A word from Barcelona

Hi all,

I´m writing this from Barcelona a little buzzed from drinking a little too much Sangria. Looking at the indicators and market action I haven´t changed my outlook. The market got maximum overbought and now it´s cooling off a bit here. Sooner or later we´re likely going to see a wack down to generate some fear. I´m guessing it happens either this week or next week.

One measure of sentiment that isn´t widely followed (therefore potentially more effective....shhh! don´t tell anyone!) is the blogger sentiment as measured by Birinyi Associates. It´s showing 63% Bulls and only 17% bears. This is the widest gap in the bull/bear ratio recording in the polls short history of 3 years. I should also note that this poll was showing stubborn bearishness all throught this rally untill now. Another thing that raised an eyebrow was when I read the Wallstreet journal over the weekend. There was a bullish article written by James Grant, a notorious permabear. He like me, was pointing out how economists and the fed had low expectations for this recovery which will probably turn out to be incorrect given how V shaped rebounds are the norm after a sharp drop in the economy. The average forecast for GDP growth for 2010 is about 2.5% which Grant feels will be easily exceeded.

Now here´s the rub. I think Grant has it right but from a ST perspective it seems that we may be seeing "Johnny come lately" bulls joining the party here. When permabears like Grant start talking bullish you know that it´´s getting late in the game with the rally which means the market may be vulnerable to a sharp correction or consolidation. Ya, I know, I´ve been saying this since SPX 1000 or so and I admit I was wrong but now we could actually see it happen. A push to around 1100 is not out of the question but more and more evidence supporting a immanent correction is appearing and so I´d keep a tight leash on any ST long side bets here. The only thing that is preventing me from making a short side bet is market action. Sentiment is giving the green light for a short side bet but market action itself is not and it´s latter than counts. You can have extreme bearishness/bullishness all you want but untill the market shows signs of acknowledging it, it is meaningless. Remember, in a bull market bullish sentiment is the norm and so you need to be carefull when claiming people are ¨too bullish¨ because being bullish is only natural in rising market.

Good luck everyone...I will try to make another post or 2 during the next 10 days or so while still in Spain