Close but no cigar

Last night I thought we'd go higher today, mostly based on technical indicators.  But I did add that there was nothing positive-looking about the Dow chart.  And so today we actually weren't doing all that bad posting some decent gains right up until Ben Bernanke opened his mouth, sending the Dow into a more than 100 point dive in the last 90 minutes of the day to close down 19 points.  So close to posting a winning day, yet so far.

Now after that big disappointment, just as I said last night, all of the factors that were in play then are still active, only now even more so.  Where we were oversold before, we're even more oversold now.  Technically, we're overdue for a bounce.  But where is it?  The failure of gains to materialize in the face of such oversold conditions only adds to my current unease over the state of the markets.

And on that note, tonight I bring you the Morningstar Fair Value graph, from http://www.morningstar.com/market-valuation/market-fair-value-graph.aspx.  (Click on the image to view larger).  

I've started paying more attention to this number recently but I thought it would be interesting to look at a longer period, so here is a five year chart of this index.  In this graph, numbers above the reference line indicate that stocks are overvalued and below it, undervalued.

The important thing though is how well it correlates with market trends.  Note the blue area last year beginning on May 6th.  That corresponds exactly to the big market correction we saw beginning that same day.  Stocks did not recover until the end of September last year, just before the index went back above 1.0 again.

And of course the previous time the index went from above 1.0 to under it was on May 27, 2007, less than two months before the all-time high of the Dow and the start of the Great Recession, clearly seen in this graph as the huge blue area in the center that looks like frozen stalactites hanging from your gutters in the winter.

So what's that got to do with now?  Well, two days ago, the number flipped from above 1.0 to below 1.0. Yesterday was 0.99 and today was 0.97.  I believe that this is yet another warning that we are in trouble and that it's going to be a rough summer and fall ahead.

And if that isn't enough, even Jim "there's always a bull market somewhere" Cramer has been telling his viewers to take profits.

So is it time to go short?  I don't think quite just yet.  I still want to see that overdue oversold bounce.  The VIX fell today and its indicators are all overbought and headed lower.  That implies a lower VIX tomorrow which in turn implies higher stocks, hard though that may be to believe after five straight down weeks and now five straight losing sessions.

The futures meanwhile are essentially flat right now at 1:45 AM EDT, although they're trending higher after falling earlier in the the mid-evening hours.  Once again, the daily pivot will be important.  It's now 1287.58.  If ES cannot break above that then all bets are off.  Below the current level of 1284, ES has no support at all until 1250, the March lows.

Oil is decoupling from the market so I'm not looking for guidance there.  The only evidence for a bottom in the Dow comes from today's candle, a gravestone doji, but that's not a particularly strong reversal indicator unless followed by confirmation, which we don't have right now.