The Teddy Bears' Picnic

For every bear that ever there was will gather there for certain

Because today's the day the Teddy Bears have their picnic

--"Teddy Bears' Picnic", by John Walter Bratton.

There's a term in market-speak, "capitulation". It's used when a trend change that has been hinted at for a time finally takes hold, and everyone piles on to drive the market in the new direction.

I'm loathe to say the market has capitulated -- the S&P 500 remains in an uptrend and it has been correcting for only six trading days.

But the numbers that I got when I analyzed Friday's trading certainly add up to something major happening. It's as though the markets held a picnic, but only the bears showed up.

My posting "Monday's Prospects" gives the details of my analysis of Friday's market results, but here are the headlines:

• Ratio of bull signals to bear signals: 1:44.
• Percentage of symbols giving a signal: 7.8%.

Bull and bear signals under the system I use are in a way of measure of momentum. (You can read my trading rules, which describe the system, by clicking here.)

The symbol has to be moving directionally in order to give a signal. It also has an element of volatility: A symbol that moves in a straight line up or down won't produce many signals, where as a symbol that zig-zags along its trend will signal more often.

The best explanation I have for the situation -- a large number of signals by stocks that haven't been prone to give signals in the past -- is that the bearish bias has spread beyond the more volatile stocks to their less volatility siblings.

In other words, the breadth of the decline has grown, and that's an argument for favoring the bear side in making trading decisions.

On the other hand, Friday's volume on the exchange-traded fund SPY is not particularly high. Looking at the past month -- 20 trading days, the volume level only ranks 3rd. I would expect much higher volume in a true capitulation.

And there's the pesky truth of the chart. SPY on Friday fell below the 10-day price channel, a signal under my system to close the bull phase that began April 10. But trend analysis -- the pattern of the highs and lows -- shows that the index remains in an uptrend. (See the discussion in my May 28 posting "Tuesday: No Trade with musings on perspective" for my trend analysis.)

For my own trading, I don't plan to stumble out of my bull positions based on these numbers. Nearly all are hedged through the use of option spreads. But until the numbers change back to an obviously bullish bias, I'll be giving priority to bear plays.

Disclaimer

Tim Bovee, Private Trader tracks the analysis and trades of a private trader for his own accounts. Nothing in this blog constitutes a recommendation to buy or sell stocks, options or any other financial instrument. The only purpose of this blog is to provide education and entertainment.

No trader is ever 100 percent successful in his or her trades. Trading in the stock and option markets is risky and uncertain. Each trader must make trading decision decisions for his or her own account, and take responsibility for the consequences.