The Golden Parabola

I've been mentioning the bearish contrarian signs for gold these past couple of weeks and I've stated that I'm on guard for a LT trend reversal but admittingly, I could be premature on a price basis and so I'm resisting the temptation to top pick gold on a LT basis until I see all the ducks line up which I will discuss further below. Here's a review of my LT bearish sentiment indicators I mentioned including a couple of new ones I just stumbled upon which warn that a LT top in gold is probably within 6 months from occurring.

1. Institutional investors who as a group shunned gold when it was below $300, smugly dismissing it as trading vehicle, now love it over $1000 and advocate it as must have legitimate asset class.

2. Central bankers who in the 1990's were tripping over themselves to sell their gold reserves when it was sub $400 now want to buy when it's $1100.

3. The LT gold chart is exhibiting a parabolic formation. Parabolas are the signature of a bubble.

4. Very few in the financial media are claiming gold is in a bubble even though its parabolic behavior suggests one.

5. The price action of gold or the US $ has been mentioned on TV dramas and in the movies. Whenever you see this happen the trend in question is usually in its final stages. By luck, last week I caught part of an episode of a show called "Criminal Minds" whereby one of the characters was checking the price of gold which he had invested in. In the Movie "2012" the strong value of the Euro is mentioned a few times (which is in turn reflects the recognition of a weak US dollar). I also recall hearing non-financial news anchors on TV mention that the long term trend of the dollar is down.

Using sentiment to identify LT turning points is tricky. As I've mentioned before, in a bull run the natural emotion is bullishness and so you have to be careful as a contrarian to say that there's too much bullishness for a bull trend to continue. Only when there is extreme/euphoric bullishness can you say that a LT reversal is imminent. But how can you tell for sure that there's been an extreme? You can't....and often times an extreme can simply get to more extremes. But, you can certainly know if you are getting near the end of road when you see certain behaviors such as the ones I described above. But if I had to just pick 1 indication of an extreme it would be the sign of the parabola on a LT chart. There's nothing subjective about price action....a parabolic LT chart has always indicated a bubble and typically results in a collapse of 70-90% from peak levels.

You need to be careful in distinguishing ST parabolas from LT ones. Sometimes you will see a stock make a "mini-parabola" on a 1 year chart. That doesn't necessarily indicate a LT concern...in fact it may suggest the opposite and indicate further LT strength is likely after perhaps a pullback. To identify LT parabolas you need to use a 20-30 year chart.

Another issue with parabolas is that it can be quite tricky to catch the top. A steep parabola can simply become steeper before finally imploding. So, how can you spot the ultimate top? There's a couple of ways. First of all at the ultimate top, you will very likely see the price of the asset in question reach a very extreme overbought reading on the RSI indicator of 85+ on both a weekly and monthly basis.

With Gold we actually saw this happen at previous IT tops in August 2006 and March 2008 which resulted in corrections of about 25% and 30% respectively. So, if we see these types of overbought readings we can expect at least a significant correction. We're not there as of yet with gold right now.

Gold Weekly



Gold Monthly





As you can see weekly RSI is overbought but not the monthly RSI. If this is the final blow-off phase of the gold rally or even if it's approaching an IT top like August 2006 or March 2008, then any pullback in gold right now would likely be limited to about $1100-1120 before making the last and final surge to perhaps around $1350-$1400. This seams ludicrous but that's what's possible if you look at the situation objectively.

So, anybody out there trying to top pick gold beware....a pullback to $1100-1120 is certainly doable but if after that the price of gold can consolidate for a week or 2, watch out because it's probably setting up for a final and spectacular surge. This type of behavior is quite common with the final phase of a LT trend...it's what I call Phase 3 whereby most of the general public has been aware of the trend for some time and it's being fully embraced by investors (Phase 1 is denial/disbelief and Phase 2 is initial recognition by investors). It can be quite profitable to ride this phase but also scary and dangerous.... you don't want to be left holding the bag.

Dubai a flash in the pan?

Seems that's the case given the green in the futures tonight (although they've faded quite a bit just now). Although there's no official bailout yet of Dubai, the United Arab Emerites Central Bank (UAECB) and Abu Dhabi have made statements which support the notion of one comming. The UAECB stated it's willing to supply a credit facility to banks and Abu Dhabi has stated it may be willing to selectively support some of Dubai World's debts. Although nothing has been done yet to resolve anything, the actions taken over the weekend prove that there's no complacency regarding this matter. Memories of the Lehman Brothers collapse and the ripple effect it had are still fresh in the minds of central banker all over the world and none of them I'm sure want to jeoprodize this recovery we have been seeing this year.

Like I said before, it's going to be tough to see the bear market resume when everyone has their guard up, looking over their shoulder for the boogie man. It just doesn't work that way. That doesn't mean we won't see corrections...but the're likely going to be shallow.

This week is going to be a big one with economic data reports. I think the market is going to quickly forget about Dubai even a lot sooner than I expected and start focusing again on earnings and the prospects for them via these economic reports.

If we go by the motto of this blog, it wouldn't be suprising if we see morning strength to rinse out all of those bears who were expecting a Black Monday and at the same time give confidence to the bulls that the coast is clear. Then once the weak bears have been flushed out and the weak bulls sucked in, Mr. Market pulls the rug from underneath these bulls either by the end of the day or later on in the week. This is just a wild guess of course....I don't know why I even bother mentioning such ST predictions when I often don't put my money on it. I don't know...I just like to see if I can call every little wiggle right even though I know luck plays a huge part.

But I will say this, if we simply gap up and run I'm not likely going to chase it. I still think this market had another downside move in it to about the 1070 level eventually.

Should be an interesting week....

Weekend Ramblings

Ok, I've looked more into this "Dubai World Crisis" and I've come to the conclusion that the particular issue regarding the $59 Billion in debt carried by Dubai World (which is owned by the Dubai government) should be easy manageable but this very likely a symptom of bigger trouble regarding the entire city of Dubai itself which has total debt exposure of $80-90 Billion in addition to "off balance sheet" debt which apparently is supposed to be significant but nobody appears to have an estimate of what it could be. But even with these other debts the problem in Dubai doesn't appear to be serious.

Abu Dhabi, Dubai's largest backer and neighboring city is expected to bail out Dubai and there's already chatter swirling over the weekend that they will be willing to selectively back some of Dubai's Debt. Abu Dhabi's wealth is quite large. Their sovereign wealth fund is about $650-$850 Billion (from sources I found) and their economy is probably over 90% based on hydrocarbons which means they are in great financial shape and have been so for years. They can easily make this Dubai problem "go away" by simply writing a cheque if they chose to. Keep in mind that the $59 Billion in debt of Dubai World is backed by assets of $100 Billion, so any "bailout" of Dubai would be supported by the collateral of these assets. Even if you give those assets a 50% haircut to reflect declining property values, it puts Dubai World in a slight negative equity position.

I hear chatter out there that this Dubai "crisis" is akin to the subprime crisis which triggered the financial collapse. This is farfetched if you ask me. First of all total subprime exposure was a much larger $1 Trillion (from what I gathered) but more importantly, there was a shit load of investments and derivatives tied to subprime such as MBS which dwarfed the $1 Trillion. You had MBS which where packaged with subprime mortgages and other mortgages like prime ones; you also had credit default swaps, commercial paper, synthetic MBS which are similar to cash settled options whereby there is no underlying security to deliver and leverage on top of leverage of all which were somehow tied to subprime and housing.

From what I gather there's none of this type of shit with Dubai - the only exposure is straight debt owned by Abu Dhabi and banks (mainly European)....nothing more. Therefore, with this Dubai crisis, it's not nearly as large as subprime nor is there the domino effect potential like with subprime. In addition, Dubai has a large backer who's economy is tied to oil revenues which have been soaring. And even if they don't bail out Dubai entirely, a partial bailout appears likely and the hit that European banks will take could be signficant for a couple of them but it's far from a systematic threat.

Going back to Dubai's neighboring states, I mentioned Thursday that the Dubai crisis could potentially cause a contangion effect with neighboring Arab states and that CDS rates were spiking in these countries. Here's a chart of what the CDS markets are doing there. Clearly, there's been spike but so far it's just a small blip and could just be a knee jerk reaction. Again, let me state that these neighboring states are overflowing with oil revenues ulike Dubai whose economy is about 9% tied to oil.




As far as the market goes, I've been waxing bearishly since mid November for a ST correction and when the market is vulnerable to such, any excuse will be the trigger. This Dubai incident was the excuse but if by Monday some sort of bailout is announced or is strongly suspected to be imminent we could see the market recover all the losses sustained on Friday.

As of now the main technical and sentiment indicators I look at are basically neutral meaning it's up from grabs for both the bears and bulls to make headway. Another push lower to about 1070 accompanied with a spike in the VIX to the high 20's to low 30s would likely set up for a great long opportunity that carries us through until the end of the year at least. I'm waiting for another one of those low risk high reward opportunities like the "all in" IT buy signal I issued in early November.

Given the edgeless situation of the indicators and elevated morning headline risk as a result of this Dubai incident, the best thing to do is watch and keep your powder dry (aside from any LT positions that you have strong convictions about). Gamblers like these types of situations because there's likely going to be a big move one way or the other done via a morning gap which means the potential to make quick, large gains (or losses which are what the gambler never appreciates...they only think about how much they can make not lose). I don't consider myself a gambler but rather a speculator and a successful speculator makes bets when he feels he has a strong edge...when the probabilities are in his favor. Not only that, but when he can also limit the damages when he's wrong and that too will be tough with the heightened headline risk.

put/call ratio just dropped big time

This leaves the market now vulnerable to going back down today....it's a big game of chicken out there between bears and bulls....one that I would rather watch then be a part of.

Here's the rally attempt I was talking about

will it continue? Tough call. I don't have a good feel for it one way or the other.
The put/call ratio is elevated and the VIX has spiked a bit but is a VIX 24 enough? I'd rather see it in the high 20s at least to make me feel comfortable with the notion that we've seen enough fear to mark a bottom. But I know all too well the market doesn't always give you what you are looking for which means you can either participate grudgingly or step aside and wait to see a clearer set up. I tend to chose the latter because if I chose the former it makes me a weak holder prone to getting whipsawed. One thing I do have is patience...sometimes too much of it as it makes me miss out on opportunities but that's me...I play a tight game and fold a lot of hands.

Dubai jitters will likely be short lived

Unless you've been living under a rock you should be well aware of the Dubai led sell off today in the world markets. Government owned firm Dubai World with $59 Billion in liabilities wants to delay payment of some of it's upcomming obligations, so, it's not a default but it certaintly indicates financial strain. First of all $59Billion isn't large on the grand scheme of things and there is apparently $100 Billion in assets supporting this debt although truth be told, I have no idea if the true market value of those assets is $100 Billion. Second of all there's already mention of a bailout from current stakeholders Abu Dhabi in particular.

The more important issue here is cockaroach theory fears i.e. when you spot 1 cockaroach it means you'll likely spot more. Contagions tend to occur every so often in emerging markets and tremors have already been felt in neighboring Arab countires as credit default swaps rates have spiked there as well. Will there be a full blown contagion? I don't think so. Contangions usually occur when there's complacency after a roaring bull market has been in effect for some time. We already went through hell and right now the world is nowhere near complacent. The world is at best cautiously optimistic constantly looking over the shoulder for the "double dip".

Now, I'm sure you can probably find a lot of smart people out there who can make a good case that the problems in Dubai are the just the begining and are serious and I'll be the first to admit that I'm no expert in credit markets and in this situation here, but what I do know is that in youthful bull markets, problems like this tend to find a way to resolve themselves. I'll definately try to keep an open mind about this and investigate this issue further but my gut says that in a month or 2 this Dubai "crisis" will be long forgoten.

The bears that dominate the Yahoo message boards are in a frenzy over this Dubai news. Once again they continue to show euphoria on just any kind of small pullback. It's quite comical. If history repeates yet again for the hundreth time, it won't be long before the market makes new 52 week highs. The euphoric behavior of the bears on small pullbacks shows that the've taken a huge beating these past several months but haven't capitulated. It shows how much in denial they are, how desperate they are to make back some of their losses and how badly damaged their egos are.

It will be interesting to see how this plays out. I was expecting a pullback to 1070 on the SPX a couple weeks ago....mabey this Dubai news will get us there but then again, this market has never made it easy for the bears and it might be too easy for us to go straight to 1070 on this news.

My best guess for tommorow is that there will be a rally attempt after the initial gap down. Whether it holds is another issue. It should be an interesting day to say the least....

Dubai default rocking markets

US markets are poised for a sharp gap down tommorow thanks to Dubai's default and so it looks like my call for a pop higher isn't going to happen unless somehow this issue gets resolved by tommorow morning.

Is this news a bull market killer? I highly doubt it but it does give the market an ecxuse to sell off and yet another reason to worry. Should be interesting....

Top picking may end up giving the market another pop higher

The market has managed to grind higher and is now only 4 points away from another 52 week high. I've noticed today traders had their guard up. I don't know if it was Prechter’s end of the world call or because of the shortened trading week or what. For instance, I noticed today that the VIX was acting in complacent fashion early on but then it suddenly firmed up and closed flat for the day even though the market was up modestly. This smacks of top picking, which in the case of a strong upward trend, tends to result in an immediate short squeeze.

I also noticed that the rydex jokers have pulled back on their bullishness tonight and are now in neutral territory and there was quite a large mutual fund equity redemption this week! If this sudden pop in fear doesn't unwind quickly we could end up seeing a blow-off move to the upside whereby we just grind higher right through to the end of the year...sentiment be damned! The same thing happened in December 2003. Sentiment indicators were showing extreme bullishness..in fact, it was off the charts and yet the market just kept on chugging higher. We aren't even close to the same level of bullish extremes compared to December 2003 but to be fair, the economy back then was showing clear signs of revival, i.e. job growth, wheras now we are seeing modest improvement in the economy.

Maybe I'm making too much of this and these strange behaviors will be just one-offs. We'll soon find out, however, based on what I saw today, I'm now accepting the notion that we could in fact see a blow-off rally that carries us right through to the end of the year. At the very least, a pop to a new 52 week high before bears finally get some play is now appearing likely...but you know what? I feel like I'm guessing here and second guessing myself.


My head is spinning right now because I had a vision of how I expected the market to play out but now suddenly things are far less clear. It's frustrating when this happens and when it does, I will step away from the market and do nothing until I get my bearings back and that's exactly what I'm going to do. And you know what? I'm becoming more and more disinterested in the day to day ST action anyways. What I am becoming more interested in is identifying the next big thing....the next big winning sector for the coming decade because that's where big money can be made by simply buying and holding early on in the trend. I have a couple of ideas that I'll discuss soon.

Permabear Prechter calling for major drop

So many people, especially today's rookies, worship this guy Prechter. I've always been critical of him because for the most part he's a permabear. I say most part because he does make tactical calls to cover shorts and/or go long but he's been a long-term bear since 1987. The following is an excerpt regarding this guy.

"Prechter’s forecasts have had mixed results. While the former rock-and-roll drummer achieved fame for predicting a stock market crash two weeks before Black Monday in 1987, his standing suffered in the 1990s because he missed the almost decade-long bull market. In December 2002, he said the Dow Jones Industrial Average would fall below 1,000. It hasn’t dipped below 6,000 since then, climbing 25 percent in 2003 and then another 35 percent through Oct. 9, 2007."


How can someone miss the entire 1990's bull market and still have any credibility? Everyone get's it wrong but for fuck sakes, to miss out on the biggest bull market in history and never admit defeat is simply inexcusable. Ya, he's made good calls but just as many if not more terrible ones. You can add his call for gold to go to $200 in 2000 to the list and once again remaining bearish the entire decade with gold.

According to Mark Hulbert who tracks the performance of newsletters, over the past 20years the performance of Prechter and co. is DEAD LAST amongst all market timing strategies he tracks! But because Prechter and his Elliot wave drones have had success in the last couple of years a lot of people have been worshiping his every word especially many unsuspecting rookies who are now permabears just like him. Apparently Prechter has just recommended traders aggressively go 200% short!
He's expecting a major drop that will eventually make its way below the March lows.

This has the makings of the mother of all bear traps. I've been ranting bearishly as of late but my bearishness is ST in nature. I think we could see a 3-5% correction in the very near future for reasons I've outlined before. I can just see it now...if we get such a correction it's going to get every single bear on earth embracing the "wave c" decline that Prechter is calling for....the same bears who have been beaten and battered to a pulp and want revenge so badly....a lot of them may end up betting whatever they have left in their account. And then.....the mother of all bear traps will be set.

But you know what? If Prechter ends up being right then giddy the fuck up. That means this market will be far from boring and there will be plenty of money to be made on the downside. I have no problems whatsoever embracing the bear side....I've done so in the past. Believe me, I no permabull. But I highly doubt he will be right because the sentiment backdrop from a LT perspective regarding the rally we've seen since March is one of skepticism, disbelief and hatred. That's not the ingredients for a major calamity that Prechter is calling for but rather, the ingredients needed for a bull market to advance.

Bottom line: A correction is likely coming but it will likely set up for the biggest bear trap of the year as bears try to make a final stand going aggressively short thanks to the dire warnings of Prechter.

Despite the green day market action and ST sentiment still poor

Another gap and run day. Last Monday started off the same way and the gap got filled by Thursday. So sure, we could see the market float around for a few days and even grind higher especially with the holiday shortened week which is prone to light trading but with the VIX hovering near 20, Rydex indicators still in bearish territory and today's very low put/call ratio, the sentiment backdrop is piss poor in the ST and it's highly likely today's gap will get filled in the not too distant future. The market as usual, ain't going to make it easy for the bears to capitalize because in bull markets the path of least resistance is to the upside.

I'll say this again...bearish signals in a bull market have less bite and are either ignored or resisted for a while before finally showing results whereas bullish signals have plenty of bite and often result in instant gratification. As an example, I've been seeing bearish signals since mid November and here we are right about at the same levels.

Be patient and picks your spots.

Interesting article on gold

http://www.marketwatch.com/story/new-gold-bugs-taking-gold-mainstream-2009-11-23

This talks about how gold is now becoming "mainstream" as some legendary hedge fund managers have now embraced gold. One quote from the article I found interesting was this "I can't remember in 20 years so many respected investors focused on a single strategy". Wow! If this doesn't scream immanent LT top I don't know what does! Here's a question I would ask...where were these "respected investors" 5 years ago? Never mind buying at the bottom in 1999, how come they weren't buyers at $400, $600, or even $800 in the years that passed? Only after 9 years run and a 3 fold increase in the price of gold have we now seen these "legends" buy into gold. lol! That doesn't seem to be very legendary to me and it tells me to be alert for a LT top in gold. Remember, the motto of this blog applies to EVERYONE legend or no ledged...actually, it applies EVER MORE to the legends....the bigger the ego and reputation the more the market seeks to humiliate such people. The operators of LTCM were the best of the best and yet they went bust.

You have to keep in mind this - at a LT top 3 things tend to occur

1) The asset in question will have made a tremendous multi-year move quite often showing a parabolic type chart pattern.

2) The fundamentals still appear to be very favorable for the trend to continue. It has to feel like nothing can stop this trend from reversing.

3) The buying power of all potential investors has been used up. You can tell that this has taken place when investors who normally don't invest in the asset jump in. This is what happened with the tech bubble when conservative investors both retail and professional alike threw caution to the wind and jumped on to the bandwagon...those were the last "greater fools" available to keep the bubble going. Once most people are in who are they going to sell to such that they all make money? It can't happen. We may be at or close to this point with gold. Notice this quote from the article "A surprising number of level-headed folks, who I have known over the years, are confessing to me that they've become gold bugs," he said. "They're starting to give more respect to what was for a long time considered the lunatic fringe." This is reminiscent of the tech bubble.
I made mention of this before....the "pros" who scoffed at gold when it was $300 now love it at $1100. This shows that we may have reached the point where most of the potential buying power has already been committed with some people I'm sure waiting to buy on the dip. Either way, I get the sense that too many people are leaning one way with gold or at the very least an IT top for gold is imminent.

I always respect that the market can go a lot further than you expect it as well which is why one should be careful betting against a strong trend especially an upward trend because unlike trying to pick a bottom where you know the price can only go down so much (with $0 as the limit) there is no limit as to how high something can go.

Another sugar rush gap up open

Here's the bounce I was expecting and man....it's a monster one.... but I'll say it again, although these big gap up days sure feel good if you are bullish they seldom aren't sustainable and tend to get filled within short order. Not only that but they suggest further bearish action will follow. Since about the middle of the November I have found myself talking bearishly quite a bit....well, that's because market action is making me. For the vast majority of this run since March we would tend to see healthy market action characterized by weak/flat opens followed by strength during the afternoon. For the past couple of weeks we have seen the opposite. Dumb money appears to be entering the long side of ths market. This suggests 1 of 2 things. 1) this is the final phase of this rally that began in March or 2) The market is setting up for a correction to shake out these Johnny come lately bulls

I'm thinking the answer will be 2. We'll soon see...

A bit of a mixed bag but I think we go lower eventually

Bears couldn't follow through very much and we only got a mild down day. Option expiration activity and/or end of week covering by shorts may have been a factor...who knows. This is why I don't day trade...way too much random noise volatility. Some people are good at day trading I suppose but the numbers show that the vast majority...something like 90% lose money in the long run. Maybe these's a system out there that consistently works over the long run and I'm sure there's some people who have been successful at it but I haven't found it. Day trading has a "fast money" appeal to it which attracts a lot of gambling prone people and for the most part, it is gambling because of the randomness of intraday volatility.

I've experimented with day trading a bit this year and I have more or less broken even and so I vowed not to waste anymore of my time and effort on it. However, there are some times when I recognize a particular low risk-high reward intraday pattern and those are the times that when I should perhaps take a stab at a day trade but those opportunities are rare....those are the times when I've made money with a day trade but then I would piss those gains away with less than ideal set ups. This is something I vow to improve upon - taking advantage of those rare low risk-high reward intraday opportunities and avoiding any other type day trade.
My strength has always been with the IT and LT moves and that's where I've made my money this year.

There's one particular trader I follow (I won't say his name) who I've seen self-destruct. He even admitted to only having $5k remaining from the $300K he started with. I've watched him make terrible, emotionally driven trades with no game plan at all...he just reacts to whatever his impulses and pain tolerance dictates and he's been getting more and more reckless. This guy is simply an impulsive gambler who calls himself a trader. He mainly trades OTM options and when you act emotionally and impulsively with OTM options you are almost guaranteed to get wiped out because the volatility is tremendous. I feel kind of bad for the guy but it seems like subconsciously he just wants to lose it all so that he'll be done with this game for good...and he will be. There are probably a lot of people out there like this guy. Thanks to the internet gambling has never been easier to do.

As far as markets go ST...I see a mixed bag here now. One trusty indicator I follow says we could see a decent bounce but rydex data and the behavior of the vix say that more downside lies ahead and so I suspect any bounce (if we even see one) will be just that...a bounce which will lead to lower lows.

Brace yourself

We got a market firmly in the red with tech leading to the downside and yet the VIX is flat. Not a good sign at all. Prepare for more downside.

there's good news and bad news

The good news is that today's drop looks like a bull market dip given that the day began with a sizeable gap down and major weakness within the first half hour of the day. This is going to lop off quite a bit of the bullishness being displayed by the dumb money indicator. Eventually that gap will likely get filled which means higher prices are ultimately in store.

The bad news is that the VIX spike that was in the making fizzeld out by the end of day on a just a weak rally attempt. This signals complacency and gives the bears still quite a bit of fuel in the tank to take this market lower and I suspect we will see it lower.

If tommorow we see an up or flat day and the VIX drops below 22 better watch out below because I think we could see the bottom fall out from this market....I'm not calling for a crash here but rather that we could see a move towards 1070 quite quickly.


Bottom line: this market is not done going down even if there's a bounce. But don't get too excited bears because this is likely just a bull market correction.

Bears already getting euphoric

every time the market sees a dip I notice the permabears that dominate the yahoo message boards dancing in the street and they are doing it again now. Poor suckers. They've been beaten into a bloody pulp and and so any hint of red can get them euphoric. You'll know the next bear market is here when the market rolls over and you don't hear a peep from these jokers.

I just saw 2 headlines on bigcharts.com which read as follows:

1.Pimco's Gross and others recomend getting defensive

2. Leading indicators rise for 7th straight month


LOL! I tell you, this rally has been the most hated I have ever seen. Leading indicators (including the market which is the best of them all) have been yelling and screaming that better times are comming but few want to believe. What a nation of permabears we have become.

Bizzaro year 2000 folks.

AAII sentiment showing mild bullishness

It came in at 42% bulls and 32% bears. Bullishness is high enough to warrent a correction only.... it's definatately not a bull killer. We still haven't even seen 1week...not 1 bloody week where bulls outnumbered bears 2:1 and that still wouldn't be a bull market killer either because after a 65% rally it would be completely justified to see such bullishness.

We are seeing the market get slammed early on via a gap down and the SPX has broke below 1100 confirming the bull trap if the bears can finally close the deal and I think today they finally will. If they do it would be a much need cleansing of the dumb money froth that I've been harping on.

We'll see how it goes....

Thoughts about Nat Gas

Natural gas has been sliding almost daily now for the past 4 weeks or so very similar to how it was sliding in August. We all know the reason cited for the slide....massive oversupply as a result of new technology that has allowed us to tap into the massive amounts of gas trapped in shale. There's likely a hype factor here with shale. First of all, it requires much higher gas prices than current ones to make shale plays economical. Second of all, not all shale wells are created equal and people are assuming that the recent success of the ones that have been tapped into will apply to the other potential shale plays out there.

Last week the IEA issued a report saying that there would be an oversupply of gas for the next 5 years. Every fund manager I see on BNN has echoed these same concerns and I remember reading a big article in the financial post in August claiming the same thing. The fundamental problem with natural gas has been well advertised for several months.


Whenever I see the "story" for a particular asset class become so obvious and so recognized by all and most importantly embraced by all that's when I start to look for signs of a long term reversal. When gold was near it's LT low 10 years ago the bearish argument was that there was still a very big overhang of supply from central banks that could crush the market at any time. Now we hear the same thing with gas....5 years of oversupply is going to guarantee prices stay low. I'm no nat gas expert but I find it just a little bit tough to believe that we are going to get this 5 year of oversupply when the number of rigs drilling for natural gas is half of what it was last year. It's laughable. I think a lot of supply we are seeing now could be spill over from last year's high gas prices. With rig counts cut in half since it's going to be interesting to see what supply looks like 3 months from now. In addition, what about the potential for a huge increase in demand for gas a result of the clean energy movement and the low price of gas right now relative to crude?

By the way my good friend Schwartz (the fund manager I discussed last week who I criticized) echoed the same oversupply issues and said this about natural gas: "you should only use it as a trading vehicle". Yet another sign of a looming LT bottom in gas. This was the same comment I heard a fund manager on TV say about gold in 2001.

To play the devil's advocate though, I have seen a lot of bottom fishing from retail investors this summer with gas playing ETFs like UNG and they got ran over by it and there still might be a bit of this going on. This is what tends to happen near major turning points....the majority will embrace the existing trend believing that it will never reverse anytime soon and at the same time weak bottom/top pickers who are trying to be contrarian get ran over. Once those guys get wiped out and give up that's when the true turn happens. Mr. Market can be a cruel, cruel SOB.

This is why rather than catching the falling knife it's better to wait for the turn and it will likely require a tremendous amount of patience and discipline. You will likely miss the bottom doing this but you will have the wind at your back and yet still be early in the trend...that's the sweet spot. I went long gas in October because it looked like gas was consolidating nicely and ready to break out after making a strong rally from the low in September. A breakout did happen but it was a false one and I bailed immediately. I still made out with a gain mind you.

The bottom line is this: whenever you see a particular story about an asset class become so well advertised and fully embraced after there has already been a huge move like with natural gas, be on the lookout for a major trend reversal. But you have to be careful because quite often there is a blow-off/panic phase to end the trend. This is why it's better to wait for clear signs that a reversal and have the wind at your back before committing heavily. Get over your obsession to pick tops and bottoms. If you insist on doing so because you are so sure about it, keep it small because the market can and will remain irrational longer than you can remain solvent.

A watched pot never boils

Ever hear that expression? That's what bears are thinking right now I'm sure. How frustrating must they feel after today when it seemed like for once they could see a decent down day. Although today seemed insignificant it didn't look good underneath the surface. Tech lagged, bonds were down and the VIX dropped quite a bit even though the market was in the red abliet slightly which made me somewhat suprised to see the market recover towards the end like that. But it hasn't changed the bearish messages I have noted and now you can add today's volatility crush to the list. I also noticed gold stocks were by far the weakest sector today even though Gold closed at a new all time high. Was it simply a one day thing because of noise volatility due to option expiration or are gold stocks signaling a turning point for gold looming? We'll find out soon. What I do know is that rydex traders continue to show bearish signs for both equities in general and gold.

Comming into today, cash flow into the rydex precious metals fund equaled that seen when gold stocks made an IT peak on June 1.




It will be interesting to see what AAII sentiment looks like tommorow.

A bit of this and that

Rather uneventful day today. Bears tried to take the market down but bulls said "sorry homey don't play that". Browsing the bear blogs I sensed quite a bit of frustration and hopelessness...quite the opposite of the blow jobs these guys were giving each other a few weeks ago when the market dipped in late October. This could be yet another sign that the bears could be thrown a bone soon...we'll see.

I mentioned the other day about how "dumb money" acts within the first half hour of the day and "smart money" in the last hour of the day. There is actually an indicator that tracks this movement. The "dumb money" vs. "smart money" trends is something I touched upon back in the spring which at the time was giving the bulls a green light....this time around it's giving the bears the green light (or should I say red light?).




Since about September 23 the smart money has turned bearish while the dumb money bullish. Although the market is higher than it was on Sept 23 it's not by much and this indicator tends to be early when giving a signal in the opposite direction of the current trend.

I get the feeling that tomorrow or Thursday could be an inflection point day where we could see some sort of downside reversal. Don't ask me why...I just get this feeling based upon everything I've been seeing. But I'm going to stress this again to all you bears...don't ever expect instant gratification when you go against the grain. Although my gut says tomorrow could be a bearish day I'm prepared if it's not.

I also find myself falling in love...with a stock. A little company I uncovered called Bennett Environmental. A true turnaround story. This company was left for dead after its former CEO was involved with Fraud. It went from a $20 to $0.13 and was left for dead. Now it's back to $1.15. They've really turned themselves around and future EPS for the next 4 quarters is practically guaranteed to be huge relative to the current stock price. This is one of my "investments" as I plan to hold this until at least March of next year. This is one of those "story stocks" that tends to have very high company specific risk and low systematic risk (general market risk). It can become very easy to be attached to a stock when you watch it progress like this...it's like experiencing your kid grow up.

But I know better than to fall in love this way. I will cold heartedly give this stock the boot if I sense something is wrong and short term noise volatility doesn't count as "something wrong". Stocks like this can swing wildly from day to day especially after having a big breakout like it has. I will try my very best however to "be right and sit tight" with this one.

We got the bear trap...but now beware the bull trap

As mentioned earlier today, I do not like the way the market has been advancing as of late. We are seeing many of these gap up and run days indicating emotional type buying. Also, I'm noticing more that we are seeing weakness/flat action in the final hour of trading which is where the "smart money" acts. Combine this market action with some of the other bearish signs I've noted already makes me believe that this new high today in the market will prove to be a bull trap. As I mentioned before though, bearish omens in a bull market don't have as much bite and can be resisted (i.e. ignored) or take a lot more time to show results compared to bullish omens. The same line of thinking goes with bullish omens in a bear market. Therefore if you try to play such counter trend trades you better 1) keep it small and know your uncle point and 2) have patience.

What I do like about the market action is that bonds have been acting a lot better. If equities pull back in the coming days with bonds strengthen further, the market would be in a much better position, in my view, of launching a sustainable move higher. I will not be chasing the market on the long side right here even though I respect that it made a new 52 week high.

It's usually the case that the most tempting set ups in bull markets are shorts and the most tempting sets ups in bear markets are longs...am I right? This is because it's easy to get caught up in the "the market has gone too far too fast in 1 direction" game. This is probably the most popular way people lose money in the market. And I can tell you from my personal experience, my biggest losing trades back in the day have been a result of playing this game. This is why if you insist on playing a counter trend trade you better keep it small and either a) don't commit all your intended capital on 1 entry point or b) have an uncle point and stick with it.

I also think a lot of people try to pick tops in a bull market and bottoms in a bear market because of ego....they want to be able to proudly proclaim "I shorted at the top" or "I bought at the bottom". Fuck ego. All through out the spring and summer I was making note of the legions of retail investors trying to bottom pick what I called the troika of death FAZ,SRS and SKF. I have no doubt in my mind a massive amount of retail investors got their accounts wiped out or severely crippled as a result of this. Some people were able to come to senses in time before it was too late but most it seems have remained bitter, resentful and cynical towards the market.

Get over it people. If you got your ass kicked this year shorting the market don't blame GS, the fed, or anyone else. Look in the mirror and yell at that guy. It's always that guy. You think the market is rigged to only go up? Why the fuck then don't you go long and make, which according to this thesis, risk free money? But you don't because you are biased, you are bitter and you want "revenge". In the end you will be an eternal loser of this game if you think that way and so many people I see out there think this way.

Right now I'm underwater a partial position in ABX puts and if I end up swallowing the loss on this one you won't see me cry about it and blame someone else. Losers do that and I don't want to be known as one.

Today I dumped one of my 4 longs. It was dragging ass not performing to my expectations and I don't want to be caught with it if the markets roll over here. The other long positions I hold right now have had for the most part, low correlation with the market but again, I know this can change if we were to see a major pullback.

I'm obviously not happy to be underwater the ABX puts but given that I'm effectively short the gold sector at a time when it is strenuously overbought I'm kind of "protected" in a way from the sector exploding a lot higher from here without a pullback. In addition, I still have another bullet or 2 to fire given that I only committed 50% of the capital I had in mind for the trade.

Bottom line: The new high in the market today looks to me to be bull trap in the making. Bears may not get instant gratification but I suspect before the end of the month is over 1070 will be seen.

Another gap up

I know that I sometimes get hung up on gaps too much but we are starting to see far too many of these gap up days lately. The "dumb money" i.e. emotional money tends to act in the first half hour of trading and the dumb money has been going parabolicly bullish lately according to this type of behavior. Sure, markets can go higher still but this type of move tends to be the "sugar rush" type which ultimately gets undone.

The put/call ratio is low so far but this can change on a dime as I've notice lately.

A few more ST warning signs

Markets managed to bounce back Friday making the Rydex traders correct for once buying the dip! Actually, this isn't the first time I noticed this happen. The same thing happened in late September when I was on my honeymoon. The market had rolled over, rydex traders bought the dip and the market snapped back a day or 2 later. It took a few days but eventually the market dropped a lot bigger on Oct 1 putting those Rydex dip buyers in the red. A similar thing may very well happen again because there are a few other ST concerns out there.

1) Although the index as measured by the SPX (as well other indices) is pretty much right at the 52 week high, the number of individual stocks within the index making 52 week highs is much lower than the last time the market was at these levels in October. This is a negative breadth divergence. Eventually though, this internal weakness tends to eventually translate into "external" weakness and the broad index level will follow suit to the downside.

2) The NASDAQ/NYSE volume ratio has spiked to 2.14 which is indicating greed as investors seek out the speculative NASDAQ names vs. the "safer" NYSE names. Although there has been the occasional false signal this indicator has been pretty reliable this year in forecasting ST weakness. Mind you, such weakness doesn't always happen the next day but typically it does within 7 trading days.

3) There was a spike in equity mutual fund inflows. Remember last week when I said there was a spike in equity mutual fund redemptions? Look what happened afterwards. These mutual fund investors are so lousy in their timing constantly getting out at ST bottoms and rushing back in at ST tops.


All of this bearish stuff I'm noting are ST concerns. And it should be noted that in a bull market, bearish signals usually don't have as much "bite" as bullish signals and the bear signals often take a lot more time than bullish signals to show results because in a bull market the long term trend is up and it's ultimate destiny to go higher, therefore, any bearish catalysts are "unnatural" to this trend and therefore tends to be resisted and muted. Whereas any bullish catalysts are in harmony with the long term trend and therefore yield results more instantly.

Despite the bearish signs I'm noting it's not a lay-up for the bears because as I've noted a couple days ago, sentiment is still pretty solid from an IT and LT perspective and like I said it can take a few days for ST bearish omens to yield results frustrating you and testing your patience..so don't be hero if you play the downside.

Good day so far with the market but bad day for my ABX puts!

Weird action from option traders today...the put/call ratio was very low for the first hour of the day which made me believe we would see the rally fizzle and then suddenly it spiked to moderately healthy pessimistic levels which of course has helped fuel the rally further.

I bought about 50% of my intended position in ABX puts given what I saw this morning and now I'm getting my ass kicked. This is Mr. Market's punishment for me celebrating the best day I've had all year a couple days ago. It's OK though because the position size is rather small because it's only 50% of what I had in mind and so I will able to take the pain if ABX and gold stocks in general make a run back to the highs they put in a couple days ago to shake out clowns like me who are playing the downside rollover. This was a danger that I knew existed which is why I commited only 50% of my intended position. Plus, I figured if I got the timing wrong it would serve as a partial hedge for other long positons I have...but you know what....I HATE losing even with hedges!

Mr. Market rope a doped me pretty good this morning. Touche Mr. Market Touche

Uh oh! Rydex jokers bought the dip today! ST sell signal now issued

Well, that was fast....the rydex ST buy signal has now turned to a sell signal just like that thanks to big buying on the dip from these guys. Now here's the deal...sell signals haven't always resulted in immediate downside this year but when they didn't and the market went higher or sideways, eventually it would end up giving up those gains and drop further. However, when a Rydex sell signal gets issued after a dip buy like today more often then not, downside follow though occurs the next day or a day or 2 after.

Prior to even seeing the Rydex data tonight I had a suspicion that we could be in store for some more downside because the market pulled back too much today and didn't do well in the final hour of trading. We may end up filling Monday's gap which brings us back to 1070. We'll see how things look like if we get there.

Perhaps if we see some downside bonds will start acting better and we will get the missing piece of the bullish puzzle I've been harping about.

But let me be clear about something....sentiment is still in good shape from an IT perpective. It suggests any downside action will be limited and likely set up for massive bear trap. Going back to the June-July correction comparision I made last week, we may stillin fact be in a similar senario here except this time instead of a lower low we could see a retest or higher low.

Bottom line: if you have any ST longs I would take them off the table here or put in a tight stop. Again, IT wise we should be fine but untill these rydex jokers unwind their bullishness I won't be going long for any trades...instead I'm going to be looking for short exposure via puts on ABX. Gold stocks may have rolled over here and are leading to the downside. The short exposure is as much a hedge as it is a direct bet on ST downside.

Sentiment still in good shape

AAII sentiment came into today with bulls and bears exactly even. A clear unwinding of bearish sentiment but still nowhere close to signaling complacency especially with the market right at the 52 week high. It's amazing how despite a 65% rally we haven't even seen one week where bulls outnumbers bears by 2:1(which would have been justified at least for a week or 2 given the strength of the market) yet we have seen a few times during this rally whereby bears outnumbered bulls 2:1. That's wall of worry action for you. Meanwhile the Rydex Cashflow ratio is suprisingly sitting at 0.96 which is still indicating quite a bit of skepticism. Recall the chart I posted on the weekend which showed the Rydex cash flow ratio at 1 which was the same level seen at the July lows. We've barely moved from that level.

With the market perched a hair away from new 52 week highs, ST sentiment suggests there's plenty of room to bust though. We'll see if it happens today or soon afterwards.

Double top, bear trap or new highs?...I say 1 of the latter 2

Bears have been badly wounded on this latest surge which has caught them flat footed and now the bulls are in position to deal the killer blow and bust this market out to new 52 week highs. I have still yet to have seen any of these stubborn bears that I track put up the white flag. It's amazing the hubris these jokers have. Look, it's one thing to be wrong about the market....everyone get's it wrong....but it's another to stay wrong during an entire 9 month 65% surge and not even admit the possibility that this is a cyclical bull market. Instead all I see from these guys is more table pouding and more hand wringing about the crash that's just around the corner. It's becoming rather comical if you me. And it seems to me that the bear blogs are just as popular as they ever were with the retail types. It's bizzaro year 2000 folks I'm telling you. We are seeing everything that happened in year 2000 play out flipped on it's head.

With the market poised to smash through 1100 to make new 52 week highs bears are desperately banking on a potential double top....they are always going to see patterns that fit their biases. I say no dice to a double top panning out. With AAII sentiment as extreme as it was just last week chances of a double top here are slim. A down/flat day or 2 is certaintly not out of the question to make the appearance of a double top but I highly suspect it would end up making one hell of a bear trap. I'm not going to get caught up in the day to day wiggles. Bulls are in control here untill proven otherwise and I'm focusing my time on my long plays which have being doing specatular. Today was the best day I've had all year!

Rydex data is no longer as favorable to the bulls as it was last week as their bearishness has unwound quite a bit and it's close to hitting modereate levels of bullishiness but it's not there yet.

We'll see what AAII sentiment shows tommorow. Last week as I noted it showed over a 2:1 ratio of bears over bulls....is it any suprise that the market staged a massive rally right afterwards? If history is any guide, will we likely see only a modest unwinding of bearish sentiment from these gurus.

I know I said I was going to discuss gas today but I'm going to pass gas (pun intended). I'll discuss it tommorow or on the weekend.

Late night Update:

Here's a post I just read on the SPY message board on yahoo finance

Last call for jibs/jabs or just anything you want to say to your Beebs. Tonight is the night I say good bye to all my SPY board folks... I won't be back...

You've all been great sports and good spirits, wish I could thank each and every one of you... even those cats that have bugged out of here already.

Counting down before pulling the plug on the account...

These are the types of posts you are supposed to see when the market is crashing not near at 52 week highs! I tell you...bizzaro year 2000!...retail investors in 2000 got wiped out the same way "buying the dip" on their favorite tech stocks that were falling from grace. This time around I suspect, like this guy here, they got wiped out buying the dip on their favorite bear etfs because this is not the first time I have seen someone make a post like this and I usually see them when the market makes a new high. So sad to see this. Investors should be celebrating when the market makes new highs instead it seems they are getting hurt by it!

are we comming full circle with gold?

Nothing really notable to mention regarding the action today so I want to talk about gold again.

It's dejavu all over again! This afternoon I was watching BNN and there was a segment with a fund manager by the name of Schwartz from Baskin Financial Management discussing stocks he likes and doesn't like. As I listened to him I was saying to myself "this guy probably underperforms the market". I said this not because of the stocks themselves he liked or didn't like but because of the reasons why he liked/disliked the stocks. The reasons he gave were things like "the company has a strong balance sheet, they had a great quarter, and they have a great product" or any other reasons relating to things that are probably already well known and obvious to other guys like himself....a recipe for mediocrity at best.

The segment then turned to Schwartz taking calls from viewers. One of the viewers asked about gold and I couldn't believe the response this guy gave. He said that he wasn't really sure why Gold has been doing so well as of late (i.e. he thinks this latest move appears unjustified) but he's long gold anyways via Barrick because he doesn't want to be left behind if gold goes to $1500 like so many analysts are calling for. When I heard this I laughed and shook my head. This folks, is called herding - one of psychological traps investors are prone too even the so called "pros".

I saw similar herding back in the fall of 2000 about 9 years from today. Back when I was an assistant to an advisor fresh out of school it was my job to analyze all of the mutual funds available to the advisor. I noticed that pretty much all of the Canadian equity funds (even including some of the value funds!) had Nortel as their top holding by leaps and bounds. I said to myself how the fuck could these "experts" with their CFAs and MBAs in good conscience have Nortel as their number 1 holding? Surely, they must have known it was grossly overvalued or did they too get caught up in the tech "new era" euphoria? I think it was a bit of both. Anyhow, we all know how that story ended. We are seeing a similar thing happen here with the gold sector. It is now a "must have" holding although I'll admit that the feeling isn't as intense as the desire to hold Nortel back then given that this stock alone make up 1/3 of the ENTIRE Canadian Index!

As I suspected and made mention recently, we have come full circle when it comes to gold. In a recent post I said coming into this decade most investors, especially institutional ones, wouldn't touch gold with a 10 foot poll when gold was about $260 trading well below the average cost of production and central bankers were tripping over themselves to sell their gold reserves. Only the hard core gold bugs who have been permabullish on gold since the late 70's were willing buyers of gold stocks.

In late 2000 I called Kinross gold asking for information from investor relations and I was able to actually speak to the president of the company! I asked him what his thoughts were. He said the company was in preservation mode and although he felt the stock was quite cheap he was too afraid to do a buyback because it would be in his words "like pissing against the wind" lol! That folks is what a long term 20 year secular bear market bottom looks like. My timing on turning bullish on gold in early 2001 couldn't have been better....it was impeccable. My mistake was selling too soon....waaaay too soon. I've been agnostic about gold for a few years now except late this summer when I turned bullish suspecting a breakout above $1K appeared immanent. I am no longer bullish...you can consider me agnostic again ready to turn long term bearish as calls for $1500, $2000 and other outrageous predictions are abound and guys like Schwartz, who 10 years ago probably didn't want a thing to do with gold, feel compelled to remain long gold stocks even though he admitted that the latest move in gold appears bubbly. These are symptoms of a long term top that warrants watching. But you need to respect that a bull run or bubble run or whatever you want to call it, can last longer than you can remain solvent especially when the asset in question keeps making new fresh all time highs. Better to wait for clear signs that the tide is about to turn otherwise you could get run over and that's what I'm doing here with gold stocks....I'm watching them with a close bearish eye.

A few words regarding Natural gas... Last time I mentioned it about a month ago, I believed it looked ready for an upside breakout....and it did break out shortly after but the breakout subsequently failed and it has been sliding pretty badly since. I'll discuss gas more tomorrow and what my good friend Schwartz had to say about it.

FYI....

I just included a pay pall donation button on my site. I did this ONLY because a person has insisted he donate something to me. I'm quite flattered by this. This site was never intended to be a business venture for me nor do I ever intend it to be. As you can see there are no cheezy adds on my site. If nobody else donates a cent I won't give a rat's ass.

I created this blog first and foremost for myself. I've been keeping a trading diary for a couple of years and I felt that by putting it online it would allow me to be more objective about my thoughts and allow for interaction amongst other investors. So far it's done exactly that and I've made some virtual friends as a result.

I intend to make a living by trading and investing not by making money with a blog site or some subscription service. Ever wonder why someone runs a subscription service to begin with? I mean, if you were such a guru why bother with a subscription service? You should be rolling in so much cash and couldn't be bothered with such a thing. Do you see Buffet or Soros running a subscription service?

Bears get crushed...yet again

The rydex clowns along with all the perma bears out there that were so eager to short any bounce off of last weeks lows got their asses handed to them...again. I suspect all this is going to do is create more anger, more skepticism and more hatred of this rally.

Is there anything I didn't like about today's rally? Well, we started with a big gap again and the equity put/call ratio was quite low today....but a low reading is justified to a degree given today's strength. All in all, market action was quite good. And by the way, most of the time there's always something not to like about a rally. And on the downside it works the same. These are the "hooks" I've mentioned before that try to keep you from riding the trend properly. For example, since April bears have been complaining about the low volume of this rally. This gave them false assurance that the rally was doomed and so they shorted at will. I warned here back then that I heard the same excuse being used by bears in the summer of 2003.

When it comes to the broad markets I have never found volume to indicate anything meaningful except for an indicator of a panic bottom whereby you typically see a volume surge. Volume works much better as an indicator of fear or greed for individual stocks or sector ETFS - which tend to see spikes at ST tops and bottoms.

Markets are now quite ST overbought so let's see what happens here. When the market broke out of the July bottom there was a big buying thrust that rendered the market very ST overbought just as it is now. What ended up happening was that the market still found a way to grind higher in the following days while working off that overbought condition. You don't often see that sort of thing happen but it happens. It would not be bullish if the market gives back a lot of today's gains tomorrow. If the market gives up about half of today's gains in the next day or 2 be on high alert for a complete reversal of today's gains. A mild pullback or flattish day would be what the bulls should want to see here on any downside move. The market should not be giving convenient entry points for anyone who missed the boat.

Bulls are now a stone throws away from making a new 52 week high. If you've been riding the bull train as of late congrats...but don't get cocky. Keep your game tight.

Rydex ratio flashing "all in" Intermediate term buy signal

Well, it's pretty much a done deal for the bears. The rydex data was giving a weak buy signal near the recent low and it simply got stronger as the market started bouncing. Cash flow into Rydex bull funds have plummeted to the lowest level of the year while cash flows into Rydex bear funds have spiked to the highest level of the year! I was waiting for cash flows into money market funds to spike but something even more bullish occured - a cash flow spike into bear funds!

Take a look now at the cash flow adusted Rydex ratio. It's at the same level as it was right at the July lows.




Is there anything else that can confirm this strong bullish signal? You bet. As mentined recently AAII sentiment showed over a 2:1 ratio of bears vs bulls the most bearish sentiment since the March bottom. At the July lows a similar 2:1 ratio occured. In addition, this week showed a large net redemption spike in equity mutual funds which also occured at the July lows.

The only significant difference between the 2 periods is the behavior of bonds which is showing weakness this time around instread of strength. Am I making too much of this? Could this be one the "hooks" that I talked about before that keeps one from embracing the proper trend? It could be, because even though bonds are acting weak yields are still lower than what they were in the summer and so perhaps higher bonds yields aren't going to be danger to equites untill they hit higher levels. It's also possible that we see bonds rally as the markets rally.

I would feel a lot more confident if all of the main indicators I look at were in harmoney but this often doesn't happen and so you need to decide which ones to embrace and which ones to ignore without being biased.

Bottom line: A strong intermediate term buy signal has been flashed. Although a retest of SPX 1030 or lower low is still possible, it's becoming more likely that the market will simply power to new YTD highs without the retest because every other time Rydex traders were this bearish the market simply powered ahead without looking back. This week we should find out which path will be taken.

I would just love to see the markets retest/break the lows with bonds and the VIX spiking to give me a super strong buy signal but waiting for things to be perfect before making a move is asking for too much. As a result, I have been selectively buying some individual names on weakness leaving myself a reserve in cash just in case the retest/lower low senario plays out. What I may end up doing as a partial hedge is buying OTM puts on ABX again because unlike with general equtities, rydex cash flow and sentiment towards gold stocks is signaling an immanent decline.

moment of truth comming soon......

Based on sentiment from Rydex and AAII bears are doomed big time....the question I ask, is this market going to run away to the upside right here right now or will the retest/lower low senario play out first?

You know I hate gaps because most tend to inevidably get filled but there's ones that don't. For instance there's a sizable gap in July that didn't get filled. This gap was a breakout gap from a ST low. In fact, the rally off the March bottom began with a gap and if that doesn't convince you, there's a huge unfilled gap that goes back to 1991. This is why you shouldn't get too hung up on gaps...although this is something I tend to do. Gaps that tend to occur near inflection points are the ones that I find make up the majority of unfilled gaps. So, it's quite possible that this gap could go unfilled plus it was done with tech leading. I'm not saying I believe this gap will go unfilled but rather that it would not suprise me much if it doesn't.

If we are going to see a retest or lower low play out, then we shouldn't see the market close above 1085. If it does you should probably kiss this senario goodbye.

With AAII bearish sentiment so extreme and Rydex data almost giving an "all in" buy signal a retest or lower low would probably set up for one of the best risk/reward long setups of the year. But I'll say this....there's enough pessimism right now and enough room before the market hits extreme overbought again such that we could see the market simply go straight to 1100 right here right now and smash though it like an anvil through paper. Yes, there's the bearish issues I outlined yesterday which haven't gone away....I'm just saying that the bulls have plenty of gas in the tank to make such a move unlike on October 12th when I mentioned that the market appeared fatigued.

The bottom line is this....bears are ultimately going to get screwed whether it's now or in a few weeks from now after a retest or lower low. That AAII extreme bearish sentiment reading pretty much sealed their fate. We should know in the next 3-4 trading days which of the above 2 paths will be taken.

AAII bull/bear ratio showing bearish extreme

AAII bulls came into today at only 22% while bears are at 56%! This is the most bearish sentiment since the March bottom which obviously is very good news for the bulls. Now, if only everything else could fall into place here....

Again we gapped up (which is so annoying) but this time tech is leading (but is it a 1 day wonder due to Cisco?) which makes it more likely than yesterday for the gap to hold this time. Bonds are still weak though.

This is such a frustrating situation for me given all the mixed signals...I hate when this happens! the current AAII reading gives solid evidence the slide in the market we've seen since late October is just a correction. In fact, it's bearish enough to suggest that it's over! But the missing links I discussed earlier and this gap up action keep me at back and I might end up missing the boat here as a result. I just can't bring myself to chase this gap opening.....I FUCKING HATE CHASING GAPS!

The ideal senario would be for the market to retest the lows or make a lower low, with bonds, the VIX and the put/call ratio surging. Of course this is the ideal situation which often doesn't come to pass....

Frustrating times for me!!!

Playing the ursine advocate

Tonight I'm going to take a different approach and make arguments that support the bear case in the short term. There's been no change with the Rydex stats tonight. As mentioned yesterday, 2 out of the 3 Rydex indicators are flashing a strong buy signal but the 3rd and most important one is still holding out. If that one ends up giving the green light as well and market action starts to improve (which it hasn't due to relative weakness in tech and weakness in bonds), I will become aggressively bullish. Until then I'm doing a whole lot of nothing and I'll continue to do so for as long as it takes. Anyhow...the bear case as promised.....

Unlike what happened last Thursday, today's gap crapped. Were there any clues that this was going to happen? I hate to sound like a broken record but tech was relatively weaker although not by a huge amount but emerging markets were strong (I consider the action in tech however more important). Bonds also broke down to a new ST low. I've been comparing this period to the June-July slide. At the low of that correction, it coincided with a strong move in bonds. TLT for example gained 10% from the time equities rolled over in mid June to their low point in early July.
In fact, if you look at every ST low since the March bottom you will see that bonds had been showing some sort of strength. Given that bonds have made a NEW LOW despite the fact equities have rolled over already, strongly suggests further weakness in equities lies ahead.

We also see the market ignoring good news. This could be an indication of bad news coming down the pipe or that the market has priced in all the good news for now. The burden of proof lies with the bulls now.

The behavior of the option market is also bearish. Sure, we have seen quite a spike in the VIX but look at how quickly it comes down on just any hint of strength. For example, over the last 2 days the SPX is up a modest 6 points yet the VIX has dropped 10%. That signals complacency. Option traders have demonstrated a spike in bearishness coinciding with the market dropping 6% but they have also been quick to flip back to buying calls aggressively on any strength once again signaling complacency.

Although 2 out of 3 Rydex indicators are showing strong buy signals the 3rd and most important indicator is NOT. Besides, the rydex data is the only one set of indicators giving a buy signal overall. Other clues such as market action, the behavior of the vix and option traders are not confirming and therefore the rydex data could very well be giving a false signal.

So there you have it...the ST bear case. You have to admit, there's some good points here, namely the behavior of bonds. Take a look at every ST low we've seen....mid May, early July, Sept 1, Oct 1...all coincided with bonds being strong for at least 1week prior. This confirms my notion that any rally we see will be ST only and a retest or lower low lies ahead. I'm not sure if today we saw the end of the ST rally…it’s a coin flip if you ask me. The next couple of days could bring fireworks in either direction due to the employment data to be released.
Truth be told, I believe the lower low scenario looks like it will play out eventually so be prepared for it. It's by no means a lay up on the short side given the rydex data. It's a mixed bag and in these situations I tend to just watch the action and wait for dust to settle. I may attempt a short side trade if there's a good set up but if in doubt I'll just watch the action.

All in all, I believe the bears have the upper hand in the ST even if the market manages to rally for a day or 2 unless of course we start seeing the negative action of bonds, tech and option data do an about face.

ramblings about gold

Back on Sept 4th I discussed gold's likelihood of a breakout above 1k. Gold had been going up for apparently no reason as the US dollar was trading more or less flat, jewelry demand was sluggish and gold lease rates were low. I speculated the reason it may be going up was due to other factors that can drive it namely, investment/speculation demand due to fears of a declining dollar. It turns out this was the correct reason. Yes the dollar did drop as well but it only dropped about 4-5% since Sept until now while gold has gone up about 15%.

Gold got a dose of Viagra yesterday when it was revealed that the Indian central bank bought 200 tonnes of the stuff but did you know that they bought the stuff between the dates of Oct 19-30th? Therefore the price of gold got a boner AFTER the fact which makes me question the sustainability of such a move. Yesterday the US dollar was actually up modestly vs. most currencies but yet gold was up huge so this means that it wasn't a US dollar drop that fueled the surge...it seems to me that this is based purely on speculation (and mabey also scrambling short sellers) that India's purchase is a signal that other central banks are going to follow India's lead, namely, China.

Now, I respect the fact that when something makes a new fresh all time high it usually goes on to make more of them...it's usually a powerful signal, but if you look at the reasons behind this latest surge it seems emotionally driven....a blow-off type move prone to failure.

If possible I would like to ask the central bankers of the world who apparently are now showing interest in gold this....where the fuck were you $500-$600 ago? Oh wait a second....you were SELLING your gold reserves! Throughout the 1990's one of the big reasons why the price of gold languished was because of the overhang of central bank SELLING and leasing of gold! It was getting so bad that in 1999 The Central Bank Gold Agreement and Washington Agreement was initiated to limit central bank gold sales. In addition to central bank gold sales many gold producers (Barrick gold in particular) heavily hedged their production which again puts pressure on the price of gold via the futures market.

Barrick by the way is quite hilarious. In September they did an equity financing to unwind their hedge book which they will take massive losses on. Again I ask where the fuck were you clowns $500-600 ago? You would figure that the largest gold company in the world would be experts on gold and thus would have smartly reduced their hedges years ago but no....it took 10 years!..10 friggen years and a 300% rise in the price for them to do so!!! Talk about selling low and buying high!LOL!

You see, even the prestigious heads of the corporate world and central banks are not immune from falling into the same psychological traps that the everyday Joe Six-pack retail investor fall into. In the case of gold, central bankers and hedgers like Barrick fell into the recalability trap - after languishing for 20 years they took an overly cautious approach to the rise in the price of gold this decade (until now) because throughout the 1980's and 1990's gold rallies were short lived and eventually led to lower lows. Therefore, coming into this decade central bankers and hedgers were conditioned to believe that the price of gold could never rise again to its former glory, that it was no longer an important asset class.

Now, 10 years later only after 2 major bear markets, a near collapse in the global financial system and a massive 300% increase in the price of gold in 10 years we are seeing a 180 degree shift in opinion from these jokers. So the question I ask myself is this....should these jokers be faded? Are the actions of Barrick gold and central bankers signaling a long term contrarian sell signal for gold or is there still yet another big leg higher to go since we may still see even more buying from central banks? I'm not really sure right now but I think there's a good chance at this happening.

To give the bullish argument some merit, there's quite a bit of room for central bank gold reserves to climb even higher because they are still a small percentage of their total reserves. But this is a similar argument tech bulls gave in 2000 when they said the internet was only near the beginning of its massive growth potential (they were right by the way but tech stocks still tanked 90 %!)

One thing's for sure is that I'm NOT going to be on board with this latest surge in gold as per the reasons I've mentioned. What I'm also sure about is this....the easy money has been made with gold. Coming into this decade anyone bullish on gold was ridiculed. The same institutional investors who smugly laughed at the gold bulls back then now advocate gold as important must have asset class and to buy it on any dips. I was quite bullish on gold going into 2001 and quite bearish on the markets but I was still a rookie. I sold waaaay too early on the gold stocks I bought...(I shudder every time think about how much I could have made if I had held on for just another year or 2). When gold first started turning heads in the spring of 2001 with a significant rally to about $290 I remember guys like Cramer and Doug Kass bashing the rally with impunity. I remember a fund manager on CNBC saying "gold will not be a good long term investment...you have to trade it". Back then if you said gold was going to $1000 before the end of the decade most people would have laughed at you looked at you as a quack. Now if you say gold is going to $2000 in the next few years you could find a lot of people who would agree with you.


What will it take for the long term trend in gold to turn bearish? It would take the US dollar to regain its status as the world's ultimate reserve currency and that in turn will only come about when the pessimism regarding the long term financial soundness of the US economy and its fall from grace as the world's 1 and only superpower has climaxed. Interest rate differentials and such will have cyclical impacts.

I've been hearing news anchors on TV, including those that are not of the financial media mention the line "the long term trend of the US dollar is down". Remember what I said about the media, especially the non-financial media....by the time they are aware of a trend it's usually in its late stages or has already turned and they just don't realize it yet.

2 out of 3 ain't bad

still not getting the full fledged buy signal from the rydex MM indicator but overall the rydex buy signal is quite solid. Remember, this is a ST indicator.
It looks like we're going to get a strong gap up open....you know my feelings towards gaps.

The game plan I mentinoned Monday may in fact play out here which was a good rally followed by a retest or lower low (of the recent lows) sometime later in the month. We'll just see how it goes.

Buy signal just got stronger

Alright, so the bulls managed to deny me of my bearish prediction today with a marginal green close...this is why you should NEVER listen to a word a say! Notice how the weak market action I pointed out early on changed to the point where tech went from lagging to slightly outpreforming the SPX and emerging markets went from badly lagging to just about market preform by the end of the day. Usually you don't see such intraday flips like this but they can and will happen. Also, I noticed the put/call ratio firmed up quite a bit by miday showing that bears were pressing and then after the squeeze it went back down again.

Also notable was the surge in gold to a new all time high thanks to the purchase of 200 tons by the Indian Central bank. So much for my bearish bent on gold stocks huh? You see, nobody and I mean nobody is immune to the motto of this blog. Sonner or later the market will make a fool out of you. Ok, I'm being hard on myself and the above was tounge in cheek. Predicting markets is hard enough and I know full well that making predictions on the day to day wiggles of the market is especially tough because the shorter the time frame the more randomness will play a factor in reducing predictive capability.

Ok, on to the good stuff...2 out of the 3 rydex measures I track are flashing a strong buy signal tonight! I will find out if the 3rd and most important one is also confirming tommorow morning.

Market action not good so far

not because the market is in the red but because tech and emerging markets are lagging and with the market as oversold as it is, if it was to snap back it should have done so by now instead of still dicking around in the red like this....this is a sign of weakness

Gun to my head.....we close in the red today

hmmm....buy signal isn't as strong as I'd thought...I'm revising it to a weak buy for now

We didn't see the surge in MM funds that I thought would have shown this morning but the rydex ratio is definately heading in the right direction. It's ALMOST there but not quite!

All in all, it appears as though the bears are using up a lot of gas here when you look at the VIX, put/call ratios and rydex data however they could still have one more decent swipe at this market and we aren't quite there yet with respect to a strong contrarian buy signal.

Mabey I'm getting too picky here and frankly I think I am. Buying on weakness from this point would likely pay off nicely a couple of months from now....just be prepared though for the possiblity for more pain and so don't use up all of your ammo.

Short term buy signal flashed...but don't get overzealous now

From the looks of some Rydex data tonight, the bulls now have the green light to make at the very least, a short term charge here. I'll get a full picture tommorow morning but as of now the bulls look to be in a positon to make a go of it here. Any further downside would likely be limited and likely just serve to strenghthen the buy signal.

The total put/call ratio came in today at 1.03 once again indicating a healthy dose of pessimism which is also causing the 10DMA to rapidly climb. But, on the negative side of the ledger bonds remained weak today and tech lagged but hey, the world can never be perfect.

The conditions of the market remind me a lot of what happened in June....

1) the market rolled over from a top,

2) there was a rally attempt that failed quickly

3) then the second rally attempt which came from a lower low succeeded for about a week. Then in early July....

4) the market rolled over and made yet another lower low from which the true bottom was made which led to a rip roaring rally to new highs

Compare this to what we've seen so far recently. We rolled over from a top, we saw a rally attempt fail quickly and made a lower low and now we may be on verge of seeing 3) play out which still leaves 4)...a lower low sometime down the road.

You can see on the charts below the behavior of the market and key indicators in June and what has transpired recently.....notice the similiarities.







Let's be careful here now....the past rarely repeats the exact same way in the futue although it often rhymes and so I wouldn't get too hung up on the notion of a June-July rerun but it does fit given the extreme reading of the oversold/overbought indicator registered last week. As I said before, in the past whenever such extreme oversold readings were registered it led to a good rally followed by either a retest or lower low in the market....I believe there's a very good chance we may be at the "good rally" part.

I'll make a quick post tommorow morning to confirm if in fact the rydex data showed a rush back into money market funds which I believe happened.

Bizzaro year 2000 still playing out

Back in August I wrote this claiming that the conditions in the market were the complete opposite of what I observed back in 2000. As I mentioned in that piece, I believed a negativity bubble burst back in March, but you know what? Although that bubble may have burst it is far, far from being completely deflated. I've been browsing the bear blogs this weekend to get a feel for what the bears are thinking and it's quite clear they are now fully prepared and willing to short the market on any rallies. In their eyes, it's pretty much a certainty that the rally is over and the market is starting a "wave C" decline according the gurus of Elliot Wave Analysis. I got to say something about "Elliot Wave"....it is the biggest bunch of bullshit I have ever come across in my life! Their abc, 123 impulsive, blah blah blah bullshit is just that....bullshit! Whether you are bearish or bullish you can pretty much use EW to identify the "waves" that fit your bias. It's such subjective, bias confirming bullshit. If anyone who reads this uses EW and got offended I apologize....but that's just the way I feel!

By the way, anyone who worships Prechter, the chief guru of EW who was bearish just prior to the collapse of 2008 should know this....he called for depression 2 back in 1987 and remained bearish ever since that time. A stopped clock is right twice a day as the saying goes. Back in 2001 he also predicted gold would go to $200 when it was at $300. And did you ever hear him say "boy did I really get that wrong big time". Nope. Instead he uses the all too familiar "I'm going to be right, I'm just early" excuse and never once capitulated as far as I know. I'm sorry but being wrong for 20 years doesn't cut it as "being early" in my book even if now we get the collapse he's been calling for because no bear would be solvent today if they shorted the market in 1987. Yet a lot of newbie’s worship this guy just because he finally gets a call or 2 right after being dead wrong most of the time for decades.

Enough about Prechter. Let's go back to the markets. One of the bear sites I track made mention that CNBC's ratings have plummeted from a year ago by 50% and the popularity of bearish blogs like his own site has increased dramatically since. He claims "If the economic recovery was here for real, wouldn't the viewer trends be the exact opposite?"
To that I say hell no! If anything this confirms that the economic recovery and the rally we have seen is in fact real! The general public, i.e. the small time investor is the whipping boy of the stock market. THEY ARE THE LOSERS of this game. I've seen it first hand as a former investment advisor....the retail public gets interested in the stock market in the final stages of the bull market an then ends up selling in disgust swearing off stocks for good in the final stages of the bear market (or they sell into the first rally of the next bull market). So, the typical retail investor makes money for about 6-12 months and then ends up seeing all their gains turn to heavy losses before swearing off stocks for good and as I've seen during this cycle, a lot of them turn to the "dark side" and become perma bears.

I'm very happy to see that CNBC ratings have crashed, that the bearish blog sites are still very popular and that I still hear commercials on TV make mention of "tough economic times" all while the market has had one of the greatest rallies in history. All of this gives me a lot more confidence that my longer term bullish outlook is the correct one.