Stock market analysis and commentary Oct. 22, 2011

The stock market had a surge yesterday on high volume and the Dow closed at a 11,808, bringing it near a 3 month high. Of course this was done on Options Expiration day. That explains the high volume, but not the surge up on the Dow. Yesterday also had one of the lower Put to Call ratio readings as seen in the chart below. Be sure to read my last post where I said to watch this ratio to go below 1.0 and head to a 0.7 reading.

What has dominated our stock market action has been Europe and the Greek debt crisis and impending crisis in Italy and Spain. there were some hopeful comments made that the meeting this weekend of the G-20 would yield some good results. Greece's Parliament did pass more austerity measures in the face of Union strikes and violence, all giving many hope that Eurozone countries will get past this problem and on solid footing. But Germany's Merkel has said to the effect, not to count much getting done at this meeting this weekend as it will take many more meetings and months or longer to solve these crisis. It didn't matter to the market traders as they jumped on the bandwagon of "hope" and drove stocks higher as the Shorts took it in their shorts with big hits in their portfolios.

The Dow trend has clearly broken above a tight range and it could have legs to go higher. I can envision a move to 12,000 is possible, but the risks to go back below 11,000 is also as strong. The 200 day moving average is at a few points below 12,000 but the line is sloping down so I don't see us going up above this level. See the 6 month chart of the Dow with the 200 day MA below:

Much will be dependent on the news from Europe. Many think that our earnings announcements will drive the market higher, but the fact is that many companies are missing their targets like Apple, The Blackstone Group, Schlumberger, Travelers Ins., Morgan Stanley ( missed w/o accounting move) and a number of other prominent companies. Remember most targets had been lowered because of the economy so even beating them is nothing really impressive with this very slow growth economy.

The best moves have been to play the wide swings in the markets due to high volatility. But this is not for amateurs. And I consider myself a amateur, as most are because we don't have the ability to execute High Frequency trade in nanoseconds like the big boys do, so we are always too early or too late for a trade to make comparable profits.

Put to Call ratio lowest close in 4 years

Yes, the Put to Call ratio closed today at 0.56, the lowest level in 4 years, as you can see from the chart above. When the Put to Call ratio is at an extreme low level, it can be a Sell signal. When it is at extreme high levels it can be a Buy Signal. It can also be a signal at this low level to increase short positions as a hedge. Maybe finally we are approaching the long awaited correction, or at least a leg down for a change. It was back in March 2006 that the Put to Call ratio was lower than today's close. Then it was as low as 0.35

1929 versus 2009 for the stock market.

I found this post from the TheMarketGuardian.com which it posted in March comparing the 1929 Crash to this crash. I have taken the liberty to place their chart at the top of this post and an excerpt I found worthy of a comment. First here's the excerpt:

"P/E is now 14, after falling from its bubble-highs. Leonhardt points out that in past crashes it hit 7 or so. Stocks have another 50% to go. (P is stock price, E is 10 year trailing earnings). 14 is a normal P/E, but not a bargain level, particularly in a recession. So far the crash has brought us back to normal, nothing more. A 4000 Dow might just happen.

This may be a particularly ugly crash simply because stocks were more overpriced."

I have 2 charts above. One is from TheMarket Guardian of the 1929 Crash and the other is a chart of the Dow in the recent 20 years to use as comparison.

I do not see us going this low UNLESS we have one of these issues President Obama is doing the best he and his Administration can, blows up. There are plenty of hand wringers around, as this entire article clearly shows. But the magnitude of these issues is sufficient to get us back down to a Dow of 6,400 again. To me the safest bet over the next year or two is this: When in doubt about market direction lean more to the Short side than the Long side. It won't take much to scare people again to panic as nerves are still sensitive. It will take a very long time to erase the fear and go Long as this financial disaster has yet to claim more victims, including Banks. This issue has rocked the Consumer for years to come. And the Unemployment numbers keep reinforcing those fears for Millions of Americans, their family and their neighbors. We are all affected whether we like it or not. Do we spend the time necessary to find out who caused this problem and find soem who should be in Jail? No. But we should!