(T2108 measures the percentage of stocks trading above their respective 40-day moving averages [DMAs]. It helps to identify extremes in market sentiment that are likely to reverse. To learn more about it, see my T2108 Resource Page. You can follow real-time T2108 commentary on twitter using the #T2108 hashtag. T2108-related trades and other trades are posted on twitter using the #120trade hashtag)
T2108 Status: 54.2
VIX Status: 12.9
General (Short-term) Trading Call: Stay short. Should have already faded Friday’s surge.
Active T2108 periods: Day #94 over 20% (overperiod), Day #2 under 60% (underperiod), Day #7 under 70%
Reference Charts (click for view of last 6 months from Stockcharts.com):
S&P 500 or SPY
SDS (ProShares UltraShort S&P500)
U.S. Dollar Index (volatility index)
EEM (iShares MSCI Emerging Markets)
VIX (volatility index)
VXX (iPath S&P 500 VIX Short-Term Futures ETN)
EWG (iShares MSCI Germany Index Fund)
CAT (Caterpillar)
Commentary
Just like that, the S&P 500 (SPY) recovered almost all its losses from Thursday’s plunge. When I wrote in the last T2108 Update that new shorts should be initiated as a fade of a bounce, I certainly did not have a complete reversal in mind! However, I took my own advice and initiated a fresh round (meaning second attempt) of T2108 trades. I bought a first and small tranche of ProShares Ultra S&P 500 (SSO) puts. I also added shares in ProShares UltraShort S&P 500 (SDS). I have not purchased SDS in a long time. I did so in this round in anticipation of an extended pullback.
T2108’s move generated the big surprise of the day. While the S&P 500 reversed most of its losses and the VIX essentially reversed all its gains, T2108 essentially went nowhere. This divergence is even more surprising than the one I identified earlier with T2108 slowly dripping downward while the S&P 500 churned in place. In fact, I am so surprised I wrote to the provider of T2108 calculations, FreeStockCharts.com, just to make sure there is no error. Assuming the data are correct, this divergence appears extremely bearish to me until it is resolved otherwise.
Given the rapid reversal, I am going to give this round of T2108 trades more latitude. Earlier, I said a new all-time is a natural stop for new shorts. Now, it looks like such a stop could cause some serious whiplash. I think a close and follow-through above 1800 on the S&P 500 seems as good as any loose stopping point right now. This stop is more important for the SDS shares I bought.
Daily T2108 vs the S&P 500
Black line: T2108 (measured on the right); Green line: S&P 500 (for comparative purposes)
Red line: T2108 Overbought (70%); Blue line: T2108 Oversold (20%)
Weekly T2108
*All charts created using freestockcharts.com unless otherwise stated
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, short SCTY put, short FSLR shares
The only explanation for this that I can infer is based on the way T2108 is determined. It’s the count of stocks above their 40 DMAs. Well, then, if when the indexes went down that count went down, but when the indexes went up that count stayed flat, my inference is that when they went down the overbought stocks (which had been present in the count) were sold – and sold hard enough to drive them below their 50 DMAs, thus lowering the count. But when they went back up the deeply oversold stocks were bought, but NOT in sufficient quantity to change the count significantly.
Correction to typo: “drive them below their 50 DMAs”, above, should be “drive them below their 40 DMAs”.
That sounds like a good explanation. The implications are then a stalemate! Will be interesting to see how this gets resolved.