What goes around comes around

You know the saying "what goes around comes around". What we are seeing is the revenge of the bulls. They were unmercifully slaughtered last year and now the bears are getting the same treatment. I can only imagine the pain that bag holding bears are feeling right now. The market has had them in a tight choke hold not giving them a chance to breathe. This was the pain that the bottom fishing bulls felt last year.

We are now at a point where 91% of stocks in the SPX are trading above their 200 DMA and 94% are trading above their 50 DMA. This is therefore a very overbought market.









But you have to keep in mind 2 things here

1) The initial thrust of a new bull market tends to produce these extreme overbought conditions. Eventually there's a corrective phase of at least a couple of months to work off this condition. You can see that this occurred during the 2003 initial bull market thrust. That thrust ended in January 2004. We could see the same thing happen again this year. One thing I know is that YOU DO NOT SEE SUCH EXTREME AND STICKY OVERBOUGHT CONDITIONS IN BEAR MARKET RALLIES.

Nor do you see extremes in overbought conditions at bull market tops. What you tend to see at a major bull market top is a "top out parade" whereby one by one sectors top out and although the indices make new highs the number of participating stocks diminishes. For example, look at the October 2007 bull market high how only 70% of stocks in the SPX were trading above the 200DMA.


2) The damage that was done last fall was as extreme as you can get. Near the November lows 0% of stocks in the SPX were trading above their 200, 50 and even 20 DMA!!! I remember looking at these stats on that that day saying "holy shit!" I doubt in my lifetime I will see such an extreme like that again. And yet despite these extremes the market STILL made a significant lower low in March. This argues that we could see off the charts overbought readings before we see any meaningful correction of 10% +

In addition to the longer term overbought condition, I pointed out how the market is overbought on a ST basis as well but we've seen in the past how the market has tended to find a way to still go higher by simply going sideways/slightly down for a few day to work off the overbought reading then making a charge higher.

Aside from 1-3 days intervals the short side continues to be unappealing here and I've been saying this since I first started this blog in April and I will re-iterate that now especially with bonds still strong.

Bears fail to admit that they are fighting an uphill battle. You have 0% interest rates, an economy gaining positive momentum and world wide simulative measures. When you start to hear rumblings by the governments mentioning about how they will start reducing these measures in some way that's when we could see a decent correction and perhaps that starts to happen soon. The government will try to "talk the market down" to avoid excessive market speculation but believe you me, they will be slow to remove the simulative policies as I explained before the other day.

As far as the market goes in the ST. I personally don't see a good edge here on either side of the market and so I've been focusing on individual microcap stocks which appear not to have a 1 for 1 correlation with the market. SPX 1100 and DOW 10K appear to be immanent but the easy money has been made on this move since Sept 2. The market is so overbought in the ST whereby it is vulnerable to a gap down and flat line type day on some sort of negative news. I'm thinking this has gotta happen sooner or later but I'll pull the trigger on a downside bet only if the setup is perfect...it's gotta be in this type of massively strong market because in a bull market, you often can get bailed out from a bad entry on the long side but not the short side...there's usually no mercy for shorts and so it's better to error on the side of caution.