Eventually today's gain will be erased but there could be more upside first...be on guard

I have been stating here for a while that the market has been climbing a wall of worry. I have pointed out many times how it gets no respect, how people keep calling it a bullshit rally, manipulation, fake or whatever. There are still plenty of skeptics but I'm starting to notice some signs of froth. We are starting to see morning strength instead of weakness which is a sign that the emotional money is getting bullish but mind you...only this week have we started to see this. Also and more importantly, the smart money which acts in the last half hour of the day has been bearish this week...again, only for a week has this occurred. Another warning sign is when the ratio of trading volume on the NASDAQ vs. the NYSE spikes which indicates an exuberance for "risky" stocks. This is occurring right now, but it's still not quite at extreme levels.

We also have an unfilled gap after today's action and the post fed hangover tendency of the market. Here's a great chart which shows that there's a very high probability that the gains we have seen today will get wiped out in short order.



However before you bet the farm short, understand that we could very well see some sort of an upside blow off panic buying type move to about S&P 900 or so first before heading down because today's action did not result in mass capitulation from bears given that the market closed under the 875. It did break 880 intraday but only briefly and because we closed at 875 it gave a lot of bag holding bears a bit of relief and hope. It may very well be the case that Mr. Market really turns the screws on the bears until they finally just can't take it anymore and capitulate and after that point head down.

I don't plan on making any trades because I don't see a good risk/reward set up. Perhaps tommorow will offer an opportunity intra day.

Could we get a blow-off type move instead?

Perhaps the senario that I outlined a couple of weeks ago about a break of 880 on the SPX leading to a blow-off type move could be in the works here. Too early to tell yet but it's looking this way. This market has been especially tricky of late and I can tell it has been causing a lot of pain for a lot of traders...

I'm on guard for anything today including a complete reversal of this move.

A very strong start

This is actually not what you want to see if you are bullish because the dumb money acts during the first half hour of the trading day and a gap up open like this eventually gets closed. Today is a fed day and I discovered the fact that 5 out of the last 6 fed days ended up with an average gain of 2.4% which is quite large and therefore must be respected if one intends to fade this rally. After this however, there tends to be a fed day "hangover" and the market gives back all the gains within the next few days. I still think however, there is the potential for this strength to reverse itself. I haven't made any moves yet....

S&P 840 likely

Given the recent market action I believe the market will decline to about the 840 level on the S&P before making any sustainable advance. At that point the market will have worked off its overbought condition sufficiently enough to launch another leg higher if it still has legs. However, I'm open to the idea that if we get the drop I'm expecting and subsequently the market rallies, makes a lower high and turns down, an IT top could be in. This is what occured at the top in May of last year. Somehow I have my doubts it will play out like this but I will let the market do the talking.

As seen by the charts below there is a negative divergence with the MSO technical indicator and the rise of the market in the past couple of weeks. This doesn't necessarily forecast a change in trend but it does indicate that at the very least, a mild correction is immanent which is why I'm targeting 840. In addition to the negative technical divergence, lagging financials and a "smart money" put/call ratio indicator I track confirm the notion of an immanent correction.




If the proper set up is there I will be looking to purchase SPY puts or perhaps I will be a FAZhole for a day and purchase FAZ of the troika of death. I hope I don't become another one of its millions of victims.

I was kicking myself today watching TBT soar after it dropped in the morning. The drop was too quick for me to pull the trigger. Oh well, serves me right for trying to play all of the wiggles...At the last fed meeting Bernanke torpedoed bond yields with his announcement of Quantitative Easing. This time I doubt any mention of it will result in anything but a knee jerk reaction.

Consumer confidence surges past expectations.....but is this priced in already?

No surpise there for me. Another "greenshoot" but given the market's big run up these past several weeks I think this may be discounted to a large degree already and we may not see much upside today especially with the banks lagging...we may even end up down. However, I have no strong inclination one way or the other.

There have only been three other times we've seen the Consumer Confidence index drop to at least a three-year low, then jump at least 10 points the next month. Those were April 1974, February 1975 and April 2003. The first one was a dud, but the last two both led to one-year gains of +20% in the S&P 500.

Again, yet another similarity to the March 2003 rally...

To balance out my bullish views as of late, I'm going to examine the bear case later on today. It's important to be aware of the arguments for both sides and not be biased.

Important "Stress Test" for market comming up here

Just tonight news was leaked from regulators (according to WSJ) that BAC and C will need to raise capital as per stress test results. This along with increased spreading of swine flu has tanked the futures by about 1.3%. It is really a suprise that these 2 banks (especially C) will need to raise more capitial? I don't think it is.... but as of now the futures are deep in the red, so let's see how this market can handle bad news comming off an overbought condition partially worked off thus far. If this rally is still in tact, then it should not breach 825 on the S&P. That would be a maximum downside target for any "pullback" that would still, in my opinion, keep this rally in tact. I don't think it gets that's deep but I'm preparing myself for anything. It also goes to show you that holding positions overnight can be dangerous due to after hours headline risk. I might get a chance to reload on the VIX puts I sold last week as well as the TBT calls I sold if I see action that I like.

Further comments about Swine Flu and Markets

First off, I wasn't accurate about what I said regarding the outbreak of SARS and the performance of the markets. The first reported case of SARS occured in November 2002 and you can see by the chart below how the market fared from the beginning through to the end of the SARS outbreak.




From what I recalled from memory, the SARS outbreak was a 2003 phenomenon...it just goes to show that you should never believe a word I say. Did SARS cause the market to decline or was it coincidental? I strongly feel it’s the latter. I doubt SARS was even significant enough for the market to acknowledge and even if it was, these sorts of external shocks will not have a lasting effect on financial markets unless the financial consequences are both severe and prolonged and the market tends to do a good job dicounting this right away. Even events such as a presidential assassination or a terrorist attack will do little to derail the ongoing trend that was in place aside from potentially sharp but short term weakness that will be recuperated fairly quickly. The Kennedy assassination for example occured during a strong bull market and it caused the Dow to drop about 3%. This was then quickly recovered within a week as the markets went on to soar to new highs in the months ahead.

911 was an exception to this rule because a) it was so unthinkable for something like this to have occurred in the US and b) the market was in the midst of a severe bear market and this event simply accelerated the downtrend already in place in September. Had the market been in bull mode, the damage would have been less severe I'm sure. Keep in mind that 3 months later, not only did the market recoup all the severe losses that 911 inflicted but it also added gains and this was in the midst of a severe bear market that had yet to have seen its final low. Thus, I'm convinced that had 911 not occurred, the market would have made a bottom sometime in Sept/Oct and staged a big rally after that point….but I digress.

Let’s face it though…. outbreaks such as the Swine Flu are not bullish events to say the least. The "alarm level" as it is called, has just been raised to 4 one step below pandemic level which would label the outbreak as quite serious given there is currently no vaccine for the virus. Therefore, given the fragility of the economy something like this is not a welcomed event. But if the prospects for an economic recovery are real and the market smells an immanent recovery, I’m sure the swine flu will be ignored unless it becomes so serious that it makes everyone want to wear a mask when leaving the house.

Regarding the short term…..I think we will see some more weakness in the market this week before any serious strength. SPX 840-845 may very well be reached. I don't know if this happens tomorrow or perhaps Wednesday...we'll see. I'm taking things 1 day at a time.

I also forgot to mention that I dumped my TBT calls today for a decent gain of 25%. I intend to buy calls again with the proceeds but at a higher strike on a dip. This is a way of pyramiding into a position.

not really trusting this dip buying attempt here

Its seems like a little too much eagerness to buy the dip here...I'm still looking for a down day today.

Pig flu to derail rally?...don't count on it

Futures tonight are down about 1.5% what could be a knee jerk reaction to the swine flu outbreak. I doubt this is going to do any serious harm to this rally aside from a day or 2 of weakness. In 2003 the outbreak of SARS did little to derail the bull run.

The market is a little bit ST overbought and so I was expecting Monday to be a choppy downside day regardless of this news. I will be watching carefully to see how traders react to any downside tomorrow morning. If there is too much eagerness to buy the dip, then the weakness could accelerate.

A lot of bears are pointing out the high levels of insider selling that has occurred recently which therefore means the "smart money" doesn't believe in the rally. Maybe that's true...but keep in mind the fact that insiders have been dead wrong in 2007 and 2008 when they were buying in "record amounts" at much higher prices than today's. In fact I remember when the market dropped sharply in July 2007 insider buying spiked to its highest level in 14 years. Clearly, that must have been a great time to buy right? Well, only if your time horizon was 2 months. If anything, insiders may very well be unloading because they too got burned and look at the rally as an opportunity to sell and cut loses. This is how the typical retail investor has been reacting to this rally for the most part! Ok...I'm probably taking this a little too far. A big spike in insider selling is clearly not bullish...these guys have been good in the long term with their timing, but what I'm trying to say is that this time around the big insider selling is not necessarily bearish because insiders have been such big buyers for the past 2 years any time the market showed weakness and now they are simply unloading some of their bigger than normal positions on this rally.

Overall I still don't think there hasn't been enough "belief" in this rally for it to be over and market action such as the smart money/dumb money indicator suggest we could see a lot more gains ahead. This doesn't guarantee things must go higher...there's no such guarantees in the market. It's simply a matter of playing the odds.

This swine flu news could throw the bears a bone here for a day or 2 but I doubt this will be a sustainable downside catalyst. In the past few weeks we have quite often seen the market have a down day on Monday only to recover on "turnaround Tuesday". This is begining to get too obvious and wounded bears might not be willing to press shorts on Tuesday given how badly burned they have been doing this...that's why Tuesday could actually end up being another down day. I'm looking a bit too far ahead here because we don't know how Monday will turn out to be yet...

Stubborn Traders not listening to the market

There's a fine line between "justifiably" fading a rally and stubornly going against the grain. When the market is in a well defined downtrend then shorting rallies makes sense because it's likely just a temporary bounce before the downtrend continues. I can understand if traders faded the rally in mid-late March when the market got overbought and got stopped out because putting this trade on worked practically every time before and at that point in time it looked like a temporary bounce. But when the market didn't fall apart as it always did when it hit such overbought levels and made further strong gains after a brief pullback that should ring alarm bells because that has not been the behavior of any of the bear market rallies we have seen before. At the very least, no matter how bearish and skeptical you are you should step aside and review your posture if what was working before is not working. Ask yourself "is something really different here?" and investigate.

Practically every trader knows the basic rule of trading "the trend is your friend" yet it seems most traders don't like this rule and don't like a bullish trend these days. It seems they would prefer the market to go down to satisfy their ego and so they go against the trend. When things go their way it's because they felt they had an "edge" but when it doesn't go their way they cry "this is bs manipulation!". They don't for a second consider even the possibility that they are wrong or that what they predict may not traspire in the near future but rather at some time in the far away future. Nope. They are convinced without a doubt the market will crash and crash now because "by right" it should.

And what do they use to back this claim up? Bearish articles and statistics of course with no regard to bullish information whatsoever. I find the typical retail trader all follow the same bearish blogs for information. The CFA level 3 program has a chapter in behavior finance and I get to see it in real life....Anchoring, overconfidence, loss adversion, herding, and confirming evidence trap.

Unlike previous rallies I'm not seeing the bears sweating. I don't expect all of the bears to turn bull but rather that they respect the upside risk of the market and lay off on aggresivily shorting it. Instead, this time around I find the bears have become angrier and bolder as the market moves against them. I hear a lot of people say (even the optimists) that the market has "moved too far too fast". Really? Did the market not have it's biggest collapse in history just about 6 months ago? Then why is it so hard to accept the notion that the market is recoiling from the most historic oversold condition ever and that we can have a very powerful rally to the 200 DMA to offset it?

Frustration is starting to mount with the bears big time and slowly one by one, they are stepping aside. But I still see plenty of wrong way bears stubbornly maintaing or adding to their losing FAZ and SRS positions. The complaceny they are showing is very reminisant of some of the bullish strategists I read during the collapse. They too insisted the market couldn't go down more because their trusty indicators suggested it couldn't happen. Bears are now insisting that the rally can't go up higher....that's is all bs manipulation.

We all know that earnings (or potential for them) is arguabley the most important fundamental driver of stock markets. First Call reports that S&P 500 Q1 earnings so far are 15.7% over estimates, vs +1.6% avg surprise since 1994. and had a -9.4% avg in the past 8 qtrs. . Bears of course will dismiss this data saying that earnings were low balled. There's really no sense in arguing with them I guess.

Bears still haven't giving up

New lows on the troika of death SRS/FAZ/SKF today and still no signs of significant fear from the loser bagholders. The market dealt them another shovel to the face today but because the S&P did not bust to new highs the bagholders stayed put. This is Sept-Nov 2008 in reverse I tell you.

I expect more pain for them next week. More comments tommorow.

Bear massacre immanent?

The market really stuck it to the bears today. It may not have seemed that way given the modest gains but from the blogs and message boards you can tell that the bears were pressing hard today hoping for the follow though from yesterday's reversal and they got badly whipsawed. It was in fact a bear trap and a rather painful one because the bear's weapon of choice FAZ/SRS underpreformed the market big time. SRS took a 10% drop in the last 10 minutes of the day alone! Ouch! Those 2 houses of pain now stand just marginally above their all time lows which means just about anyone who owns those pieces of turd are bagholders.

Stress test results are going to be relayed to the banks tommorow privately by the regulators and the test methodology will be revealed in the afternoon and so investors will be able to draw their own conclusions as to who may or may not be "in trouble". Offical results will be made public on May 4th. This is comming at a time when the market appears to be at an inflection point as per the chart.


A big break out is comming one way or the other. I think the bulls will win. The dumb money indicator continues to make new lows while the smart money is flirting with its highs and again I see no let up from the SRS/FAZ bottom fishing. It's getting to the point where bears are becoming delusional....I'm serious. How much money must they lose before they stop fishing? No matter how many times they get stopped out, they keep trying....with no fear. Look at stocktwits today. The FAZ to FAS ratio was about 3:1! This is madness I tell you! I think this serial bottom fishing is also a case of a lot of egos being bruised here. They want to be proven right about their bearish posture that the've bought into hook line and sinker from Roubini, Whitney, Schiff and all the other celebrity bears.

I will be looking to take advantage of what could be a bear masacre tommorow if I see a good set up. The potential for both bulls and bears getting whipsawed here so the best way to pay these senarios is with a "all or nothing" call option spec. I am eyeing the XLF June 8 and 9 calls.

Bullishness didn't last long from AAII

The latest numbers from the American Association of Individual Investors show that bears now once again outnumber bulls. Bulls are now only 32% while bears are 39%. So you can see how quickly mom and pop investor have abandoned their bullishness and yet the market is down only 1% from the last time this survey was taken.
I mentioned a 1 week reading of at least 50%+ has marked previous IT tops...and usually it takes 2 or 3 consecutive readings of 50%+. We only got as high as 44% which occurred last week and this occurred in the face of 6 weeks of gains. In the previous big rallies we've seen, such strong and persistant gains like we've seen this time would have no doubt caused a massive surge in bullishness...but not this time. It shows that people have been burned so many times with these types of rallies that they are not going to be fooled again so they think. This attitude simply reinforces the wall of worry.

Futures are up this morning but I wouldn't be surprised to see any morning strength get faded by the end of the day. But I'm just guessing here. A healthy advance usually starts with a down/flat opening gaining strength through out the day.

I think we could very well see the market set up a bear trap here. If today's pop fails, it going to build the confidence of the bears even more who like I mentioned yesterday were so ecstatic about yesterday's reversal. Then next week perhaps the trap will be sprung. We'll just have to see. As always I'm willing to change my view if evidence suggests so.

Market will show it's hand soon

We are soon going to see what this market is made of. There's still plenty of skeptics out there as I've been duly noting. Bearishly inclinded traders, who have been nothing but wrong in their calls during the past 6 weeks are not very respectful of the upside potential of the market given it's 6 week run. At any hint of weakness they are jumping in with both feet only to get burned. Everyone is calling for a 10% pullback even the optimists. Well, I strongly suspect if we get the 10% pullback there will be another 10% pullback shortly after that.

I mentioned how this rally reminds me of the March 2003 rally. If that's the case pullbacks should be limited to no more than 5-6% as was the case back then. The market is never meant to be obvious and the obvious senario right now is a 10% pullback leading to another run higher. Don't count on this playing out.

Anyone who is using some sort of a IT momentum indicator to time the market could also get badly whipsawed if this rally plays out like March 2003 because on the dips it caused these momentum indicators to roll over from very overbought levels triggering short signals only to reverse higher and get overbought again. This is why paying attention to fundamentals and market action (smart money, dumb money behavior) is more important than just blindly following indicators.

Euphoric bears

Markets did a nice reversal into the close and now the charts show a potential double top in the Nasdaq. I mentioned how the financials were lagging today which is always a warning sign about the sustainability of a rally, but I've also seen times were financials were weak through out the day only to turn strong by the end, therefore, I was in no mood to play the long side or the short side especially the latter given how crowded that trade appears to be.

There was huge amount of high fiving going on today with the bears. It's as if the market crashed back to the lows in March. I also saw a number of traders on twitter chase FAZ and SRS into the close holding overnight. How many times must they get whacked in the face with a shovel before these guys learn to respect the upside risk of the market? It's the definition of insanity. If you are bearish in the intermediate term, this is not the type of behavior you want to see. Such euphoric sentiment and for what? A reversal? What damage have the bears done to the market? Absolutely none.

I think the odds are quite high that this will turn out to be a bear trap and quite possibly a massive one. Markets can certainly go lower from here in the next couple of days but aside from perhaps any intraday trading opportunities I'm not joining the bears. When I see the market decline over 10% from it's highs with a series of lower higher and lower lows then I might be inclined to join the bears. Either that or some genuine panic buying or capitulation from the wrong way bears who have done nothing but lose money in the past 6 weeks.

Should be another interesting week or 2.

FAZ = NT (in year 2000)

In Canada Nortel was the darling stock of the tech bubble and remained that way even as it crashed starting in Sept 2000. Canadian retail investors bottom fished with the persistancy of a crack addict needing his next fix. After the first 50% drop it was a "bargin"...another 50% drop made it a "super bargin".....and yet another 50% drop made it a "once in lifetime buying opporunity". I remember this clearly. This went on and on for several months...a classic case of chashing yesterday's winners. No matter how much pain that stock caused, people viewed it as a chance to "buy on the dip". Then it got to the point where the bagholders stopped buying it but didn't want to sell their position unitll there was a rebound. They felt that so long as they didn't sell it wasn't a loss. To this day there are still tons of these Canadian Nortel bagholders who hold Nortel in their accounts with 99%+ losses. I have seen it first hand.

Now take FAZ, which was just pennies from hitting it's all time low today. It is still by far the number 1 ticker tweeted on stocktwits and the number 1 choice of the angry, bloodied bears who are pounding the table claiming that the market MUST crash. FAZ is the Nortel of 2000.

I'm not saying FAZ can't ever have a good run. On it's way down Nortel had some nice bounces but it destroyed so many accounts in the end which FAZ has already done.


Today the market is throwing the FAZ and SRS bagholders a bit of a bone as financials are showing relative weakness. Mabey the market has finally started to listen to all of the yelling, kicking and screaming of the FAZ/SRS bottoming fishing cult. Mabey this is it....finally they hit bottom! At last! Now crash market crash! Do what I say!

Is being bearish the "in" thing? Sure seems like it

Here's a post I found on stocktwits tonight

"all this short talk..lol..new investor..any advise on where to get some good reading or research on shorting stock? THANKS!!!

This further confirms my thesis that there's too many investors/traders/gamblers whatever you want to call them, who are bearish fading this rally.

This kind of reminds me of the attitude new retail investors had about tech stocks during the dot com bubble days. Could it be possible that we have seen the bursting of a short bubble? Call me a Larry Kudlow wannabe but I think this could actually be case!

One of the surest ways to have investing success is to fade the retail sheep. By the time the retail masses are aware of a trend/theme it's quite often late in the game which means that if you fade them too early it could be painful for a while but in the end...and it might take several months....the retail sheep ALWAYS GET PUNISHED for their herd like behavior and give up any gains they made and then some. I saw it happen first hand with the tech bubble and the energy/commodities bubble just last year.

Thus consistent with the smart money/dumb money indicator, the attitude that the typical retail investor has may indicate, dare I say it, that this bear market could in fact be over!....whoa! Ok, maybe this is implying too much. But I don't think its a stretch that based upon how crowded the bear side is, we could potentially see a lot more upside in the months ahead to shake the lemmings off the tree before the bear comes back with any teeth....just a thought....but a serious one.

Geithner says chill....everything's OK

Geithner sparked a turnaround for the bulls today saying that he believes the vast majority of banks are well capitalized implying that most will pass the stress test. The results are being released on May 4. If the market rallies into that announcement there's a good chance that there will be a sell on the news reaction. But that's looking a little too far ahead right now.

Once again there was mass destruction in the FAZ/SRS bottom picking cult. The amount of capital destruction those 2 etfs have caused must be at a record and yet I STILL see bottom fishing there with no fear. This is quite unbelievable. Bears it seems are getting angry that the market is not doing what they think it should and insisting that the market MUST drop. Well, good luck arguing with the market...just like arguing with a women who has PMS...you rarely win. It's best you just say I'm sorry or better yet don't get into the argument to begin with.

The gaps I had mentioned today got only partially filled. But I realize that I shouldn't get so hung up on unfilled gaps especially if they are minor ones. In the past it has cost me missed opportunities.

I couldn't resist selling my VIX puts today because there was a good bid by a trader in between the market maker's spread close to the ask price and since the spread is usually .15 with the July 30 VIX puts which are trading near .85, selling near the ask like this was too tempting for me to pass up especially since I believe the upside vs downside risk is about even right now for the next few days.

The next few days will be critical. Tons of bears I'm sure shorted at 875 (because it was such an obvious thing to do) and have stops just above that level. A quick revisit to those levels this week would probably be met with resistance unless there is some huge positive catalyst. A break above those levels could usher in panic buying. It would best for the bulls to see a couple of mild down days to work off the overbought condition a bit more before making another upside assault. The market of course doesn't care what I think it should do, so I'll be watching the action very carefully.

sold VIX puts

not a huge gain but I'll take it. I think I'll get a chance to buy them back cheaper later this week. The gaps I mentioned are still looming to get filled. Mabey we don't fill them and the market takes off here and the VIX collapses more. If that happens, ce la vie...

Gap hunting

Taking a look at the charts I see gaps that need to get filled at 1590 in the Nasdaq and 925 in the XLF. I think we'll hit those levels sometime this week which suggests a little bit more downside in ultimately in store and if futures are any indication we may actually see that happen today. Again, markets opening up weak is "wall of worry" type behavior. They say that dumb money (emotional money) operates in the first half hr of the day and the smart money the last hour of the day. As you can see by this chart, the gap between smart money and dumb money is very large and it shows that since the October low smart money has been getting more and more bullish while dumb money more and more bearish.




Near the peak of the tech bubble in 2000 it was the opposite condition....smart money had be trending strongly bearish while dumb money strongly bullish and again there was a huge gap between the two. It should be noted that this indicator is a long term indicator used to predict changes in long term trends and it can be early....about 6 months or so. Thus, given that the huge divergence between smart money and dumb money began in early October just over 6 months ago it could indicate a change in long term trend from down to up is immanent....or has already begun.... stay tuned.

Looks like just a correction for now...

So was this is? Is the widely awaited top in? I don't think so. I mentioned before that rarely do IT tops get made with a large gap down like this. This is more indicative of "wall of worry" behavior. Only in hindsight will we know if I'm right or not but what I do know is that there was a bear party today. On the blogs and message boards I've neven seen such jubilation from traders like this in a long time. This proves my point that the trading community has been fading the rally all along. I like to go to stocktwits.com to check the pulse of the gamblers...er....trading community. They have a list of the top tickers that are twitted the most. Today the FAZ to FAS ratio was about 3.7:1 showing that traders were pressing the downside rather than buying the dip. FAZ has been the number 1 ticker by far for the past month. So, despite the fact that this ETF had probably the worst performance of any ETF that you could buy, it was the most popular selection for traders! It seems to me a clear case of chasing yesterday's bear market. This was the same sort of thing that happened after the dot com bubble collapsed...people kept chasing former tech winners with futility. Sure, some of them caught a nice counter trend rebound but we all know the ending to that story.

I've noticed that quite a few bears are pressing their bets today instead of using this dip as an opportunity to cover and recoup the losses they have taken. A lot of them chased this gap down today as well and are willing to hold FAZ and SRS overnight. After the massive damage these bear ETFs have caused you figure that traders would be gunshy but no! What hubris! I don't think Mr. Market will think too kindly of this. It also shows the gambling mentality that most traders have. These 2x and 3x sector etfs are prone to large gaps in either direction which makes risk management difficult to employ effectively if you hold overnight.

I mentioned that I wanted to see how bears would react if the market had a significant pullback and I got my answer. Clearly they are pressing believing that the top is in with no respect for the upside. That doesn't bode well for them and suggests the market will turn higher to at least test the recent highs in due time.

Anyone who top ticked at the 875 level on Friday and held over the weekend must feel very happy about themselves. But I'm affraid this may simply re-inforce a bad behavior that they will eventually get punished for.

Ok that's enough blabing...I'm going to lay low now as I promised!

Bot July VIX 30 puts today

Again, a small position. The beauty of this position is that it's not neccessary a bet that the market will rise but rather that volatility will subside. So, even if the market is in the process of topping out or rolling over you often see the VIX show relative weakness. For example, when the market rolled over in Janurary it had a brief rally near the end of the month. That resulted in the VIX tumbling to the lows it made at the peak of rally in early January. Thus, the market had made a lower high while the VIX retested it's low. Sometimes you see the VIX actually make a lower low in these cases. Thus, anyone who got caught buying VIX puts near the Janurary highs had a chance to escape with a small loss 3 weeks after the market topped out and rolled over (due to the time premium decay).

I bought the July puts to give me plenty of time for my VIX 30 target to get hit. Even if 875 was the high of rally, its quite likely it will be retested to fill today's large gap eventually.

I doubt the bulls will be able to recover by the end of the day however. This looks like one of those gap down and flat line days. I suspect the best the bulls can hope for today is a close to about the 850 level.

I likely won't be posting as much in the next little while because I need to focus on studying for the CFA level 3 exam. This stuff is addictive and is taking up too much of my time.

Big gap down to mark end of the rally?....unlikely

Apparently stress test results have been "leaked" to the Turner Network radio and they are very bad which is why futures are indicating a big gap down. Aparently however, this report is in error and is being pulled. This sort of headline risk has made it difficult for anyone to hold overnight positions.

Regardless of this, rarely have I seen a big gap down mark the end of an uptrend, unless it gets filled quickly intraday. Gap downs during uptrends indicate "wall of worry" type action. They can be scary though if you are long. This is the opposite of what the shorts experienced last year. There was so many times when the market would open up big during the downtrend to test the mettle of the bears. Those gap ups indicated "slope of hope" behavior.

But as I said in the prior 2 posts, markets are ST overbought and compressed therefore, weakness to relieve this compession is not suprising in the least. If the rally is over and market action indicates we will rollover into an oblivion, I have no qualms with changing my view and riding with the bears and if that means missing the first 20-40% of the downside so be it....better to ride the market with the wind at your back.

If I see too much eagerness to buy the pullback then perhaps the bears may be back in the saddle for a while. I'll be watching like a hawk.

What's the hardest trade right now long or short?

The answer is usually the right trade to make. I think the easy trade is to short right now. We've been up for 6 weeks in a row, the market is quite overbought and the economy is still in the toilet...therefore the market has just got to collapse any day now right? It's such a no brainier... and that's the problem. When a trade looks so obvious that means a lot of other people are doing it and when a trade is crowded...especially a counter trend trade they tend to be bad ones because there's plenty of stops to get whacked to fuel the trend even higher.

Look for example at SRS, which is double short real estate. Last week it was announced that a major mall operator was in financial trouble and so logically SRS should have soared right? Wrong!! It continued its freefall. Amazingly I still get the sense that there's tons of people STILL bottom fishing SRS even after 6 weeks of non-stop pain. Not a good sign if you are long SRS unless the bottom fishers quickly cash out on the first decent SRS rally.

If you are ever going to attempt to top or bottom pick you need to see capitulatory type action. We have not seen that with this rally yet. The market tends to start off weak and then grind its way higher. That's not capitulation behavior. What I believe would potentially mark capitulation is some sort of significant bullish news that causes markets to gap up sizably. News that would make bears say "shit, this is not good for us, there could be a huge rush of buyers to push this thing much higher". Instead, from what I see most bears keep thinking the rise in the market is a gift to go short. Beware of a market that bears a gift for it may be a guillotine for your head. Respect, its all about respect and the bears it seems have no respect for the market.... they’ll learn to before this is done. Here's an example of what I mean about lack of respect. A trader posted this today:

"I am underwater in srs right now and loving it" .

Huh?? I don't know about you but I don't love losing money. This remark shows that this trader has no fear that his position will come back because he believes the market is in his words "fucked". He's right, it is fucked. But he might just get fucked first because he's not respecting the market.


Despite all I just said, it's never wise to be smart ass. Being up 6 weeks in a row is extreme and so this is no time to be hero if you play the long side.... however, I won't dare to go short on an IT basis until I see the evidence I described in earlier posts. Bears need to show they have taken back control.

March leading indictors will be released at 10 am on Monday. I have no doubt they will show an improvement. I believe however that Monday will be choppy with a downward bias due to option expiration hangover and the market is ST overbought again...but I will be watching the action quite closely. I expect to see an upside blow-off move eventually and that can happen at any time even tomorrow.

Fireworks should start in next 2 weeks

I'm still expecting to see a bearish capitulation before any significant downside occurs. I expect to either see bears throw in the towel as markets climb even higher or quickly cover shorts on the first dip. Either of those occurances should mark the end of the rally...or a least a signficant pause.

I'm noticing some bearish divergences in momentum indictors such as the McLennan Oscillator and further cracks in the wall of worry are showing as per the 44% bulls, 36% bears in the AAII sentiment survey. Readings of 50%+ bulls have coincided with previous IT tops. However, let's be clear about something. If this is the first leg of a new bull market sentiment could get a lot more bullish before signaling danger and extreme overbought readings could stay extreme overbought for quite some time as like what happened in the initial March 2003 bull market launch which by the way lasted 3 months. Top picking traders got steam rolled during this period because they were gaming the extreme overbought readings and bullish sentiment which in the prior occurrences always signaled an immanent top. Their mistake was that they were playing by bear market rules. Bull market rules allow for a much higher tolerance of overbought conditions and bullish sentiment especially in the initial trust.

Now, I did mentioned before that I don't believe this is a new bull market similar to the 2003-2007 variety and if it is some sort of retest is likely at some point. However, I am cognizant of the fact that the Sept-Oct decline was the worst ever drop in history in such a short time frame and so payback is a bitch and this may be what we are seeing here. I am open to the possiblity of a 3-6 month mini bull market.

I mentioned before that I believe the VIX should hit 30 on this move. The VIX is clearly making a significant breakdown and yet there is not much talk about it. At prior IT tops such as May 2008 and January 2009 you can see the VIX just about touched the lower band of the RSI indicator. It certainly looks like it will happen again this time at the least and therefore a move to about 30 would be in store at the very least.



I intend to take advantage of this by puchasing June VIX 35 puts. At 2.50 this gives you the chance to make a quick double should the VIX hit 30. These types of option plays are "all or none" for me....its either 100% return or bust.

Let's keep in mind that prior to the once in a lifetime September-October debacle a VIX of 35 was considered extreme. Therefore, if the economy does in fact stabalize at least for a few months, calling for a VIX of sub 30 by June 19th would not be outlansish.

Should be an interesting couple of weeks....

Bears need to admit...this rally although long in tooth has acted differently than the other bear rallies

I mentioned in a previous post that the relentlessness of this rally reminds me of the March 2003 rally. During that rally, indicators hit extreme overbought and stayed there for 3 straight months. The difference between this rally and the March 20003 rally technically is that this rally is not as clean because there's a lot of gaps in the charts at lower levels which tells me that one day we will see those lows again.... but it could be a while before that happens because there are signs that the economy is stabilizing. Bears are expecting that when this rally fizzles it will be back to the lows in no time....I have my doubts. It will probably not happen until sometime in the late summer or the fall and by that time I suspect most bears will have been cleaned out.

The tone from the typical retail trader is still one of skepticism. Ask around you who believes in this rally. Although some are conceding that the market can go higher still, everyone seems to believe that the market will go back to the lows in short order once this rally is over. I don't think so. The economy is showing signs of life for the first time since this mess began. Everyone agrees that housing needs to stabilize before we can recover and it's showing signs that it is. Housing affordability is also the best it’s been in 30+ years. Also, a very respected source for predicting turns in the economy is the Economic Cycle Research Institute. They were bang on during the last recession and this one as well. Their leading indicator has been steadily rising forecasting an improvement in US economic activity. Could it be just a hiccup? Maybe.... but this hiccup could last for last for several months. Remember, the 2003-2007 was essentially one giant economic dead cat bounce. This one could perhaps be 6-12 months.... who knows.... the bottom line is that if the economy gains momentum; bears would then be fighting an uphill battle. At the very least I believe these "green shoots" of economic stability warrant a test of the market's 200 day moving average which has not happened in this bear market. Currently the SPX 200 day moving average stands at 982. I doubt we will go there on this current run. After this rally cools off it will probably take a month to digest the gains if my thesis is correct. By then the 200 DMA will have dropped.

Ok.... now back to the short-term prospects of the market. A lot of people are saying the market is in a rising wedge pattern that will end abruptly at any day now. Its looks more like to me a parabolic type move that will end off with a "blow-off" move to the upside to around the 900-930 level. I suspect this happens in the next 1-2 weeks. I keep raising my upside targets due to the way the market is behaving.... not just because it keeps going up but by the way it goes up...inch by inch. This tells me there's a lot of top picking going on and not enough panic buying.

Once this move is over there will probably be a quick violent sell-off initially. If the bulls have any mettle the sell-off should be contained at around the 790-800 level and markets consolidate for a while. If not then a retest of the lows will probably occur sooner than I think. We'll see how this all plays out. My game plan is always a work in progress. I'm thinking quite far ahead and I'm sure I will be making adjustments to my outlook as things progress.

The Rodney Dangerfield market

It just gets no respect it seems. Seems like everyone is waiting, watching for the big pullback in the market that just "has to" happen. After all, this rally is "bullshit" right? Bears will say banks are reporting "fake" earnings, the economy is still a mess, commercial real estate is showing cracks, we've been up for 6 straight weeks (unless markets fall apart big today), there's a rising wedge showing in the chart..ect, ect. I agree with a lot of these points, however, the reason why we haven't tanked like everyone has been expecting is because....everyone is expecting it. Instead of fearing it and/or chasing the market like they typcially do after a big rally, most traders it seems keep trying to fade it getting stopped out again and again fueling things even higher. So, ironically they are causing the "bullshit" that they refer to. I'm not trying to mock traders who are getting stopped out like this...I've done this myself in the past. I'm just saying they need to realize that they are the problem and until they start respecting the upside the market will likely keep punishing top tickers. I'm not going to be a smart ass and say that we will never see a big drop until everyone turns bullish. Perhaps the markets dip and all the top tickers quickly convert to buy on the dippers creating a slope of hope for the market to descend further. That could very well happen too.

All I know is that market tops tend to occur when there is evidence of panick buying and when the general consensus feels that a) upside potential is still quite large and/or b) markets are due to pullback but it will be a buying opportunity. A classic example of this thinking was when oil hit $130-140 last year. The consensus expected a pullback to $100 which at that point would be a great buying opportunity.

So, what will it take for the trading community to give this market respect? Like I said the other day, a break of 880 on the SPX should do it. We'll just have to wait and see if it happens...

The squeeze is on

I was away the whole day due to wedding planning....I can't wait until this shit is over and done with. I'm also being distracted by my CFA studies...level 3 exam in June. Anyhow, this could be the breakout I expected, but i think we could see the market cool off in the early going tommorow. After that, I don't know...will have to see how things are going. I also think the VIX will hit 30 before this rally is done. Prior to this debacle a VIX of 35 indicated extreme short term pessimism and the rallies that followed didn't end until the VIX hit about 20. I don't think we'll hit 20 just yet but 30 is doable and I'll show why with a chart in another post.

As I suspected, this rally has been fueled by a lot of wrong way traders in the market. It appears as if practically every short term trader was caught short in early March. Check out this except from an article I just read

"The recent market rally that started on March 10th has been dramatic, unexpected, and actually quite painful for the vast majority of quantitative equity managers. Based on our conversations with numerous managers in recent weeks, we believe that most quantitative managers’ portfolios were not positioned in expectation of a rally. Of the nearly 80 managers we have talked to, only one manager said they were up since March 9th and the clear majority admitted to being notably down or stopped out on their positions."

We may be seeing a lot of quant fund blow ups right now. Apparently a lot of these types of funds cleaned up during the crash....what goes around comes around.

There are clearly more "greenshoots" in the economy if you want to call less bad a greenshoot. Wednesday for example showed that the housing market may have bottomed. The national association of homebuilders has what they call a housing market index which measures homebuilder's sentiment. It's been pretty reliable in calling turns over the years. As you can see here it has shown the first substantial uptick since the housing crash started.

This uptick is comming off extremely depressed readings. Yes...its only 1 uptick, yes....this could be just a one off....and yes the reading is still very low. But skeptics are missing the point about these "greenshoots". For first time since this crisis began we are seeing some improvements in the data as opposed to the relentless freefall we have been accustomed to. This is a major sea change. This gives people some legitimate reason to hope that things might get better as opposed to just blind faith. Sure, these greenshoots could just be noise as the economy simply grinds along the bottom or gets worse later on but when you are trapped in a pitch black room for 1 year, finding a flickering light is like wining the lottery. Combine this sense of relief with the lemming-like behavior of the trading community who have been shorting on every uptick getting stopped out again and again you get a relentless rally like this.

I see a lot of frustrated bears saying things like "this rally is bullshit!", "the PPT and Goldman Sachs is manipulating everything!". These are pathetic excuses from losers. Losers blame others for their failures. There's a saying that goes "the market does what's is supposed to do but not when". For example, clear cracks in subprime mortgages occured in March 2007 and after a drop in the stocks of companies like Fannie Mae, not only did they recover but they made new highs. Only about 6 months later did they start crashing. Timing is everything when it comes to making money in the market and if you plan on fighting the market because you think you are right and the market wrong, then you better be prepared to endure plenty of pain. Ask any bear who shorted tech in 1999 when the Nasdaq hit 2500 when clearly it was a bubble...that bubble doubled before crashing and most bears were wiped out before they had a chance to profit from the crash. I'm sure they said "this rally is bullshit!" "the PPT and Goldman Sachs is manipulating everything!"

Upside breakout immanent?

It looks like we could see an upside breakout any day now that could push the market potentially to the 900 level on the SPX....but this would likely lead to a buying climax marking the end of the rally. Playing these types of blow-off moves is best done via an all or nothing option bet because the odds of getting whipsawed in either direction are high.

The reason I believe we can see a breakout is because a couple of important hold-outs that marked prior tops as mentioned previously are still not there....however, one of them has now fallen into place. We got a pop in bullishness from the Investor's Intelligence survey. 43% of advisors are bullish and 34% bearish. This was about the same level reached in the last week of December. Markets continued to rally for about another week and then made a top.

What we are not seeing to mark a top is panick type buying. Notice how the market tends to sell off in the morning and then claw its way back to the green by the close like today. At a market top there tends to be reckless buying, i.e. markets gapping up when they are already very overbought.


Although there are clear signs of the trading community starting to embrace this rally, I still see quite a few stubborn bears out there. I get the feeling that a lot of bears have been shorting around the 850 level and some feel 875 would be as high as it gets....I originally did too but I now think this is too obvious. This is why I feel that 875 would be taken out. This would probably cause maximum pain for the bears and make them cry uncle.

Check out this message posted by a bear trader "i think bears are looking real good still. i think anything above 880 and were in trouble"

And another from a trader who is constantly bearish with numerous failed attempts at top picking the rally.... I'm looking at a close above 860 as the death blow to the bear case ... at least for a while

Things should get interesting in the days ahead....

Bot TBT June 37 calls today

A small position. With the fed announcing that they are purchasing bonds and with recent CPI and PPI stats indicating deflation one would think this trade is a stupid idea....and it just might be....but given that the bond market yawned to this supposidly very bullish news it makes me believe that this news is all but priced in and bonds are likely going to be much more sensitive to inflation scares rather than deflation scares.

Also, notice how nobody is talking about the "bond bubble" anymore? When people were talking about it last year expecting it to burst, I knew it wouldn't because everyone was waiting for it. Same thing happens with all bubbles....they don't burst until people become desensitized by the notion and accept the prices as normal. If there is ever a time for the bond bubble to burst it would be within the next 12 months. Wallstreet strategists by the way are recommending a record level allocation to bonds in their model porftolios....after of course they had a huge run....and these are supposed to be the "professionals". I feel good fading them.

This trade is not neccessary to anticipate the bond bubble bursting (although that would nice if it happened), it is based on the notion that I believe we could see a growth scare in the market that will make investors reconsider their very low inflation expecations.

This is 2 month hold and if it blows up in my face..no big deal...I'm not betting the farm here.

Ridiculously high put/call ratio so far this morning

this takes away any incentive for me to play the short side today unless the pcr substantially subsides later on in the day.

Another down day likely tommorow

As I mentioned yesterday, I was expecting a down/choppy day today. Markets got short term overbought and consistant with the sawtooth pattern of higher highs and higher lows we are seing, we got to the higher high point and so a decline today is to be expected. We are still a little overbought on a short term basis and given the disapointment with Intel after hours I believe another down day is in store. Bears shouldn't get too excited just yet...but given how overbought the market is on an intermediate term basis this is definately not the time to be brave on the long side either.

I'm in the camp that this current rally is a bear market rally, but I have to admit that the relentless nature of the rally smacks of bull market behavior...(let me be clear though...I don't think it's a bull market). In a bull market run off the bottom, pullbacks are relativily shallow, not giving longs the chance to buy in at the prices they want. This is occuring right now. Other prior bear market rallies have not been this relentless.

I remember the last bear market from 2000-2003 quite well and this rally reminds me of a mix between the post 911 crash bear market rally and the new bull market rally off of the March 2003 bear market low. The post 911 rally was V shaped and lasted until Janurary 2002 with a retest of the highs in March. That rally brutally shook out the bears, not only after the intitial thrust but also the mini rally in mid Feburary 2002 that led to the double top high. During that rally the economy was comming out of the reccession although jobs were still being shed. After 6 months of no material declines most bears were either too broke or gunshy to take advantage of the final leg down. I doubt bears this time around have the stamina to last for 6 months....not that I believe the rally will last that long....just saying. I'm already seeing serious signs of bear destruction and capitulation already only after 6 weeks.

The relentlessness of the this rally is reminiscent of the March 2003 rally. However, at the March 2003 bottom the economy had already well turned the corner and the first strong month of job growth occured about 4 months later. We are nowhere close to seeing job growth. At best we will get a decline in job losses. Thus, that's the difference economicaly between this time and March 2003.

From a sentiment perspective, it took the financial media about 5-6 months after the March 2003 bottom to ask the question "did we hit bottom?" as opposed to asking this question just 2 weeks off the latest bottom this time around which tells me there was not enough capituation and that there's still too much hope that the worst is over.

If markets give people the pullback they want, i.e. SPX 770-775 range....then this rally is likely finished and shorting strength from that point would likley be successful. But I'm still detecting a decent amount of skepticism/worry from sidelined money. People still want to see more evidence that things are improving and comming into earnings season there was quite a bit of fear that the market would fall apart on what is expected to be bad reports....the key word here is expected. If the market doesn't fall appart in earnings season then you might see a further unwinding of what I still think is a strong hold of skeptic holdouts that are itching to get back in the market but don't want to get burned again. A bear market rally will do WHATEVER IT TAKES to get people back in and shake out most bears.

I always try and guage what expectations are from traders, the financial media and mom and pop RRSP/401K investor. I learned that markets usually don't do what the general consensus expects it to do even it if seems so obvious. The consensus is usually either flat out wrong in the expected direction of the market or if they are right about it, their expectations get greatly exceeded. If the consensus expects a big move in the market and gets it right, then it's likely a blowoff type move which will result in a major trend change to eventually burn them badly.

I'm still not seeing all the ducks line up here to declare we have seen the high of the rally. Mind you, the ducks didn't all line up at the latest bottom either. When in doubt, I always let the market be the arbitrator. Until I see evidence of the bear taking control or a blow-off type upside move I won't attempt to take any IT positions and will instead chose to cherry pick for ST opportunities using small positions.

I will try to play to short side tommorow if a good setup presents itself.

Inching even closer to the top but still not there yet.

Markets gapped down on GM bankruptcy rumblings...this IMO was a weak excuse for a dip. Everyone knows GM is toast. Their stock says it and their bonds says it. Goldman Sachs has been on a tear comming into their earnings which blew past estimates. To be honest, most people expected this, even the bears and so there was a bit of a sell on the news reaction after hours.

Financials were very strong today and more damage was done to the bears who continue to try and top tick that sector with futility. I've been picking on FAZ and SRS bottom fishers for a while and today on the FAZ yahoo message board I continue to see confessions of how much money some people have lost. Some of these clowns actually went on margin to buy FAZ. They deserved to lose their money for being so reckless and foolish.

I'm noticing more bruised bears pulling in their horns (or should I say claws) giving up on trying to top pick the rally conceiding that it could be several months before the bear comes back. Ironically, this sort of behavior is what you see near tops. For a top to occur most people have to be afraid of trying to pick it. Same things occurs at the bottom. Another thing you tend to see near tops is when options players are aggresivily buying calls in the face of market weakness like today and getting away with it. The equity put/call ratio was a rock bottom level of 0.50. I remember in early May last year the same thing occured and the top was put in about 1-2 weeks later. But despite these warning signs of a top the following tends to also occur which hasn't happened yet:

a) a spike in bond yields b) at least a 1 week spike in bullishess from sentiment survey's c) investor's pouring money back into equity mutual funds d) bearish "market action" as I like to call it. Gap down days like today is bullish market action because it indicates a "wall of worry" tone to the market.


Market weakness or choppiness tommorow would not suprise me but again, I'm not concerned about the daily minutia. My insticts still say that even if we see weakness in the comming days, ultimately we will see another move to the upside from current levels before this rally is over. That move will very likely be the final phase of the rally.

Good Friday Thoughts

I've been obsessed more than usual about the markets lately. There's a tug of war going on inside me. I'm trying to determine if what's left of the trading community is still trying to top tick this rally (a lot of these guys are nursing severed fingers, arms, and legs after Friday's masacre in FAZ and SRS). I definately saw capitulation from the bears on Thursday and noticed a shift that some traders are willing to buy on the dip but I still get the sense that too many people are trying to pick the top of the rally or are waiting to pounce short on the first sign of weakness. Thrusday's move left a big gap in the chart which in due time will get filled but that doesn't mean this has to happen on Monday. Trader's, even the bearishly inclined types, are expecting Goldman Sachs to report a good number so there might be a sell on the news reaction to that but I'm not going to play that guessing game. When I see reckless buying, i.e. shorts desperately covering positions because they can't take the pain anymore, extremely low put/call ratios, ect that's when I'm going to pounce.

Lou Dobbs on CNN today was waxing bullish claiming how there's hopeful signs that the economy has hit bottom and he mentioned that based on a recent poll 86% of economists expect the reccession to be over in September. I'm also hearing the phrase "green shoots" a lot lately to describe what appears to be early buds of a recovery. Clearly there's tons of hope that we've seen the worst but unfortunatley bear markets decend on a slope of hope. But I'll give credit where its due. The following chart is a pretty good feather the bulls can put in their cap. Leading indicators have turned up from very depressed levels. Notice the headfake though In Janurary 2008...could this be another? Possibly...but its less likely given that we are upticking from such extreme levels with huge stimulus thrown at the market. I wonder however how leading indicators fared during the great depression i.e. if there was headfakes or false signals.



I believe the above chart is why this rally has been so strong. Just like in the spring of last year wherby markets rallied for 2 months on signs of stability, it's quite possible and likely we will see a rally of similar duration and perhaps longer given all the stimulus in the system now vs then. That gives you early May as end date to this rally...at the earliest. This thesis will be put to the test soon because even if we do get a prolonged multi-month rally, it will have to at least cool off and consolidate within a week or 2 given how overbought we are.

This gameplan is work in progress....it always is.

Panick stage of rally has begun...FAZholes crushed

Today was pure, unmerciless bear destruction. From what I gather a lot of bears seem to be in FAZ and/or SRS these days and man did they get cleaned out today big time. I was dead right about FAZ and SRS being overcrowded trades. Much better than expected earnings from Wells Fargo ignited one hell of a rally today in financials. FAZ down 41%, SRS down 24%....unreal! I definatley saw capitulation on the message boards with horror stories about how some people had 50-70% of their portfolio in FAZ and had to take huge losses. However, there are still many people who are trapped and don't know whether to sell or not praying for Monday to bail them out. Therefore the capitulation may not be over yet. I don't think the bears have given this rally enough respect yet because they seem so eager to pounce on the market on the first sign of weakness. Before this rally is over for good that attitude will change mark my words.

With the SPX now closing above 850, we have a technical breakout of a downtrend channel that everyone has been eying. This could lead to a blowoff move to end the rally. Goldman Sachs reports on Tuesday and the stock is acting like the number will be better than expected.

The VIX is imploding which I mentioned is a key ingredient to signal an immanent top. Another thing I want to see is a spike in bond yields. It's been rising but only grudgingly so. I'm also noticing Cramer getting very arroagant mocking the bears. Near the lows in March he was suicidal, now its like he has overdosed on Prozac.

I believe that a lot of newbie investors got married to the bear case in a similar fashion to how they blindly bought into the new era bullshit during the tech bubble in the late 1990s. They are now learning a very hard lesson that the market punishes group think. You can spew all of the fundamental arguements as to why the market should go up or down but my experience shows that when everyone puts on the same trade they will get punished for it and it won't stop until they throw in the towel. Bear rallies can last several months if need to convert skeptics and washout weak bears. This rally since early March has no doubt destroyed most if not all of these newbie bears.

My thinking all along has been that this rally could last until mid April-early May. I'm keeping an open mind as always. I'm waiting for a clear sign that this rally has exhausted itself. Like I said yesterday, we are close but not there yet. Based upon the charts and indicators there is room to run up to about 880 on the SPX. This is a max upside target subject to change. I'm quite confident though in due time we will see sub 800 in the SPX. Should be an interesting next week.

Volatility crush indicates bulls on thin ice...but they still have control

We saw the market go in the red only for the briefest of moments today and then when it looked like it would be a flatish close the market got a dose of viagra in the last 20 minutes of the day. Yesterday the VIX was in the red despite the fact that the market was in the red, usually this "fear" indicator should pop when markets go down over 2% like they did yesterday. Today the VIX declined again and is now below the 40 mark, just about where it stood at the Janurary top. Mind you, actual historical volatility has subsided quite a bit so this drop in the VIX is justifed to a degree, however, near the final stages of most bear market rally tops you tend to see this type of volatility crush.

It looks like "dumb money" is starting to buy the dip according to a couple of indicators I look at but I still see bottom picking attempts in FAZ and SRS by stubborn traders who I'm quite sure missed the boat on them earlier this year. I can tell this bottom picking is taking place by browsing blogs and message boards and by looking at the most popular tickers on stocktwits . FAZ has been most popular ticker mentioned day in and day out for weeks. Most of the people who post there are just gamblers in disguise and in due time I'm sure blow up their accounts. I can tell because I see certain people post frequently for a few weeks and then suddenly they are never to be seen again and I doubt it's because they got bored because whenever they make money they are sure to post their profits but you don't hear a peep when they lose.

My gameplan is to continue to do nothing until I see all the ducks line up. Either side of the market is dangerous to play right now. There's still a decent chance that the market will dip to 810 or so before making a final push higher. But this is just minutia guesswork. My main goal is to catch a big multi-week wave.

I'm 100% in cash. When this rally is over it may end the way the way it started i.e. a straight line because the market is quite compresed. Therefore, I will likely attempt to top pick this rally with an initial position of 30-50% depending on my conviction level at the time.

Comments on today's action part 2

Here's my line of thinking right now. I believe we are close to an intermediate term (IT) top but not quite there. We are definately overbought enough to warrent an IT top however "market action" as I like to call it and sentiment aren't there just yet. I define market action as the way market flucations take place. For example, big gap down and flat line days like today in the context of a generally rising trend is usually indicative of nervous bulls taking profits.
The indicates there is a sufficient "wall of worry" for the market to climb higher eventually (and I say eventually because I think we go down again tommorow...at least initially).

Obviously, one needs to take into account any news related events. For example a gap down due to a nuclear bomb wiping out half the plannet would likely not be indicative of normal profit taking.

Although there is definatley a rise in bullishness over the past 3 weeks there is still IMO, plenty of cautiousness out there. Mutual fund investors have been selling into the rally since it started about 4 weeks ago. The consensus view from the financial pundits is that they are encouraged by the rally and the latest upticks in some of the economic data, but before they are convinced it is anything but a bear market bounce, they want to see more upticks in the data and they want to see the market not fall apart during this earnings season for which everyone expects will be bad.

Therefore, if in fact we do see more signs of economic stability and the markts hold up Ok during earnings season, then we may get what I believe is the 3rd stage of the bear market rally - panick. This is when the underinvested people are convinced that the rally may be real and can't afford to miss the boat. This is also the point where most bears are too affraid to top tick the rally. Obviously, none of this has to happen and we can fall apart right now if we get some really bad news given how overbought we are on an intermediate term basis. This is why anyone who attempts to play the long side here just do with limited capital therefore, option plays in these types of senarios work well. In addition, I find that most of my successful option trades have been when I'm going with the trend.

Comments on today's action: still looks like just a pullback for now...mabey more to come tommorow

I was away from my desk the whole day but based on what I saw today, it still looks like we are pulling back rather than rolling over from an intermediate term (IT) top. Markets have just about worked off their short term overbought condition, but IT wise, it is overbought, so be carefull if playing the long side, but until proven otherwise, the market looks to be sawtoothing higher. A good long opportunity for a speculative call option purchase would be near SPX 805-810 I'm going to be watching carefully how the market acts at these levels instead of pulling the trigger blindly. I did not like how the VIX closed down today despite the market closing deep in the red. This indicates complacency. I would rather see a VIX pop on a dip that I want to buy. I am eyeing May XLF 9 calls for a small spec play when I believe the bulls are ready to take charge again. I love these types of plays because they are all or nothing plays i.e. I don't use a stop and therefore won't have to worry about getting stopped and whipsawed.

Fundamentally speaking the data is not looking good. Consumers are retrenching on credit like never before and this is what I warned about when I talked about the end of the super cycle of debt. An excerpt from marketwatch today reads:

"No other recession has seen monthly changes in consumer credit contract this many times or so deep before going back to January 1943, which is how far the data go back," wrote Young Kim, an analyst for Stone & McCarthy Research. The retrenchment reflects "less available credit, less consumer demand for credit, and consumers' new found propensity to pay down debt."

Comment: This makes it crystal clear this is not just a recession.

Here's another excerpt from Bloomberg:

"April 7 (Bloomberg) -- Thirty-five companies defaulted in March, the highest number in a single month since the Great Depression"

Comment: If it walks like a depression, talks like a depression....

It's clear as the day that we are in a depression, but like in the depression there were several counter-trend rallies along the way and the big bad crash of 1929-1932 destroyed both bulls and bears alike.

Comments on today's action

Seems there was a tug of war going on between 2 analysts. The morning sell-off was sparked by a bearish report from bank analyst Mike Mayo stating that the banks would be insolvent under his version of a stress test but then celebrity star analyst Merideth Whitney made comments in the afternoon that banks could show decent numbers this quarter and advised against shorting them at this time. However, she's still bearish on them longer term.

After examining the indicators I look at, there is further evidence that this rally is running on fumes. I still however believe that the odds of a false breakout above 850 on the SPX is significant so I am avoiding top picking. I am very tempted to purchase a small speculative call position in FAS or XLF because I still think we need to see capitulation from tons of traders who are trapped in FAZ, XLF and SRS. My style when buying out of the money options is all or nothing with no stops. My stop is is at 0. It is far too easy to get stopped out of these types of positions due to noise volatility. Having no stops however, is not the same as getting out of a position at a loss if for a valid reason you believe you are wrong in your thesis.

A comment on analysts Whiteny and Roubini who have recently achieved super star status: From my experience anytime an analyst or strategist or whoever become market sages they inevidabely will fall from grace usually shortly after the point when everyone worships their every word (we could be at that point already with these 2). These 2 will WITHOUT A DOUBT one day become goats. Mark my words. Whitness for example Robert Precter who gained legendary status when he correctly called the begining of the secular bull market in 1982, turned bearish near the1987 crash and predicted a 1930's style depression after it. He remained stubornly bearish for the entire period since then! After the countless number of times he cried wolf he became irrelevent. In the mid 1990's you had Abbey Jospeh Cohen who was the sage du jour and then she earned her goat status when she remained stubbornly bullish through most of market collaspe form 2000-2003. You need to always remember that these are human beings and human beings are prone to error and fall prey to the same psycological traps that regular investors do, the typical one being achoring.

On that note, I find that being bearish is becoming "crowded". I notice a lot of newbie investors/traders and the fast money types (i.e. gamblers in disguse) are bears blindly worshiping the bearish alter. Although I believe there will be at least one more final downside episode before the year is over, I'm completely open to the possibility of a bullish resolution after it (even though it may be a short lived 1-3 year bull market). However, if we are at the brink of a once in 100 year type complete economic collapse (which is certaintly possible given the circumstances) then all bets are off because high levels of bearishness would be completely justified and will have little contrarian implications. These are very tricky times for traders and investors.

Intermediate term outlook: Approaching top but not quite there yet

The strength of this rally caught a lot of people by surprise including me. Near the market lows in March I was well aware that the market was quite oversold and a snap back rally could occur at any time. But because certain sentiment indicators namely, the put/call ratio (which has been by far the single best indicator since the bear began) were not at extremes I didn't think it would amount to more than a rebound to about 750 on the S&P initially. But I noticed a strange thing....anedotally the tone of the trading community and the media was one of skepticism. The rally was being faded heavily by traders it seemed and labeled just another bear market rally and so the contrarian in me resisted the tempation to short it.

As per the teachings of hedge fund manager Todd Harrison whom I respect, bear market rallies have 3 stages: denial, migration (cautious optimism) and panick (fear of being left behind). Up to the rise of 750 on the S&P it seemed like were still at stage 1 but as the market climbed to 800 and above we reached stage 2 and now I believe, based upon the change in sentiment I'm observing, we are at or near the begining of stage 3. Bears are running scared now and just like in late November-early December a lot of them are now calling for the S&P to hit 1000. When bears start running scared like this, you know the rally is near its end because they are the last ones to be convinced of it.

But there's still a lot of trapped bears out there who have loaded up on FAZ and SRS sitting on big losses. Most of these guys I bet missed the boat on a lot of the big gains FAZ and SRS made earlier in the year and when these ETFs crashed these Johnny-come-lately types figured these things were a no brainer to "buy on the dip". These guys are now trapped in triangle choke hold and judging by what I read on the message boards a lot of these guys are just about ready to tap out some of which I'm sure already did, but I still think there is some more bear capituation needed for this rally to end for good.

Everyone is eyeing 850 on the S&P. If we close above that it would constitute a "breakout" according to the legions of technicians that are out there. This event would surely lead to any hold out bears throwing in the towel fearing that 1000 on the S&P is inevidable. This capitulation would lead to the climax of the panick stage of the bear rally and would make a fantastic medium term shorting opportunity which I intend to take full advantage of. Obviously a lot of what I just said is pure conjecture and we are certaintly overbought enough now to see a wicked decline. However, my experience/intuition is saying "not yet" with respect to hitting the short button on a longer term basis. If I'm wrong and we already made the top then I will have no problem joining the bears on the way down but I will try to do it smartly. Chasing gap downs in the context of an uptrend is usually not wise unless your holding period is 1-3 days.


The action we are seeing today looks more like profit taking rather than a rollover from an intermediate term top.

The world that we live in

I don't need to say that we live in historic times. I'm Canadian and up here our downturn is "normal" compared to our neighbors in the south and in Europe but I believe our economy is lagging by one year thanks to the commodities boom that only ended about 9 months ago. I'm deeply concerned about the long-term future of the world economy. I don't need to tell you that the actions taken by the US government are unprecedented. They are doing everything they can to avoid the end game of the super cycle theory of debt. I first read about this theory from BCA research and I'm a believer. Basically, the theory is that since WW 2, we have avoided severe downturns (depressions) because the authorities have reacted to downturns with reflation policies (i.e. increased government spending, lowering interest rates) to prevent the system from completely wringing out the excesses from the prior boom. As a result, the recessions are not as deep as they otherwise would have been, however, imbalances are created (essentially higher public and/or private debt levels) which will result in bigger problems down the road. Basically, we keep going deeper into debt to mitigate economic weakness and stimulate recovery but there has to be and end game to this. We can't go into infinite debt and throughout the years the marginal utility of debt has been declining. In other words, it's taking more and more debt to get a $1 of GDP. In the 1950's The ratio of total debt (both government and private) to GDP was about 1.5, by the early 90's it hit 2.5, by 2001 it was 4.5 and now it will probably be approaching 6! This is scary stuff...and it has to end one day and when it does it means economic collapse.

The question I ask myself now is are we at the endgame right now or will the actions of the government result in one last hurrah? Stock market mega bears as early as the 1980's were premature in calling for the end of this super cycle of debt. Every time we had a downturn they said "this is the end" but the economy and the market still managed to recover and if they put their money where their mouth was, they went broke several times over. But like the boy who cried wolf one day they will be right I'm afraid. Is that time now??? Maybe.... but beware if you intend to profit from this. A lot of people thought that the bursting of the tech bubble in 2000 was the end game of the super cycle of debt. The similarities to the 1929 crash were uncanny and the mega bears were certain that time we would see a depression. Instead we got a mild recession and although the market crashed 50% it was far less than the 89% crash after 1929 and 5 years later the market recovered those loses whereby it took 25 years to recover after the 1929 peak.

I'm quite open to the possibility (no solid evidence of it yet) that we could see another economic revival like in 2003 to once again extend the end game of the super cycle of debt but if and when that occurs, the next downturn will likely be catastrophic because we can't go to negative interest rates next time to stimulate borrowing and we probably can't see governments increase spending to a multiple of today's already massive levels. It's important to realize that all of the above concerns are long-term in nature and if you try and profit from this timing is critical otherwise like all of the perm bears in history you will be broke several times over before the end game arrives.

Also keep in mind the possiblity that somehow this super cycle of debt problem will resolve itself or extend a lot further due to a new technological wave that sparks a massive growth cycle like the IT age of the 80's and 90's. Always keep an open mind and be flexible.

My next post will be about where I see the markets in the intermediate term.

Popping the cherry

Well, this is my first post. I honestly don't care if a single person doesn't read this blog....it's mainly a release mechanism for myself. Up untill now I have kept a private journal describing my thoughts about the markets and where I feel they are headed. I now intend to do this on the www to perhaps gets some feedback from others but if I don't that's fine...it would be the same as if I kept entries in my private journal. I will be posting a collection of my market thoughts, trading style, ect in the very near future...