. I should have just held the shares for the full day, especially with that put in hand. I am still holding the put and will use it as part of an overall hedge on a quick return to oversold conditions.

Weekly T2108

*All charts created using TeleChart:

Related links:
The T2108 Resource Page
Expanded daily chart of T2108 versus the S&P 500
Expanded weekly chart of T2108

Be careful out there!

Full disclosure: long SSO puts, long GOOG call, long FLS put, long AAPL call