Euro looks poised to breakout (therefore dollar break down)

Today has been unusual in that both the market and dollar are down. For the past several months there has been a strong negative correlation between the dollar and equities. People assume that this correlation is going to be there forever which I think is a bad one to make because on a long term basis that hasn't been the case.

I pointed out before with my post "what's up with UUP?" that I detected a lot of bottom fishing in the dollar from the "not so smart money" to put in nicely. I continue to see that. One particular trader/investor who posted by the name of "Marvin newtradr" (does it get any greener than that?) said that he bought a LT position in the dollar via UUP. This same guy in the past has been, to put in it very nicely, not spectacular in his calls. He's not the only one bottom fishing....over the weeks I've seen numerous retail folks shorting the EURO.

Meanwhile take a look at the chart of the euro currency. What a lovely uptrend. There's no sign at all of exhaustion, panick buying or any kind of top. Instead, it looks pretty clear to me that this chart is signalling an upside breakout is immanent. Why anyone would try to top pick this chart is beyond me. At least you should look for some sort of a blowoff/panicky type upside move like in December to try and top pick or a clear confirmation of a top. Instead what you are seeing here is a creeping uptrend. The chart of the Euro looks very similar to that of the yeild on the 30 year bond just before it broke out in the spring.

Here's what the chart of the 30 year bond yield looked like just before it broke out



and now take a look at the current chart of the euro



Now, take a look at what happened to the 30 year bond yield


Will the same thing happen with the Euro? I think so and I think 1.50 will be hit before the end of the year. I'm sure you can come up with 100 arguements as to why the Euro should tank...I'm making this call based purely on what the market may be saying here in combination with the favorable sentiment backdrop of dumb money bottom bottom picking the dollar (top picking the euro).

I already have a put position on the dollar via UUP. I'm considering adding a long euro position via calls on FXE.

Beware the ideal pullback

There's a decent chance that the bears will be thrown a bone this coming week for reasons I discussed in my previous post. SPX 1000-1010 looks like the first logical target. If breached, 960-975 would likely be the secondary target that should hold. A close below 940 would put this bull run in serious jeopardy because that would represent about a 10% pullback from the peak which would be uncharacteristic of a true bull market run during its initial thrust.

I mentioned the following a few times before - in the first phase of a true bull market you don't get the "ideal pullbacks" that underinvested longs want i.e. the 10-15% pullbacks. A true bull market doesn't allow comfortable, convenient entry points. Let me ask you this...when you look back at any of your losing trades how many times did you say "wow, the market just gave me a gift to buy(short) here, this is a no brainer". Lesson to be learned: the market rarely gives you gifts.

All throughout the spring and summer pundits called for the 10-15% pullbacks which never materialized. I warned that such a pullback would be a danger sign. Get this...throughout the bull market of 2003-2007 guess how many 10% pullbacks occurred....0! That's right 0! The biggest pullback was about 8%. Now, mind you that was extremely unusual....I don't think it's ever happened during any other cyclical bull market in the past. But let's examine the behavior of some prior cyclical bull markets and how long it took before the first 10%+ pullback:

1970-1973 bull market: 1.5 years

1974-1980 bull market: 9 months

1982-1990 bull market: 2 years

1991-2000 bull market (technically the market bottomed in 1990 but the initial bull market thrust occurred in early 1991) : 3 years

Looking back even further all the way to 1930s yield similar results except for what happened off of the 1932 bottom whereby a sharp correction happened within about 3 months but that's only after the market gained 100% first! Therefore, you can conservatively assume on average it takes about 1.5 years to see the first meaningful correction (10% +) after the initial thrust of a new bull market.
The typical corrections you see during the first 18 months of a new bull market are 2.5-5% from any peak. That's pretty much what we've seen thus far since the March bottom. We did see about an 8% pullback from the June peak mind you.

But let's be careful not to be dogmatic about this. There's no rule set in stone that says a true bull market run can't have a 10%+ correction so soon. Never think in absolutes when it comes to the market because the market can and will do the unexpected to ensure the motto of this blog is fofilled. But history has made it quite clear that the odds heavily support my thesis.

Stuck in trader pergatory but I'm leaning bearish in the ST

Ok, I just looked at every single chart and indicator I could get my hands on and I've come to the conclusion that the market is going to dip in the ST probably to about the 1000-1010 level on the SPX. As per the Rydex clowns as I now like to call them, the high levels in MM funds always suggests 1 of 2 things: a)upside breakout immanent or b)any downside drop would be limited. I orignally felt a) would be the outcome but I'm now thinking b) because of other trader money flow indicators along with weak market action from leading sectors such as tech, emerging markets and also the Dow transports. In addition, the 10 DMA of the equity put/call ratio is quite low and there was a spike in mutual fund inflows despite the fact that the market didn't go anywhere. When you see enthusiam like this with no justification from mom and pop 401K investor is smacks of Johnny Come Lately buyers comming in...and Mr. Market tends to love give these guys a baptism of fire. I know it's only 1 week of data, but still....




Let me also say that I'm not making this ST bearish call with the greatest of convictions. The rydex clowns along with the 49% bearish reading in AAII gives strong reason for doubt and what could end up happening is that the market makes some sort of a blow off move to the upside at around 1100 before FINALLY pulling back signficantly. But I'm going to stick with the ST bearish posture, so there....no cop out.

Next week is a big economic news week capped off with the big kahuna non-farm payrolls on Friday. The market is likely going to be very whippy so be very careful.

Short side candiates I'll be looking at will be POT, RIMM and EEM. Because my conviction level on the short side isn't high, I will not be playing the short side unless the set up is near perfect. I'll glady remain in trader pergatory i.e. do nothing.

put/call ratio too low

It looks like today will end up being a choppy flattish day instead of the breakout I suspected would have happened. It's actually better for the bulls to have the gap filled. The put/call ratio is too low indicating greedy bulls were going for the jugular early this morning and so Mr. Market had to punish them. If we end up getting a flat or down day bears are going to start comparing this consolidation to the June top which I believe is going to set up for one hell of a bear trap because the rydex data is screaming bullish.

I still haven't done anything at all this week and neither has the market.

Due to discipline I rarely chase gaps unless they can hold for the first hour of trading and I see favorable put/call readings. Neither of those happened and so I'll probably just end up doing nothing the whole the day. Next week however is very likely going to bring fireworks in one direction or the other....you know where I stand.

Rydex clowns signalling upside breakout immanent

I was shocked this morning to see that MM funds in the rydex ratio has spiked to levels that were the same as the March lows!




My goodness me...based on this indicator alone it is saying look out above!
Intel just announced that it's raising revenue expecations....bears look to be in big trouble today...should be an interesting day.

Another split in sentiment

First off I gotta say, the strength of this market is uncanny but there's underlying weakness because although the markets ended in the green, the advance decline ratio was negative meaning more stocks dropped than rose today. To me this smells of a short squeeze..so I wouldn't give too much bullish credit for today.

I'm noticing another bizzare thing on the sentiment front. Investor's Intelligence sentiment shows 52% bulls and only 20% bears but the American Associatin of Individual Investors sentiment shows only 37% bulls and 49% bears. This is a very wide desprepancy. I noted the same thing occured June 25th and I speculated that the outcome would be a short term rally (1-2 weeks) followed by further downside. We ended up getting exactly that....1 week rally followed by lower lows. I think the same thing could happen this time. I will be very interested to see tommorow morning how the Rydex jokers reacted to this day. These loser traders have been nothing but wrong day in and day out.

I want to touch upon the Kass article for a bit. I think it is critical that you read the opinions of people which are contrary to your point of view. The confirming evidence trap is one that many people fall into which basically means you only seek out information/opinions that agree with your point of view. This is the equivalent of a judge listening only to the plantif's side of the case while completley ignoring the defendant's. There's always 2 sides of the story. I encourage that you listen to people who are against your point of view and try your best not to be prejudice. View the information as if you are 100% in cash. Once you have a position in a stock it can become very difficult to keep your objectivity. Remember the name of the game is to make money...not have loyalty to your stock or a market view. Quite often you may read a point of view that doesn't end up materializing in the stock market. That doesn't mean you should dismiss it. Like I pointed out with Kass, he correctly warned about the housing debacle however nothing materialized untill 2 years later. It would have been very easy to have dismissed Kass' view as rubbish.

I still plan on doing nothing and so far it's been a good strategy...I want nothing to do with whipsaw city. The only thing I hold right now is a modest put position in UUP.

Doug Kass calling the top

Doug Kass is a well respected hedge fund manager. He nailed the bottom in March within days of it happening and now he's saying that the top for the year is in.
You can view his latest piece here:

http://www.thestreet.com/story/10590765/1/kass-market-has-likely-topped.html

Let me tell you a few things about Kass. He's a very sharp guy who likes to go against the grain....a contrarian at heart. I read his articles often because he tends to be ahead of the curve....but often times he is very early. For instance he was bearish on the market as early as 2005 as he warned about the unsustainability of housing. He was eventually proven right of course but if you followed his advice and shorted the market in 2005 you would have been crushed for 2 years and very likely would have capitulated before the bear of 2007 arrived. Kass was also bearish just before the 2000 bear and turned bullish in the spring of 2001. Markets bounced nicely after that point but the bear market was only half over and a lot more damage occurred in the months that followed. Kass' weakness is that he often goes contrarian just for the sake of going against the trend. A contrarian needs to realize that during the heart of a trend the crowd will be right...after all, you can't have a sustainable trend unless the crowd joins in one at a time...it's when the crowd gets greedy/complacent usually near the point when everyone has jumped in the pool that’s when you should look to go the other way. Identifying that point is often very tricky but I doubt we are at that point now.

In this article Kass argues that most investors have turned from fearful to enthusiastic. I disagree with this. At best I see investors as cautiously optimistic...very quick to run for cover the moment the market shows just modest weakness. Meanwhile I still see a large cohort of investors out there who are still skeptical as ever. I think I've done a good job proving this. If you read Kass' article there is a poll which asks if you agree with his call. About 2/3 of the people who voted agreed! With the market still close to YTD highs does that indicate to you investors are over-enthusiastic?

While browsing the message boards throughout the months it's clear to me the vast majority of people missed most of the rally and/or got burned badly shorting it. I'm sorry but that's not what you call enthusiastic investors. Near the peak of a market you should see stories of retail investors bragging about how much money they made being long. Instead all I see is horror stories of how they lost their life savings betting against the market with bear ETFs. I haven't seen one single person brag about how much money they made being long...not one!

I've been calling for a consolidation and I've warned to keep your guard up but I disagree with Kass's top of the year call. This makes me nervous since I’m a nobody and he a famous hedge fund guy…a true David vs. Goliath situation. By the way, Kass didn't follow his advice when he called for 1050. He's been ranting bearishly ever since about 930 or so.

Famous speculator of the early 1900's century Jesse Livermore said something to the effect that he has met plenty of people who were bearish at the beginning of a bear market and bullish at the beginning of a bull market but nobody who stayed the course all the way through.

As a final note, remember what I said about market gurus like Kass. No matter how many great calls they have made in the past, just like anyone else, they are susceptible to being wrong in a big way at any time. I've seen it happen many times not only with him but others too. Which means you should come to your own conclusions and think for yourself. Nobody and I mean nobody is immune from the motto of this blog. If on this dip I notice a change in attitudes whereby investor’s are overly eager to buy the dip as opposed to running for the hills like they've been doing every time, then there’s a chance I’d be inclined to agree with Kass. If markets are going to retest the lows I have no problems playing the short side even if that means missing the top.

The churn

Over the weekend I suggested that the market could churn for 1-3 days before making an attempt at 1050. Well, we got the churn now will we get the launch? I've pointed out the weakness in the leading sectors of the market as some cause for concern but to counter that I'm still seeing a stubborn VIX and wrong way Rydex traders pile into MM funds. It's still a tough call here. Do we go down first to about 1010 before attempting 1050 or do we just simply churn another day or 2 before going for it? I honestly don't have a strong feeling about it one way or the other which is why I have done nothing this week. I pointed out before that situations like this are very tricky which means you could get whipsawed quite easily whatever side of the market you play. I'm too affraid to short, too affraid to go long at this point.
I'm going to be scouring the markets today for individual stocks with good charts.

There's a hedge fund guy by the name of Doug Kass who nailed the market bottom in March and is now calling that the market hit it's high for the year. I'll discuss this later on.

Search for the market truth

The following is an excerpt from a very good economist I follow:

stock prices have now fully anticipated a strong recovery in the economy. With the S&P 500 now trading at over 19 times prior peak earnings, stock prices now reflect the same valuations seen in 1929, 1965, 1972 and 1987, exceeded only in the advance to the 2000 extreme. On any other measure than earnings, valuations are higher than any prior peak except 2000.

This sounds like something similar you may have read recently, correct? Well, the date of this article was Sept 14, 2003. Just so you know, the market dipped about 2% shortly after the above was written and then never looked back rising 50% during the next 4 years. Yes, ultimately those gains were given up and more but a 50% rise in 4 years is not something to scoff at...further more, the above argument of the market being overvalued would suggest one go short the market which would have been disastrous. Which leads me to my point....what's the truth? What really counts when it comes to what moves the markets?

I've followed markets for 10 years now and I've been through 2 complete bear cycles and 1 complete bull cycle. These are the cycles you need to pay attention to and if you want to play them, you need to know what actually drives them...not what you think should drive them. By in large, I have found that the driving forces behind major market trends are 1) the expected trend in earnings (which is tied to the economy) and 2)investor psychology.


I see plenty of people making calls on the market based upon things like p/e ratios, debt to GDP levels, social security obligations, or other things have had ZERO predictive value. Most people I find try to impose their will on the markets claiming things such as "the market is overvalued and so it MUST come down".....there's too much debt in the system, the market is doomed".... "there's a social security time bomb ticking...the market is doomed". None of this stuff really matters unless these issues pose an immanent threat. These things might matter in the long, long term but the market doesn't look ahead 10-20 years, it looks ahead 6-12 months.

What the market tends to care about is not neccessarily the absoulte level of earnings but the direction of them. When earnings are in a rising trend, beating expecations most of the time you got yourself a bull market. When the opposite is true you got yourself a bear market. Pretty simple isn't it? OK I'm sure there's more to that than this but I gotta tell you, this is pretty much the meat & potatoes of what drives the market....at least that's how it's been for the past 20 years.


Investor psychology is just as important as the earnings trend. I’m talking about fear, greed, denial, and skepticism. Forget about p/e ratios and balance sheets...market participants are humans and humans are emotional. This is where the motto of this blog comes into play. Except for 911 type events, big drops/crashes in the market only happen when investors completely drop their guard. For example the 1987 crash didn't happen because the economy and earnings were about to tank, it happened because market participants got greedy sending the market to parabolic heights. The crash turned that greed into fear and the market began to recover almost immediately after it because the underlying fundamentals of the economy were still sound. In early 2002, despite the fact that earnings and the economy bottomed in late 2001 and were on the rise again, investors dropped their guard embracing that the worst was over until the Enron and WorldCom scandals resulted in a collapse of investor confidence triggering the final leg down to the bear market that started in 2000.

Earnings and investor psychology...these are the things that truly matter. You can whine and complain about the long term sustainability of earnings that are debt induced or driven by government spending or point out the structural problems the US has and what have you. Odds are, the market is not going to give a shit and will rise substantially if the economy and hence earnings are poised to expand for the next several months and years while expectations are modest. That’s the nature of the game. If you don't like the rules don't play the game.

Tomorrow morning I'll talk about the ST prospects of the markets.

My head is spinning!

Yet another flip flop from the dumb money traders! A spike again in MM funds from the rydex folks. My god....I have never seen such ficklessness by ST traders like this before.


It seems to me that this behavior is being caused by something I touched upon a couple of weeks ago when I said the comming correction will be the most anticipated ever. Since everyone is expecting the correction anytime we see any hint of a reversal traders are quick to run for the exits or go short. So far EVERYTIME they have done this the market has gone the other way. I am also seeing a very high put/call ratio so far today which means....you guessed it....the market is poised for another up day today!

Long side still dangerous....but short side not quite ready yet

Market action continues to warn of a correction with the NADSAQ and Emerging Markets sectors once again lagging. Yet other "doji" candle was put in today. The last time I noted 2 back to back doji candles was back in late July and I was very suspicious of the bearish implications they had and correctly warned of a bear trap. This time around I'm not as suspicious but I admittedly I still have doubts.



I'm having nagging doubts as to whether the bears are going to take control right here at this moment. Part of it has to do with the continued relentless stubbornness of a group of loser traders I've been watching who have been trying to pick the top for several weeks. They're STILL going at it without any fear it seems. I suppose eventually they have to get it right even though it may be temporary like in mid June. And yes, I know, these guys aren't necessarily representative of the consensus but you gotta go with what works...and fading losers works.

Another reason why I'm not gun-ho to play the short side just yet is the behavior of the VIX. It stubbornly refuses to make a lower low and drop into the low 20s even though the market has made new highs. The VIX will often signal an excellent confirmation of a top when the market makes a lower high or double top and the VIX makes a lower low signaling complacency...it's not doing that right now. It's seems to go down only grudgingly but is very quick to spike on weakness like what happened last Monday...that’s supportive of the market because it indicates wall of worry behavior.

A couple of stocks I have in mind to buy puts on are POT and CYOU. They are showing significant relative weakness which means that it's likely they will drop more than the market when the market corrects. I'm not an expert in these stocks but what I do know is that POT is sensitive to corn prices which have been very weak for months while CYOU is a Chinese gaming stock which IPOed this year. IPOs tend to have a pump and dump effect during the first year once insiders are able to unload locked up shares. I have no idea if that's the case with CYOU...all I do know is that it's acting very weak relative to the market when previously it was acting very strong. Therefore, the potential underlying company specific weakness of these stocks is being counteracted by the strong markets in general i.e. a strong market lifts all boats. Once the support of the strong market is gone these stocks could see a significant drop.

Bottom line: It's still dangerous to go long here in the ST because the market leaders are no longer leading but I'm just not quite ready to play the short side for a multi-day hold...intraday yes, I'm open to it. I might take a partial put position in CYOU and POT but I really want to have the wind of the market at my back.

Rydex traders flip flop confirming bearish omens

Well, just like I suspected, Rydex traders reversed their top picking antics and bought "the dip" on Monday (I know,there wasn't really much of a dip). A correction is looking more likely now. The market may not fall appart right away but the message to me is clear - don't play the long side right now. For the first time in many months, I'm actually going to consider a multi-day bearish put play. I have a few stocks in mind....stay tuned.

Keep your gaurd up

A comment first about today's action....despite the flat close as I was expecting, I saw some bearish signs out there today. That push higher in the morning squeezed out a lot of weak shorts. I saw greed today early on from the option speculators via a very low put/call ratio...it firmed up a bit towards the close but I would still classify it as greedy behavior. In addition, the leading sectors of the market tech and emerging markets continue to show relative weakness which has been going on since about the first week of August. When leading sectors become relativily weak it's often a warning sign of an impending broader market correction. The same sort of behavior occured in early June which eventually led to a 7% correction in the market.

I also noticed for the first time in a long time that there's not much talk about the reversal day today which formed a doji candle in the chart. You might recall how in the past I dismissed any excitement such chart patterns generated deeming them bear traps...this time we may have actually seen a legitamate reversal day.

These comments seem like a flip flop of the bullishness I was expressing over the weekend...well, they are...and better get used to it because I have no loyalty at all to any side of the market or my previous opinions....I have ZERO ego to protect. Mind you, it's still way too early to dicipher much from a single reversal day. I am very curious to see the rydex data tommorow morning to see if rydex traders did a flip flop of their own and bought on today's weakness.

Bottom line: Today's reversal should put you on gaurd for more weakness in the comming days although it's too early to really know for sure if the real correction is going to start immediately, after all, the market was at a new YTD high just this morning. When we had that 2% down day last Monday, I said it was my gut feeling that the real correction would start next week....well here we are now. I told you that these situations are very, very tricky. Don't force it. When in doubt do less or better yet stay out and wait for an edge. That's what I've been doing.

Nothing but a lack of respect from the bears

Unfriggenbelievable! You would think that a new YTD high in the SPX would bring out some humility from the bearish folks who have been getting slaughtered like turkeys on thanksgivng....but no. They STILL are stubbornly refusing to acknolwedge the notion that the stock market is signalling recovery. Browsing the message boards and blogs I saw no change in attitudes whatsoever....instead all I saw was even more conviction from these bagholders. I saw one short say "this is a great time to short...too bad I have no more money to do so". LOL! can you believe that comment? You would think that by being broke and therefore wrong in a big way about the market that he might be inclined to rethink his views...but no. I suppose the only way these bears are going to change is by brute force just like that girl I mentioned in the previous post.

I took a look at the Rydex data and to my suprise, there was no capitulation at all from these wrong way jokers....in fact, it was the opposite! There was a drop in MM funds but these funds went into the bearish inverse funds which means bulls stood pat while bears increased their bets in the face of new YTD highs! This is so bizzare! So then, now what with the markets? I'm thinking that the stubborness of the trading community to embrace this rally is going to counteract the extreme ST overbought condition of the market which means we could see 1-3 days of sideways or moderately higher action before making yet another push higher to about 1050. These situations are very, very tricky and so the best thing to do is take it one day at a time and tread carefully. I'm not for a second going to drop my gaurd thinking that we can't see another 2% drop like last Monday - the extreme ST overbought condition gives the market room to do so...but when you see this sort of top picking its makes it much less likely to occur and much more likely for another squeeze higher to occur after mabey a day or two of churning.

Should be an interesting week.

Weekend Ramblings

What can I say about Friday's action....unmerciless bear destruction for one. I saw quite a bit of bear capitulation today. It seems anytime the market makes a new rally high it blows out a new cohort of bears. I have underestimated just how much bag holding bears are still out there. I read a post today by someone who was taking the advice of a popular bearish blog....let's call it ztrends. This person claims to have followed the trades made by the authors of the blog since March when she was first made aware of the blog. She started off with about $650K which was all of her and her husband’s savings. She finally threw in the towel today with only about $125K left. She posted this on the blog but it was quickly deleted by the blog owners. I luckily had a chance to see it before it was deleted. She claims her life is ruined...I'm sure she's not alone. I've made mention of these types of horror stories before of people who have lost their ass betting against the market. The only other period I can recall such horror stories was when the tech bubble burst in 2000 except at that time people got killed being long the market, in particular, tech stocks. This just further reinforces the bizzaro year 2000 post I made a few days ago.

I said before that I believe we are in a consolidation phase and I still maintain this view even though the SPX made a new rally high. Notice however, how the leading sectors of this bull run Emerging Markets and tech have been lagging a bit. That's a bit of concern. I mentioned Thursday that if the market had another 1% move to the upside it would render a maximum ST buying climax reading. Well, we got that and more and a maximum ST buying climax was in fact reached Friday.




I mentioned Thursday that if such a reading was reached it would all but guarantee a good whack down Monday or Tuesday. You can see by the above chart that this is not necessarily the case. The last time we such a buying climax the market still found a way to grind significantly higher after only a couple of days of sideways action.

I've touched on the following point before - I have found that bearish omens given by the indicators I follow are having much less bite than bullish omens. For instance anytime a similar buying climax reading as the above was reached in 2008 and early 2009 when the market was in bear mode, significant and often immediate downside ensued. The same goes with other indicators such as insider activity, overbought/oversold readings and what have you. Therefore, the market is acting like how a bull market acts: bearish signals often result in marginal weakness or ignored entirely while bullish signals often result in substantial gains. Bull markets often ignore overbought readings, bear markets often ignore oversold readings. When the market transitions from bear to bull and vice versa it tends to crush a lot of short term traders because they were conditioned to buy/short when certain indicators hit certain levels and they fail to adjust the parameters of these indictors according to the new trend. This is why trading is more an art than a science and why mechanical trading systems will often fail.

Before making a ST call I want to see how the rydex jokers reacted to Friday's rally. Monday, however, should be flat or down based upon the extreme in buying climax. Even though the SPX made a new high I still believe we are in a consolidation mode here. This period kind of reminds me of when the market made a new rally high on June 1st. Ultimately those gains were retraced but downside was quite limited.

fugetabout it

I was planning to make a bearish play today but I'm going to be cancelling that. I'm now believing today will be an up or flat day. The rydex money market chart I posted last night doesn't include the effect of yesterday's rally....you have to wait the next morning to see the changes. Well, I checked and they didn't budge at all meaning they didn't chase the rally and still have quite a bit of money parked in MM funds. This suggest another good up day or at the very least a flat day with very marginal upside or downside. I know this is only 1 obscure indicator but it's been such a damn good one in calling the day the day wiggles in the market. Futures are looking good far too. I'll be watching to see how things look like by late morning...mabey I'll change my mind again....yup, I'm a flip flopper and proud of it!

possible ST buying climax but longer term wall of worry well in tact

I've been a bit busy these past couple days with wedding stuff. My day of capituation is September 13th.

I've mentioned time and time again how investors are quickly to go from bullish to bearish on just marginal downside but do the opposite you need to see a rip roaring rally and then only, kicking and screaming do investors turn bullish in a big way.

Once again Rydex traders are getting badly whipsawed and very, very quick to hide in money market funds on only marginal downside. Once again the level in MM funds has spiked up indicating signficant fear. But notice the erratic behavior lately. These poor saps have been getting whispawed very badly chasing short term rallies and then stampeding out on ST declines only to see the market rally again. The current level of MM funds is good for the bulls here longer term although the fickleness of these jokers can be quite extreme and so we can see them do a 180 at any time. Never have I seen such erratic behavior by these guys wherby practially every single ST move they have made lately has been DEAD WRONG! A ST spike in MM funds coincided with a ST bottom and a ST collapse coincided with a ST top. Picture a dog chasing his own tail.





Next you have AAII sentiment which has shown a huge reversal on just a 2% drop which now has been recovered completely. Last week about 51% were bullish 32% bearish. This week 34% are bullish 40% bearish. What a massive flip in sentiment and for what? A 2% drop? If that doesn't scream wall of worry I don't know what does. Since March investors have been acting like frightened turtles at just the first hint of downside.


The memories of the collapse are still so fresh and so investors take a 2% downside as a warning that the big bad bear lurks around the corner. Contrast this sentiment with all those beaten to a pulp bears out there who were thumping their chests like mad gorrillas when the market had that 2% drop Monday. And since then what has the market done?.....made fools of as many men as possible.


Having said all this....the market may have reached a ST buying climax here and so the bears could get some relief again. Another move of about 1% up tommorow would render a maximum ST buying climax reading which would practially gurentee a good whack down Monday or Tuesday...that's probably not going to happen methinks but I'll respect the market action and if it looks like it wants to go higher I'm not going to argue with it. My gut though tells me the market goes down starting tommorow. The NASDAQ/NYSE volume ratio today hit 2.02 which also suggest the bears could get some play very soon. But based upon all I've said, the consolidation thesis I have remains valid, Tommorow morning I'll discuss a put option play I'm considering.

Are we in bizzaro year 2000?

I'm probably going to keep trading light in the next couple of weeks because I believe the markets are going to be rather choppy and erratic for a few weeks as I suggested yesterday. I believe this is good time to do research on your favorite stocks and sectors and make a buy list. In these times, I like to reflect upon the bigger picture. Going forward I'm likely going to be using more of a buy and hold type strategy.

Shanghai is going through a correction here due to fears of a deceleration in bank lending to rein in their overheated markets. This is having a spill over effect here. Drops triggered by such catalysts are not bull killers. You need to see massive and prolonged credit tightening to end a bull run and that will typically be signaled by an inverted yield curve. The yield curve is extremely steep all over the world.

There's no shortage of worries out there and like I mentioned that's a good thing. Worry is a bull market's fuel source and that's why they say "bull markets climb a wall of worry". When there's nothing to worry about that's when you should be worried. One of the big worries out there is the large budget deficit right now and as an investor you might think that it’s a bad time to invest in the US markets when this happens....well you would be badly mistaken. It turns out that the market performs well above average when there’s a significant increase in government spending and performs below average when there's a surplus. Why? Obviously there's the stimulative effective of such spending but I think it also has to do with the psychological state of the market. At times when there are massive increases in government spending the mood of consumers and investors are in a depressed state which means expectations and stock prices are low. Every time we find ourselves in depressed economic times and the governments start to use this Keynesian pump priming strategy the bears come out saying that this is going to come back to haunt us badly one day as we pile up debt. You hear this now quite loudly. But did you know bears have been saying this since the 1950s? Will there be an endgame to this? I believe yes, simply because of Murphy's law - anything that can go wrong eventually will. So long as there is a positive probablity of some event happening (such as a complete economic collapse) then one day it will happen. But is that time now or in the near future? I don't think so because the stock market and the bond markets aren't saying it is. The stock market is a barometer of prosperity/future prosperity. Yes, it can be subject to manias, panics and crashes but for the most part it is an effective barometer of economic health. I have also learned that time and time again it pays to go against consensus think ESPECIALLY when the market is telling a different story.

So what is the market saying right now? We've seen a 55% rally in about 5 months, we've seen credit spreads collapse to pre-crisis levels and we are seeing a very steep yield curve....the same yield curve by the way, which was became inverted in 2006 flashing the opposite message of an oncoming recession. So while you have this fantastic forward looking indicator screaming of better times ahead, you still see commercials on TV starting off with "in these tough economic times". Remember, when main street media mentions anything about the economy they are ALWAYS late to the party and won't change their tune until it's painfully obvious a turn around has occurred. To me it looks like we are in a situation where the music has stopped and yet people are still dancing...the same idea when the tech bubble burst in 2000 but in the opposite direction. It took about 6 months after the tech bubble burst for people to really begin to embrace even the possibility of a recession.

I believe we saw a negativity/short bubble burst in March. In many ways, what we are seeing this year is the complete opposite of what we saw in March 2000....bizzaro year 2000 if you will. Here's why...

In March 2000 the yield curve was inverted
In March 2009 the yield curve was steeply slopped (and still is)

In March 2000 the NASDAQ had a blow off top after a 3 month 30% rise
In March 2009 the Bank Index (XLF) had a blow off crash after a 3 month 50% drop

In March 2000 consumer sentiment was near all time highs
In March 2009 consumer sentiment was near all time lows

In March 2000 the most popular gurus were bulls such as Cramer, Cohen and Blodget
In March 2009 the most popular gurus were bears Roubini, Whitney and Schiff

In March 2000 the annualized 10 yr rate of return in the SPX was near a historic high of 16%
In March of 2009 the annualized 10 year rate of return in the SXP was near a historic low of -6%

By March 2000 IPOs (new stock supply) were being issued like crazy most of which were poor quality companies.
By March 2009 hardly any (if none at all) IP0s were issued

A common theme in 2000 was that we entered a "new era" of high prosperity for years to come due to the tech/internet revolution.
A common theme in 2009 is that we entered a "new normal" of below average growth for years to come due to ongoing deleveraging.

Do you see what I mean here??? Look, by no means do the above points guarantee it's going to be onwards and upwards from here but I hope I have shown a variant perspective about what could unfold here. I see so much group think from all the pundits and bloggers out there.
Quite frankly, I'm liking the bull case A LOT from a longer term perspective based upon these points because it just "feels" right based upon my experience. But don't get me wrong here folks...by no means am I married to this view. This may sound like a cop out and if that's the way you feel so be it...I will quickly throw this bullish thesis into the garbage if evidence suggests so and do a 180 and you can call me a flip-flopper or whatever. That's fine.

This is not about pride or ego or wanting to be proven right so that your friends think you are such a smart guy after you gave them your opinion on the economy. This is about making money and to do that you need to be brutally objective in a robot-like way. This is very, very hard to do and not only that, you can still get it wrong even if you are purely objective either because you don't do enough research or just plain bad luck. If for instance a nuclear bomb wiped out half the earth tomorrow then no bullish indicator in the world is going to matter.

Anyhow, sorry for the long rant.

A lot of chest thumping from the bears yesterday

Based upon the celebration I saw from the armchair bears yesterday, I would have been made to believe that the market had tanked 15%. I've even noticed some of these same bears who have been getting their teeth kicked in for months say that they hope the market gets to new highs so that they can short some more and make "a fortune" in the comming crash this fall. Such bravado and arorgance after being humiliated is never a good sign for these bears. This is the equivalent of a boxer who has been getting the crap beaten out of him taunting his opponent after landing a jab.

Yesterday's drop has already nipped the signs of froth I've been noticing. The VIX popped 15%, the NASDAQ/NYSE volume ratio tanked (although not to the opposite extreme), rydex traders are retreating back to money market funds and like I mentioned, bears are getting quite cocky after only what....a 2% drop? I noted this type of behavior before over the past few months and it wasn't too long before Mr. Market sent these jokers with their tails between their legs.

We're seeing a bounce today which so far looks OK but I believe we will be in a consolidation phase for a few weeks before going higher. I'm quite sure within these weeks there will be a downside scare similar to the failed H&S pattern. I expect the action to be a bit whippy for a few days.

Bottom line: so far this drop looks more like a correction than the begining of new bear downleg even if the market eventually works lower.

Don't look for a pop into the close

I believe there is too much downpressure and technical damage for a pop into the close like what happened Friday. Also, I think this trade is too obvious now and the put/call ratio isn't quite high enough. I will look to short any attempt of a late day pop after 3 pm.

I'm ST bearish but LT bullish

Well, it looks like the drop I’m expecting is going to happen immediately. Futures are suggesting a gap down of nearly 2%. Once again, notice how difficult it has been to profit from any downside in the past 5 months unless you have a position trade short which for the most part has been a disastrous strategy.

I pointed out signs of froth with my previous few posts and anytime signs of froth have appeared in the past 5 months they have been quickly extinguished with downside action. That’s healthy for a bull trend to be sustained. Bulls need to be humbled when they get a little cocky and bears need to be emboldened when they get too discouraged….the complete opposite of last year. If there is complacency as the market drops then that would be indication of more substantial downside in store.

From a longer term expectations point of view, there’s also no shortage of concerns out there. Fears remain about a double dip recession, commercial real estate shoe to drop and below average growth rates for years. This is good fuel for a bull market….you might be saying “what the fuck is this clown talking about?” Well, the logic is counter intuitive. You need fear/worry for substantial advances to occur because long term market moves are driven by the re-pricings of expectations. So, if expectations are low, there’s room for them to get revised higher as these fears are alieviated and thus moving the market higher.

Late last year and early this year expectations were very low but they just kept getting lower as conditions deteriorated further. But since March there’s been a turnaround in expectations and right now we are in the sweet spot whereby expectations are slowly but surely rising from low levels. The time to be concerned was early last year when while the economy was showing clear signs of deceleration, a common view was that the housing crisis would be contained to subprime mortgages and not spill over into the rest of the economy. That gave room for expectations to be revised lower. Now we are seeing the opposite. The so called “green shoots” are being scoffed at by plenty of people out there. Bears are trying to be contrarian by saying “so many people expect a recovery so that means we aren’t going to get it”. This is flawed thinking because last year so many people expected a slowdown, even a recession, in early in 2008 but markets still tanked hard. Why then? Because even though a slowdown/recession was expected, nobody in their right mind expected the type of collapse we saw….most felt a mild recession at the worst would occur. This is the complete opposite of now. People expect a recovery but a modest and fragile one.

Sometimes it’s best to keep it simple and yet the simplest but most reliable economist in the world is saying NO CHANCE for a double dip recession but rather it is yelling and screaming that strong economic growth lies ahead in the next 12 months.…This economist I’m referring to is Mr. Yield curve. Bar none, it has been the best predictor of economic activity in history. Its signals usually take about 6-18 months to come to pass. The yield curve is such a well known predictor of economic activity yet it seems that every time it sends a strong message people seem to rationalize why the message should be ignored and yet every time it proves these people wrong. I believe this happens because of the lag associated with the yield curve which I touched upon and also the difficulty in accepting a radical change in fundamental conditions at the time.

The only time we saw a double dip recession was in 1980 and 1982 (please correct me if I’m mistaken). The economy bottomed and rebounded out of a recession in the second half of 1980 but then stalled by the second half of 1981 and fell into recession again by early 1982. This double dip recession was well predicted by the yield curve which became well inverted towards the latter months of 1980.

Right now the yield curve right now is extremely steeply sloped and has been so for several months which make the likelihood of a double dip recession close to nil. In fact, it is predicting ROBUST GROWTH in the economy over the next 9-18 months. Right now you’re probably saying “bullshit! no fucking way that happens!” Well, you can go ahead and argue with the best economist in the world if you want….just keep in mind its stellar track record and also keep in mind that the typical amateur investor right now is as skeptical as ever about the notion of a recovery.

So who do you want to side with? The best economist in the world or the rest? I’ll choose the former thank you. But you know what? I really don’t care which way the wind blows. If it turns out that we are going back into the abyss in the months ahead, hopefully, I will see the warning signs and I’ll gladly join the bears. ..but I strongly suggest you do some research to see how equities did 12-18 months after the yield curve has been this steeply sloped....oh wait, don’t tell me…the yield curve is rigged by Goldman Sachs.

Bear's chance for a little redemption possible now

Thus far, the bears have been unable to break the bull's grip of this market despite some good catalysts, namely, disappointing retail sales and consumer confidence. A lot of bears I'm sure are probably very nervous and/or extremely frustrated that the market didn't tank because of these bearish news items....but it looks like they will get some play soon. I have found that in very strong trending markets sometimes it can take a few days for the news to sink in because the momentum is just so strong.

To game a turnaround in this uptrend you need to see some sort of evidence that the bulls are getting greedy and/or the shorts have given up. I'm not so sure about the latter but as of Friday, I am seeing the former. The dip we saw on Friday was over-aggressively bought by the bulls. How do I know? The NASDAQ/NYSE volume ratio spiked to an "off the charts" reading of 2.72. Recall that this ratio gives you an indication of greed vs. fear. When investors are greedy, they will favor the high beta names in the NASDAQ vs. the more conservative NYSE stocks, thus the NASDAQ/NYSE volume ratio will be elevated. To put the current reading of 2.72 in perspective consider the following points:

a) This reading is the largest I've seen in several years. It marginally surpasses the reading registered right at the bull market peak in October 2007.

b) During the past few months a reading this high occurred 3 times:
1) June 10th - the SPX was down 7% from this point in 2 weeks time
2) July 6th - the SPX was down 3% from this point in 3 days
3) July 24th - this turned out to be a false signal. The market simply chopped
around for a few days before going higher. However, at this time other
sentiment indicators were conflicting with the NASDAQ/NYSE ratio which I noted
in my July 24th post titled "Conflicting Indicators".

Since other indicators such as the Rydex ratio and the sentiment surveys are corroborating the bearish signal given by the NASDAQ/NYSE ratio this time around unlike last time, it makes it quite likely that we won't get a false signal this time, thus I expect a pullback of at least 3% to occur starting this week sometime. Hence, I will be looking for bearish entry points unless I see these signs of greed reverse themselves quickly, which has tended to be the case anytime we see the market have a modest decline.

I still have to say this though…the wall of worry from a longer term perspective is still well in tact and there’s good reason to believe that the economy will surprise people to the upside. I’ll discuss this in the next post.

Bears get thrown a bone with consumer sentiment

University of Michigan consumer sentiment came in below expectations today. The current reading is 63. Bears I'm sure are going to have a field day with this claiming that this is a bad sign for the economy. Well, I beg to differ. Consumer sentiment should be viewed as a contrary indicator when at extremes and right now it is and it has been since November. Other times consumer confidence was this low were 1990, 1982, 1980 and 1974. These periods all coincided with great long term buying opportunities. Now, one may counter this and say "what about in the 1930's?" Well, fair enough....there's no data that goes that far back as far as I know and it could very well be the case that consumer sentiment was low and stayed low for years rendering it a useless contrary indicator. You can go ahead and believe that but you would be betting on a low probability event given the long term track record of consumer confidence readings and the outlier that was the Great Depression. And is it really fair to compare this period with the 1930's when back then GDP contracted over 25% and unemployment hit 20%?

Last year at about this time some bulls argued that the low consumer confidence numbers was a contrary indicator as I am doing now....the problem though was that a) confidence although low was not at historical lows b) the stock market was acting bearishly. This is why I always look for the signs that the market is confirming any notion I have. You can go ahead and think the market is rigged if that makes you feel better.

Anyhow...as I type this the market is grinding along near the lows of the day. I have noticed that any significant down day since the March bottom has began with the market showing weakness right off the start with the majority of the downside happening within the first hour of trading. That folks is bull market/wall of worry profit taking behavior. I've touched upon this many times over the past few months. In a true bear trend you tend to see the market start off positive/flat and then fade into the red by the end of the day until right near the very end of the bear phase when the panic selling hits.

Only bears that have been holding overnight positions (and suffering for months doing so) benefited from this down day. The "day trading bears" likely got nothing out of this. All this does is re-enforce bad behavior because it will make bears gamble more holding overnight which for the most part has been a losing strategy.

The put/call ratio is high today which gives the possibility of a late day squeeze but with the market down significantly, this high reading is somewhat justified and so it's contrary implications are mitigated as a result.

My gut tells me that the REAL correction will start in about a week...but that's just pure instinct talking. Until bears take out 990 they haven't broken the bulls control over the market. I'm sitting on my hands right now.

Be on guard for another squeeze higher today

The losers I'm tracking seem even more confident than ever that we are going to go down big today. Will they get yet another serving of humble pie acompanied by a shovel to the face? I say the odds are high given their horrific track record.

Look, I know I said that a consolidation/correction is immanent but it looks like we need to see stuborn bears like this get humbled first.

The longer the market just hangs around like this in positive territory, the greater the chance we see a pop higher. The put/call ratio is moderately in favor of the bulls but not as much as yesterday.

More of the same

After analyzing conditions yesterday morning (Wednesday) the market acted pretty much how I expected. The 1-3% pop that I warned about looks to be playing out here. I'm not sure if the market makes a new rally high soon but it's not going to suprise me. I do however, believe like I said before, that any gains from here will likely be given back quickly after.

There's a group of retail burned bears that I track to use as an indicator and they still continue to be as stubborn as ever. They were fuming like crazy today and not only did they not capitulate...some added MORE to their underwater short position. My god, how many shovels across face will it take for these jokers to give up? Of course....according to them it's not their bad judgement that's losing them money...it's Goldman Sachs, the PPT and Obama. Such pathetic losers. I know these group of guys I'm tracking aren't representative of the whole market but I gotta tell you, there's a lot of people who feel this way. Go to any popular investment site like seekingalpha.com, marketwatch.com or yahoo message boards and you will see that at least 75% of the people who post messages are permabears and conspiracy believers. In 1999 it was the complete opposite.

So what now for the next few days? I'm really not sure. I'll be playing it by ear.

upside likely to stick today

today is the complete mirror image of yesterday. the put/call ratio is high in the face of significant strength suggesting skepticism of the rally from the option crowd. As a result I suspect the market will remain strong the whole day.
The only way I see this not happening is if the fed says something really unexpectedly on the hawkish side. I expect them to indicate that they intend to keep monetary policy accomodative without any serious hints of hiking rates soon.
Watch for the classic knee jerk sell-off after the fed announcement...it probably will be short lived.

Sentiment no longer favorable in the ST

Investor Intelligence (II) figures came out today and it's not good news for the bulls. 49% are bullish while only 21% bearish. That's a bull/bear ratio of 2.3 which has bearish contrarian implications. The last time sentiment was anywhere this bullish was early June which is right about where the market topped and had a brief correction (although it took about another week or so of churning before it rolled over). This bearish evidence corroborates the bearish rydex ratio data I discussed the other day. It took a 55% rally to finally see sentiment show some excessive bullishness.

Does this mean the rally since March is over? Not necessarily and not likely. These surveys measure ST sentiment only and it could be quite possible, like in July, to see the bullish sentiment reverse quickly after only modest downside. II sentiment was showing excessive bearishness in March, July and October of 2008 but that didn't prevent the market from going significantly lower afterwards after brief counter trend rallies that followed these bearish readings. Also keep in mind were we are coming from. For about 9 months straight (July-08 to March-09) II sentiment was showing excessive bearishness pretty much the entire time except for a small pop in bullishness once in a while. Therefore, just because we are seeing signs of excessive bullishness now for only the 2nd time in 5 months doesn’t mean it’s game over for the bulls.

Like I had mentioned recently, when sentiment gets giddy in favor of the primary trend what ends up happening is a shakeout/correction to shake out the Johnny-come-latelys. We saw this last year with the bear market. Anytime it seemed utterly hopeless, the market would get a ST pop to keep the bears humble and the bull’s hopes alive. Now, I believe we are seeing the same thing on the upside and we are probably at or close to one of those shakeout periods for the bulls.

Bottom line: recent sentiment stats confirm that a consolidation/correction is immanent, if not already began. The potential for marginal upside of 1-3% is still there....sometimes you see these sorts of head fakes to the upside to really stick it to traders trying to play the downside rollover. At this time I don't believe any correction/consolidation will be deep. 960ish would be the maximum downside target for now.

What's up with UUP?

I've noticed some popularity with UUP lately amongst the retail crowd betting on a bounce in the dollar. UUP is the dollar bull fund which is a bullish bet on the US $. Anytime I see bottom picking by the retail crowd when the chart is showing no signs of a bottom and with fundamentals not favoring a bottom I become interested in betting the other way. A similar situation occured with UNG not too long ago.


With interest rates in the US at a ridiculous 0% along with huge fiscal spending and a huge current account deficit the headwinds against the dollar are quite strong. On a purchasing power parity basis the dollar is slightly above fair value and so you can't make the case the dollar is intrinically undervalued with limited downside. Typically you see currencies go to overvalued levels when fundamentals are good and then swing to undervalued when fundamentals stink. Rarely do they make long term bottoms at fairly valued.

My guess is that tomorrow Bernanke and the fed are going to assure markets that they have no intention of raising rates anytime soon even though they should be (at the very least to 1%) and that's probably going to send the dollar dropping and bonds selling off which would be a message to the fed that they better think again about this and acknowledge reality.

Lowering rates to 0% was an extreme measure due to the once in a lifetime collapse we saw. Now that CDS spreads, corporate bond yield spreads, TED spread and other measures of credit stress have collapsed well below pre-Lehman Bros. bankruptcy levels (which was the beginning of the great panic), interest rates shouldn't still be at 0%. It is so ridiculous. The Fed with all its knowledgeable and experienced members in the end are no less subject to the emotions and biases of the typical retail investor. They are still shell shocked from the collapse and they won't embrace any signs of a recovery until it's painfully clear that it has arrived without a doubt. They are usually very slow to react by cutting rates when a downturn arrives as well.

But out of all the central banks in the world the US is probably the quickest to act. The ECB is the worst. I remember last year at this time laughing at them when they were still talking about how they wanted to raise rates. It took about 5 whacks with a shovel over the head for them to finally acknowledge what was going on.

Bottom line: Look for the dollar to continue to fall shorter term and longer term. The current short term downtrend in the dollar is a bit long in the tooth and so you must beware of the snapback, but I still see it going lower because I don’t see any signs of a technical bottom at all. What I see is a well defined downtrend making lower lows and lower highs and the not so smart money trying to catch a bottom. As a caveat I must warn you that currencies are not my forte.

put/call ratio very low so far today

this suggests that the downside will stick today.

No changes to outlook...

I'm still thinking that the upside potential here is about 1-3%, however, the downside risk in what I believe is a coming consolidation will be accompanied by modest downside that would very likely wipe out any gains made from this point. I touched upon the Money Market component of the rydex ratio as a measure of trader sentiment a couple weeks ago which was bullish for the market in the ST given that it showed significant skepticism in the face of a strong market. Well, that's no longer the case now.




The level of MM funds is back to where it stood in mid June which was the last time the market had a correction. Notice however, how MM fund flows have spiked up and down a couple of times lately. This is indicative of the fickleness of traders and it shows to me that the rally isn't being trusted because these rydex traders are quick to go to cash at the first hint of danger. Again, this is bullish longer term from a contrarian view...when you see these traders showing complacency about downside in the market it would hint of a larger drop coming.

Bottom line: upside although still possible from here will be modest and likely given back in the correction/consolidation that follows. I believe any downside will be limited as well similar to the mid June correction because the psychological backdrop from a longer term perspective is still favorable. Most burned bears I follow are still in denial showing very little respect for this rally and are so confident the market is going to collapse this fall while most bulls out there it seems are only cautiously bullish.
The consensus thinking out there is that any recovery will be modest and below average due to deleveraging which will result in below average growth for years. And as I said before, due to this consensus view, there's a greater chance for positive surprises than negative ones longer term.

Weekend thoughts

This post will be rather long, so buckle up.

As you may be able to tell, I focus a lot on investor psychology to determine where I believe the market is heading. To me, there is no better way because I believe whole heartedly in the motto of this blog "The main purpose of the stock market is to make fools of as many men as possible."

The collapse last year made certain people gain celebrity like status. Roubini, Whitney and Schiff come to mind. I wrote the following in April:

A comment on analysts Whitney and Roubini who have recently achieved super star status: From my experience anytime an analyst or strategist or whoever become market sages they inevitably 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.

After incorrectly calling for a resumption of the downtrend several times over the past few months, Roubini semi-capitulated a few weeks ago claiming that the worst was over for the markets for now but he believes a double dip recession will occur in 2010. The goat horns are already sprouting on his forehead and if we don't get a double dip recession (which is a low probability event given that it happened only in 1980 and 1982 I believe). Roubini may become hated and laughed at like the permabulls were recently. The same goes with Whitney who capitulated on her bearish stance on Goldman Sachs just prior to their blow out earnings release.

Slowly, these "celebrity bears" are starting to fade from the picture. And guess who have been the best forecasters these past several months? None other than Jim Cramer and Abby Cohen who are the laughing stock of the trading community and still are. Cohen predicted the SPX would hit 1000 a few months ago and probably only a few crickets listened. Cramer's roasting on the Daily Show in March was in hindsight one of the biggest contrary indicators ever for him. Maybe one day Roubini will get the same treatment.

But it wasn't too long ago when Cramer and Cohen were held by most people as market sages. Cohen in particular used to move markets with her calls. She was once the queen of the bulls in the mid/late 1990's correctly remaining bullish even though the market had some sharp and scary corrections. She fell from grace by remaining bullish all throughout the 2000-2002 bear.
When a particular market strategist or guru has been right about the market for a consistent amount of time they begin to attract a large following as people believe that this guru has found the "holy grail" in predicting markets. And just when these gurus are looked upon as gods by the masses, Mr. Market pulls the rug right from underneath their feet and the guru along with their flock of sheep followers get served a large serving of humble pie.

There's a few bear sites out there which I won't mention that gained a very large following and they just experienced what I just described. The retail trading community, in particular the rookies, are still for the most part bears, even if they play the long side. Let me ask you this, how many bullish orientated sites do you follow? Do they even exist now? The most common site I see Joe six-pack retail trader get information from is zerohedge.com which is a bearishly biased site. With the market 50% off its lows and the economy showing signs of improvement the fact that the bear sites are still popular with the dumb money tells me that this run isn't over. Of course there will be corrections but they'll likely be modest until at the very least I see some TRUE CAPITULATION from the stubborn, underwater bears out there.... not this "I've learned my lesson" after getting blown out of the water and then going short the next day. All I see from the burned bears out there is anger and stubbornness. I very much doubt this run will be over until they become silenced and truly humbled. I noticed this same behavior from the permabulls after the tech bubble burst. It took them about 1 year or so for them to become silenced and humbled and even then markets still tanked.

I realize there's some signs of giddiness out there like with CNBC but what do you expect after a 50% run? Some giddiness is only natural. With the natural flow of bull and bear markets you tend to see counter-trend rallies/consolidations when you see sentiment get a bit giddy in favor of the primary trend. That's probably close to where we are right now. AAII sentiment and II sentiment are both close to hitting a 2:1 ratio in favor of bulls vs. bears.

Bottom line: We're likely going to see a significant consolidation with this market soon. I'm thinking there's still room for a little bit more upside (1-3%) but not much before the market will start to cool off and go sideways for a few weeks. I still see a lot of bears out there who have been getting slaughtered still very confident that we are going to crash again in the coming months....some of them I noticed are still in major denial angrily dismissing any positive market data as government lies and upwards moves in stocks as manipulation. How can you not continue to fade these guys?

The following is a message board post of what I believe is the common perception of many retail investors.

"I do not trust this rally. The rally is a contradiction of what the economy is telling us. Fannie Mae just asked for another 10.7 billion dollars. Half of the states are on the verge of bankruptcy. Unemployment continues to be negative. The treat of tax increases looms. National debt has exploded. The baby boomers will soon start withdrawing money for retirement. Thousands of soldiers will be returning home to no jobs. Foreclosures are still rising. Commercial real estate issues have not hit yet. On and on. Until I start seeing companies hiring again, I will not trust this rally. "

This is the wall of worry folks. By the time this guy sees all the data he's looking for the market will be at much higher levels.

Barbarians at the gate

By trading sideways for the last few days, the market has worked off a lot of the extreme ST oversold condition I mentioned a few days back. This could very well be the “pullback” that everyone was expecting....not quite as deep as everyone thought it would be isn't it? Maybe the pullback is still to come but the market now has the green light to go ahead and make news highs…in other words, we won’t see another ST overbought condition until the market goes up to about 1050 or more.

Market action suggests to me that it wants to go higher because with the market having been so overbought bears had every opportunity to knock it down hard, but instead, they did what that kid did in American Pie when he had that hottie naked in his room....blew their load and got nothing to show for.

What I'm noticing is that bearish signals from the indicators I follow have had much less potency. This is classic bull market behavior. For instance, I warned here around June 10 of a top and we got one but the correction that followed was rather modest and the market went on to make higher highs shortly after. Similar bearish signals occurred in 2007 and 2008 which led to nasty down legs.

The bulls have the bears by the balls right here. When the market got extremely overbought a couple days ago, the bears had their chance to take the market down and they blew it big time. Now they have paved the way for the bulls to go for the jugular and take the SPX to new highs. I still see plenty of bears to squeeze to help fuel such a move. I also noticed tonight the NASDAQ/NYSE volume ratio was quite a low 1.29 today which has ST bullish implications.

Bottom line: The road has been cleared now for the bulls to make another charge. I'm not sure if it happens tomorrow but it's looking like they are going to bust through that SPX 1000 gate soon. Even a move back to 975 wouldn't put this thesis in jeoproday. I move towards 960 would though.

The comming correction will be the most anticipated ever

This is such a bizzare situation right now. Everyone knows that the market is so overbought and much overdue for a pullback but when we get it, it will be the most anticipated one I have ever seen. A lot of traders have been jumping the gun shorting the market but they keep getting denied and as they cover it simply adds fuel to the raging fire of this rally.

I know exactly what kind of agony underwater shorts are thinking. They are banging their heads against the wall in utter disbelief as to how this market can be so strong and not even close 1 day in the red. They are fighting their instinct to cover and stop the pain but fear of regret i.e. ego, won't let them because they are thinking that the moment they cover the market is going to have the big drop they've been waiting for. I have found that most bears who have capitulated have done so only by force i.e. they got wiped out. Others capitulated in some form, promised to be a better trader (bargining stage of 5 stages of grief) and yet STILL went short and lost again! It's almost like a crack habit with these guys.

I have found that when everyone expects a correction because a market is overextended, 1 of 2 things happens

a) the correction is a lot shallower than people expect and the market makes even higher highs shortly after before the REAL correction happens

b) the correction is actually the start of a much nastier downturn and people buy back in and shorts cover after the dip only for the price to go down a lot further. Case in point - Oil last summer. When it hit around $130 or so, a lot of people were talking about a correction...barrons even had a cover story about it....but they like others said it would be a good buy again at about $100.

So, what's it going to be this time around? I'm leaning towards a) unless I see a signficant change in attitudes and expecations from the trading community.

For any speculators out there check out this site...

www.intrade.com. This is an online gambling site which will allow you to bet on a variety of things but it works like the stock market whereby you can go long or short and trade intraday whereas if you go to a bookie and make a sports wager for example, you either win or lose when the game is over.

intrade.com has what's called "financial contracts" which provide a variety of different ways to speculate on the Dow Jones. I focus only on the Dow Jones daily close contracts which allows you to bet on where you think the Dow Jones will close for the day.

For example, the DOW +25 contract will payout if the Dow closes up 25 points or more. You can go long or short any contract and there's a market maker that provides liquidity along with market depth to see all outstanding orders. The contracts (i.e. the event you are betting on) are what's called binary options - you either win or lose if you hold them to expiry. Every contract will expire at either $10 (for a win) or $0 (for a loss).

For example, if you went long 10 contracts of the DOW +25 and the Dow closes at +40
you would get paid out $100 (10 contracts x $10) if you held until the close. You could always sell them intraday if you wish at the going price. The going price will depend on where the Dow is at the time. If for example, there's 10 minutes left in the trading day and the Dow is at +35, the going price for the Dow +25 contract will likely be about $7.5 (the quote by the market maker will actually show 75).

These contracts offered by intrade which I just described are 1-day binary options.
They provide a unique risk/reward tradeoff which if properly used can act as an effective weapon to the speculator's arsenal.

It can also just be used as a cheap way to speculate on the market or experiment with ideas on an intraday basis. It can also be used as a cheap way to test and sharper your instincts.


I must warn you however. There's not that much difference, if any, between gambling and trading these contracts. USE ONLY A VERY TINY AMOUNT OF CAPTIAL if you want to try these things out....no matter how good you may do initially....because it might be just pure luck.

I believe the most you can start off with is $250 as an initial deposit amount from your credit card...and depending on where you live and what credit card you use, you may not even be able to deposit money from it because of online gambling site laws/restrictions that are applicable to you.

And please, please, please don't blame me if you decide to trade intrade contracts and lose money. Don't be like all the burned shorts who are blaming Goldman Sachs for their loses. Use the site at your own risk and take responsibility for your actions.

I should also mention that I'm not affiliated with intrade nor compensated by them in any way.

Just about as stetched as it gets in the ST

As a result of today's move the market is now just as overbought as it gets on a ST basis so I'm expecting to see the market cool off here either by going sideways for a couple of days or pulling back.

I made a post a few weeks ago saying that conditions were beginning to remind me of March 2002 which led to a multi-month decline and new bear market lows. However, I did say that not all conditions were in place yet to make the comparison complete and conditions never did fall in place and to this day have not. What I expected to see when that H&S failed was full fledged capitulation from wrong way bears and a big spike in bullish sentiment as underinvested longs completely dropped their guards. Instead what we have seen is the same wrong way bears hold steady with their shorts or added back shorts quickly after getting stopped out while others simply got blown out of the water by force because they were already "all in". Although more sidelined money is coming in, you are also seeing longs quick to take money off the table and some have even turned to the bear side. I'm sorry, but that is not what you see at major tops. Everything I just described is the psychology you see in a bull market. The media is starting to talk more about a housing bottom and recovery but the average Joe Sixpack still isn't close to embracing that the worst is over. I still see commercials on TV that begin with "in these tough economic times". Main street media has been and always will be late to the party in recognizing a financial trend...by the time they recognize it, it's just about over or already is.

Unless I see a significant change in attitudes and expectations, I believe SPX 1100 at the very least will be seen before year's end. It's going to be tricky though from this point forward because the market is so overbought. In a strong market overbought can become even more overbought but we are at the point right now where historically on a ST basis the market has rarely advanced further without at least a bit of a breather. I see only a maximum of a 1.5% advance from here if the market just keeps going up from here without any retracement at all.

Bulls not even giving bears a chance to breathe

Well, I was right to suspect a bear trap but wrong to think that we'd see a little dip first. As I type this the bulls have already made a few attempts at 1000...I don't think the bears will be able to hold them off for much longer.

It's going to be very, very interesting to see where this market closes today. If I had a gun to my head I'd say the market closes near the highs of the day

A bear trap in place? There's a good chance

Look, I know the market is very overbought and it would be piggish to press longs here, but I gotta tell you, be very careful here on the short side if you intend to hold for more than a day or 2 because I think a painful bear trap is being set up here just like with the failed H&S. A lot of people are taking about the 2 "doji" candles that are showing up in the charts. These candles take place when there is a reversal in the intraday trend, in this case a downside reversal.

These dojis are giving trader types the confirmation that the upside may have finally exhausted itself and therefore are going to play the short side. I've even noticed some bullish traders turn bear now too! On the downside last fall we saw the same thing happen in reverse...bears turned bull around SPX 1100-1000 but yet the market still dropped another 25% before making a ST bottom in October.

I've talked about the rydex ratio as a timing indicator. It has worked very well in spotting bottoms in particular. The rydex ratio is the ratio of exposure rydex traders have in bull funds + sector funds vs. bear funds + money market funds.

One of the best components of this ratio to watch is the level of money market funds because it doesn't get distorted by changes in NAV. Big spikes and drops In MM funds coincide with ST or IT bottoms and tops respectivily. Typically and naturally, the level in money market funds should drop as the market rises indicating a decline in fear but look at what's going with MM funds.




MM fund levels have actually spiked instead of dropped like they should be doing and are approaching record levels! This is very bullish from a contrarian pespective because its showing huge skepticsm/fear in the face of a rising market i.e. wall of worry behavior. Notice MM fund levels are almost as high as they were at the March lows!

With current levels of MM funds it suggests at the very least downside will be quite limited and at face value suggests another big upleg in the market is going to happen again in the not too distant future. I know this is only 1 indicator but it has been a very damn good one. The only way I see this working out in the bears favor is if on a dip we see MM funds collapse. That could happen but it's not likely.

Bottom line: The odds of another bear trap being set are high. We saw the market stop at the predictable level of 1000 and it appears as if the trading community continues to fight this rally tooth and nail. I know it's piggish to press longs here after such a run up but to go short for more than a day or 2 is out of the question for me given what I've just discussed. If the market dips to fill the gap and can hold 970ish the bulls could very well be setting up for another charge higher...it probably won't happen instantly though....a little bit of base building will probably take place.