As per my previous post, I hypothesized that the 1040 low would be revisited before the summer was over and now here we are...a lot quicker than I expected. Apparently the reason for today's beating is concern regarding China as Chinese leading economic indicators have shown the smallest gain in five months. Seems like a pretty flimsy an excuse for such a steep sell-off doesn't it? I mean, it seems as if everyone is expecting and even welcoming a cooling down in the Chinese economy and it's not as if leading indicators have dropped sharply...they still showed a gain! There's other concerns that have been building up as well. Corporate bond spreads around the globe have been rising and CDS spreads in Europe are flaring up again. It seems apparent to me that the market was on its way down anyways and the China news was simply an excuse to get it down.
The sharp drop we've seen in the market lately is what tends to happen when you have a combination of deteriorating structural conditions combined with weak handed technical types holding long positions with a lack of bears pressing shorts (another thing I have noticed lately). I warned about how the market had been rising via gap up action driven by these weak handed technical types and how such types will bail en masse the instant the market goes against them. It's not a good sign for the bulls when ST overbought conditions result in steep sell-offs like this. In bull market conditions like we've seen prior to May, such ST overbought conditions were either ignored or resulted in mild pullbacks/sideways action. This is yet another sign that the market that has changed stripes since May.
Notice how the market has once again conveniently and neatly bounced near the 1040 low (so far today). This is the 3rd time now. I'll say it again...I will not trust such bounces because they have an “artificial" feel to them. Remember how I quoted a strategist a few weeks ago who said that a break of 1040 would signal the end of the bull market since March of 2009? IMO, we need to see such a break in order to have any hopes of a genuine low. We need to see white knuckle fear and capitulation from weak bulls like that strategist and I'm sure there's more like him out there hanging on to their longs by a thread....they need to be wiped out.
The 10 year bond yield has dipped below 3% today. There's 2 ways to look at this. 1) It means the bond market is signaling deflation is coming i.e. signficant economic weakness or 2) an emotional flight to safety which makes stock prices more attractively valued. I'd guess it's a combo of both but I'd put a bit more weight into 1).
In the past I've mentioned how the yield curve was the best economist in the world and the best single leading economic indicator. Last year I mentioned several times how the steep yield curve was very bullish signaling good times ahead. With the 10 year bond dipping below 3%, the yield curve is still steep technically speaking, but we are in an odd situation whereby we can't get the traditional warning of a recession from the yield curve because it can never get flat or inverted given that the short end is at 0% (it's extremely unlikely the 10 year bond yield would ever get anywhere close to 0% even in a depression...although it did happen in Japan) With the 10 year yield below 3% I have to admit that this could be a bad signal for the US economy. Low government bond yields are a good thing because borrowing costs tend to drop along side with them and stock prices are more attractive on a relative value basis vs. bonds. But "too low" a yield may signal that serious deflation is ahead which is very bad for corporate profits and thus the relative value vs. bonds is simply an illusion because corporate earnings may be heading south in a major way. This is the weakness of the so called "fed model" which determines the fair valuation of equities by comparing the earnings yield to the 10 year government bond yield.
I've mentioned in the past that I keep an eye on government bond yields as an indicator for equities. It's a tricky thing. Generally, rising bond yields are bad for equities and falling bond yields are good for them but there are times when the opposite is true. I explained above when falling bond yields can actually be bearish for equities. Rising bond yields can actually be bullish for equities as well when it is occurring from low levels because it signals that deflation concerns are abating i.e. the economy is anticipated to grow. This is what happened in early 2009.
Bottom line: Since May began, volatility has risen substantially and any upside progress has been done in a shitty way i.e. via gap ups and morning strength which can't be trusted as sustainable (in my opinion). The latest ST overbought condition has resulted in a significant bearish "bite" which is a change in character for the market. This is bear market behavior and so we have to assume that at the very least we are in a prolonged correction phase. Untill such behavior changes I have to respect a potential for bearish resolution to this consolidation phase we are seeing (a bullish resolution is still on the table) and the best thing to do is step aside or take ST trading positions (although it will be difficult and frustrating to capitalize). I've chosen the former for now. I'm too busy, distracted and not confident enough right now to do the latter. The only bullish thing about today's action is that there's a big gap to be filled on the upside now. I said the same thing about a month ago when the market gaped down on the poor payroll figure. Eventually that gap did get filled...but there was additional downside first and it took some time.
Tuesday, June 29, 2010
Monday, June 21, 2010
pullback probably comming soon
I haven't made a trade for over a month and a half and I've been largely out of the market since then. I get very tempted to play some ST moves i.e. the game of chicken but I've refrained from doing so for a couple reasons. The first one being is that I'm not getting enough of a "feel" for it. In other words, I can't seem to get a good read on the market when it comes to the ST which gives me a lack conviction to hold positions. I mentioned previously how the Rydex ratio was giving a good buy signal but I couldn't pull the trigger because other issues were bothering me, namely, the gap up nature of market advances (which I call poor upside action since it tends to eventually lead to full retracement). When I get conflicting signals like this I do nothing.
The other reason for my inactivity is that I'm a huge soccer fan and so the world cup has been an additional distraction to me. I've watched most of the games which have started from 7:30am with the last one being over at about 4:20pm or so.
The market is now ST overbought and so a pullback is in the cards here. I'm not sure if it will be a deep one this time around but I strongly suspect that by the time the summer is over there will be another "scare" in the market or 2 that sends us back towards the 1040 low. This advance has been built on for the most part, morning strength and I know I sound like a broken record saying this but I don't trust such action and view it as unsustainable with full retracement likely sometime down the road. Now, I know very well that if I turn out to be right the market is not going to make it easy for bears to profit it from it. If too many people try to game the pullback they will get squeezed and squeezed and squeezed until they give up and once they do that's when you get the air pockets to the downside that kind of come out of nowhere like what we saw with the flash crash.
The news out of China is a mild positive but nothing I would take too seriously. I remain neutral here longer term. I will indeed still try to do some shorter term trading but if in doubt I will still stay out. One might say to me " hey you booked some decent gains this year so far, why not just let loose and take a gamble or 2?" I'm sorry but I don't treat any part of my account as the "house's money". Yes, it does give me some breathing room and the ability to be aggressive when there's a strong edge but I will not take reckless gambles simply because I'm up. This is mistake many amateurs make. One of the rules I have for myself is to treat every dollar like it's my starting capital. I do realize however that sometimes I'm overly cautious and miss opportunities because I'm too picky (my friends would say the same thing about me when it came to girls back in the day). That's something I need to work on.
The other reason for my inactivity is that I'm a huge soccer fan and so the world cup has been an additional distraction to me. I've watched most of the games which have started from 7:30am with the last one being over at about 4:20pm or so.
The market is now ST overbought and so a pullback is in the cards here. I'm not sure if it will be a deep one this time around but I strongly suspect that by the time the summer is over there will be another "scare" in the market or 2 that sends us back towards the 1040 low. This advance has been built on for the most part, morning strength and I know I sound like a broken record saying this but I don't trust such action and view it as unsustainable with full retracement likely sometime down the road. Now, I know very well that if I turn out to be right the market is not going to make it easy for bears to profit it from it. If too many people try to game the pullback they will get squeezed and squeezed and squeezed until they give up and once they do that's when you get the air pockets to the downside that kind of come out of nowhere like what we saw with the flash crash.
The news out of China is a mild positive but nothing I would take too seriously. I remain neutral here longer term. I will indeed still try to do some shorter term trading but if in doubt I will still stay out. One might say to me " hey you booked some decent gains this year so far, why not just let loose and take a gamble or 2?" I'm sorry but I don't treat any part of my account as the "house's money". Yes, it does give me some breathing room and the ability to be aggressive when there's a strong edge but I will not take reckless gambles simply because I'm up. This is mistake many amateurs make. One of the rules I have for myself is to treat every dollar like it's my starting capital. I do realize however that sometimes I'm overly cautious and miss opportunities because I'm too picky (my friends would say the same thing about me when it came to girls back in the day). That's something I need to work on.
Monday, June 14, 2010
At a crossroads
I recently read about how George Soros thinks we are in act 2 of the credit crisis. It's the bear case which essentially suggests that governments around the world are going to go default and fall like dominos the same way banks did in 2008. Bears suggest that the chain of events will unfold similar to how they did in 2007-2008 when the subprime meltdown was the first symptom of the collapse that was to come. Greece is the equivalent to subprime they say.
The chant is getting louder and louder for restructuring of these debts. There is little confidence it seems that austerity measures alone is going to cut it in the long run. But, EU leaders are being stubborn and are not listening to the market. If debts are restructured and European banks take their write downs I think it would clear out the dead wood in the system and actually allow the market to resume its upward course in a sustainable way.
Market action continues to resemble that of a bear market. Again, I must stress that during bull market corrections it's not uncommon to see such bear market action but I have to admit this poor action has been going on too long. Since May 1, volatility has gone up tremendously and every time we've seen strength in the market it's mainly been done via gap up action. That's bear market behavior. I showed in my previous post how the Rydex ratio suggests pessimism may be overdone here but this may very well only pertain to the ST/IT similar to what happened in Mid August 2007.
We are at a crossroads here folks. The next 4 months or so is going to be very important. I've made the case well before this correction began that bull markets have a multi-month consolidation phase after about the first year (give or take a couple months) of their inception. Therefore, the action we've seen thus far could very well be such a consolidation. But there are some ominous signs out there. For one, there's been poor market action as I've described in prior posts but in addition to this, we also have smart money leading indicators turning decisively negative.
There's an outfit called Economic Cycle Research Institute (ECRI) who predicts business cycles based upon their proprietary leading indicators. I first heard about these guys in 2001 and they’ve earned my respect. They correctly called recessions and recoveries in advance. Currently their leading indicators have turned down decisively negative but the ECRI has stated that it's too early to say if this means that there's going to be a double dip or if it's just a moderation after the initial thrust of an economic recovery which has indeed happened in prior recoveries (this rhymes with the consolidation phase of bull market after their initial 12 month thrust).
Here's a chart of their leading indicator.
I got this chart from Hussman's site, a noted bear and he got it from Mike "Mish" Shedlock, another bear. I've also notice John Mauldin yet another bear; make mention on the ECRI data as well last week. There's no doubt that this chart is cause for concern. It's certainly has my attention and I respect the potential bearish resolution. But here's what I have to say to the bears that are using this chart. WHY THE FUCK WAS THERE NO MENTION OF THIS CHART LAST YEAR WHEN IT WAS HEADING UP? It's obviously because the chart didn't agree with their ingrained, stubborn bearishness they all had and so they dismissed it. But now that the chart actually favors their bearish outlook they are all quick to point it out. lol! This is a fine example of the confirming evidence bias. This is also why you shouldn't be mesmerized by the bears out there like so many were and still are. Most of these bears are permabears with big egos who will rarely admit being wrong, however they can provide valuable insights because after all, the market is a 2 way street...bear markets do indeed occur.
The next 3-5 months are going to be very critical for the market. With governments around the world slashing spending we are going to find out if this recovery is the real deal whereby the private sector is strong enough to take the baton from the governments which are slashing spending aggressively. The market is clearly worried about this which is fair enough....remember we went up 80% in 14 months and so anyone who got in early has a good reason to take money off the table.
My take: Step aside and wait for more resolution. Even if the bulls will win out, the market is likely not going to just go upwards and onwards to new highs like it did after prior corrections. A more likely senario would be multi-month base bulding. I'm looking for clues via the market as to what path will be taken. Keep an open mind and let the market tell you what to do. Right now market action stinks. Although we can certainly rally more here (the VIX and Rydex ratio are at elevated levels and the market is still IT oversold) I have little confidence to hold long positions with any conviction for a prolonged period of time because shitty market action suggests any rally can fall apart quickly. As a result of this I am going to consider taking ST trading positions both long and short with a limited amount of my portfolio. Ya I know.....I might fall victim of the meat grinder which is why I'm keeping things small and selective. If in doubt I'm just going to stay in cash. I'm not going to let a good year slip away by forcing trades for the sake of doing something.
The chant is getting louder and louder for restructuring of these debts. There is little confidence it seems that austerity measures alone is going to cut it in the long run. But, EU leaders are being stubborn and are not listening to the market. If debts are restructured and European banks take their write downs I think it would clear out the dead wood in the system and actually allow the market to resume its upward course in a sustainable way.
Market action continues to resemble that of a bear market. Again, I must stress that during bull market corrections it's not uncommon to see such bear market action but I have to admit this poor action has been going on too long. Since May 1, volatility has gone up tremendously and every time we've seen strength in the market it's mainly been done via gap up action. That's bear market behavior. I showed in my previous post how the Rydex ratio suggests pessimism may be overdone here but this may very well only pertain to the ST/IT similar to what happened in Mid August 2007.
We are at a crossroads here folks. The next 4 months or so is going to be very important. I've made the case well before this correction began that bull markets have a multi-month consolidation phase after about the first year (give or take a couple months) of their inception. Therefore, the action we've seen thus far could very well be such a consolidation. But there are some ominous signs out there. For one, there's been poor market action as I've described in prior posts but in addition to this, we also have smart money leading indicators turning decisively negative.
There's an outfit called Economic Cycle Research Institute (ECRI) who predicts business cycles based upon their proprietary leading indicators. I first heard about these guys in 2001 and they’ve earned my respect. They correctly called recessions and recoveries in advance. Currently their leading indicators have turned down decisively negative but the ECRI has stated that it's too early to say if this means that there's going to be a double dip or if it's just a moderation after the initial thrust of an economic recovery which has indeed happened in prior recoveries (this rhymes with the consolidation phase of bull market after their initial 12 month thrust).
Here's a chart of their leading indicator.
I got this chart from Hussman's site, a noted bear and he got it from Mike "Mish" Shedlock, another bear. I've also notice John Mauldin yet another bear; make mention on the ECRI data as well last week. There's no doubt that this chart is cause for concern. It's certainly has my attention and I respect the potential bearish resolution. But here's what I have to say to the bears that are using this chart. WHY THE FUCK WAS THERE NO MENTION OF THIS CHART LAST YEAR WHEN IT WAS HEADING UP? It's obviously because the chart didn't agree with their ingrained, stubborn bearishness they all had and so they dismissed it. But now that the chart actually favors their bearish outlook they are all quick to point it out. lol! This is a fine example of the confirming evidence bias. This is also why you shouldn't be mesmerized by the bears out there like so many were and still are. Most of these bears are permabears with big egos who will rarely admit being wrong, however they can provide valuable insights because after all, the market is a 2 way street...bear markets do indeed occur.
The next 3-5 months are going to be very critical for the market. With governments around the world slashing spending we are going to find out if this recovery is the real deal whereby the private sector is strong enough to take the baton from the governments which are slashing spending aggressively. The market is clearly worried about this which is fair enough....remember we went up 80% in 14 months and so anyone who got in early has a good reason to take money off the table.
My take: Step aside and wait for more resolution. Even if the bulls will win out, the market is likely not going to just go upwards and onwards to new highs like it did after prior corrections. A more likely senario would be multi-month base bulding. I'm looking for clues via the market as to what path will be taken. Keep an open mind and let the market tell you what to do. Right now market action stinks. Although we can certainly rally more here (the VIX and Rydex ratio are at elevated levels and the market is still IT oversold) I have little confidence to hold long positions with any conviction for a prolonged period of time because shitty market action suggests any rally can fall apart quickly. As a result of this I am going to consider taking ST trading positions both long and short with a limited amount of my portfolio. Ya I know.....I might fall victim of the meat grinder which is why I'm keeping things small and selective. If in doubt I'm just going to stay in cash. I'm not going to let a good year slip away by forcing trades for the sake of doing something.
Wednesday, June 9, 2010
Rydex ratio in position
One of my trustiest indicators the Rydex ratio is giving the green light here. It is now showing solid pessimism which well exceeds the pessimism seen at prior correction lows which like I said earlier, is what I want to see. The Rydex ratio has been very solid as a ST/IT timing tool. Currently standing at 1.14 it's quite bullish for the market going forward. Now of course it could rise even more getting more extreme if the market sinks lower but that would set up for an even stronger buy signal. At 1.14 the Rydex ratio strongly suggests downside in the market is limited from here and/or big upside is imminent. Even if we ultimately crash like the bears think, we should get a strong rebound first. Look for instance what happened at mid August 2007. The Rydex ratio was at the same level as it is right now and the market made a bottom and had a very nice rebound even though ultimately we crashed in 2008.
Was today the start of the rebound? I'm not so sure about that. Notice how we conveniently "double bottomed" yesterday at "support". I'm always very suspicious when the market bounces off or sells off at well know support or resistance levels when making a powerful move. You tend to see such moves last for a few days or even 1-2 weeks but they end up failing because the trade was too crowded. I still get this feeling that too many weak handed technical types are trying to pick bottoms which isn’t a good thing because these guys will all dump en masse once the market goes against them. Look at Cramer. 2 days ago he was saying sell into strength and now when the market goes up for 1 day he says "negativity is overdone". That's the sort of "fear of missing the bottom" attitude that prevents the market from making a true low.
In today's National Post I read an article titled "Markets test key support" and the strategist in the article was quoted by saying “1050-1040 is crucial for the market" "this is really the last line in the sand. If you don't hold it here the rally from Marck 2009 is over." I've been arguing that the break of such well known support levels is what the market really needs to flush out the weak longs like this guy and embolden the bears to press the short side which would then very likely set up for at least an IT low if not a LT low. Given that we've held support so conveniently, it makes me leery of a bottom just yet although I suspect the bottom is probably not too far below 1040. Maybe I'm wrong about this and I'm being too picky about the things I'd like to see. It certainly wouldn't be the first time.
Bottom line: A bounce here certainly won't be surprising but that's the problem with it....it's not surprising making it susceptible to failure shortly afterwards especially when there's no solid positive catalyst behind it. A better set up for a bottom would be a break below 1040 accompanied by a VIX spike to 40+ but as I always say, the market doesn't always give you what you want.
I remain patient.
Saturday, June 5, 2010
Ugly action and it's probably not done yet but we're getting there.
Poor job numbers was the catalyst that took us lower but I think we were going to head down anyways. Every rally attempt I've seen lately has looked suspicious and appears mainly the result of short covering. The euro was the tell....it was weak despite Wednesday's and Thursday's rally. Coming into Friday the Euro was right at its 52 week low on the verge of a major breakdown and obviously that has now happened.
It seems apparent to me that there's going to be more shoes to drop in Europe and this crisis is going to drag on some more. Eventually we are going to hit a point where the market discounts the absolute worst and we bottom even before all the issues there are resolved. I don't think we are at that point just yet. Yes, there's still very encouraging bullish signs building up in the market which I believe will ultimately lead to an important bottom but I've seen my fair shares of meltdowns and I've learned that if the market acts in a way that suggests it wants to go lower still, it's best to ignore contrary signals no matter how strong they may be. Once you see the market act in a way which either suggests a) exhaustive panic selling followed by a reversal or b) a clear mutli day or week reversal with bullish market action (simply going up doesn't necessarily constitute bullish action) then it would be wise to listen to the contrary signals.
Using market sentiment is very much an art as it is a science. Just what constitutes an extreme in bullish or bearish sentiment depends on the circumstances. For instance, in the fall of 2008 our financial system was literally collapsing. Therefore a high degree of bearish sentiment is only naturally to be expected. I saw a lot of "sentimenticians" get run over in September 2008 trying to play the bullish contrarian because they noted how bearish sentiment was similar to that seen at the lows of the bear market in 2002. The mistake they made was that they didn't consider the differences in the contexts. The financial landscape was far direr in the fall of 2008 compared to the lows in 2002 which therefore required an even greater extreme in bearish sentiment for it to be considered "too bearish". We did eventually get to that point when everyone including my grandmother (literally!) was bracing for a depression.
Given what I just said above, it's logical to assume that based upon what we are experiencing now in Europe we will likely need to see sentiment register bearish extremes that exceed what was prevalent at previous correction lows of the past 12 months because the circumstances of this correction are more serious than those of which occurred previously.
These sorts of contagions pose a systematic risk to everyone given how interconnected economies around the world are. It's not as bad a situation as in 2008 because it's primarily European Banks that have direct exposure to PIIGS debt whereas in 2008 most banks around the globe it seemed had direct exposure to the failed mortgage products and institutions of the US and the US is the leader of the global economy. In addition, the economies around the world were already weakening well before the meltdown in 2008 happened whereas prior to this crisis, the economies had been strengthening.
This crisis could simply only be an aftershock to the financial earthquake that happened in 2008 as opposed to a new leg in the crisis of 2008 which the bears would have you believe. We are going to find out which path is taken before the year is over. I think it's the former but until the market confirms what I think I have to be prepared for the possibility of the later. Stubborn convictions will be the death of you in this game. Just ask any bear last year and early this year. Many of them got wiped out and most that still remain are probably crippled and are still in the red even despite this drop (the funny thing is, based upon what I observe a lot bears missed a great deal of this move down covering way too early and getting whipsawed).
The market is intermediate term oversold but only mildly ST oversold (it was ST neutral coming into Friday). Considering the damage today, the put/call ratio was far too low which suggests further downside in store. The market continues to trade "broken" with wild volatility and euro making a fresh 4 year low. The euro has been a leading indicator which suggests this move down isn't over yet.
I've noticed there have been too many bottom picking attempts by weak handed technical types. What I would like to see is a breakdown below well known support levels, moving averages ect, which causes complete bullish capitulation from the weak longs. Of course, the market often doesn't give me what I want. Instead we could see yet another dead cat bounce...even a huge one back above 1100+. The wild volatility makes it difficult for one to try and bet on a further decline. This game of chicken between traders as I like to call it ensures that the market will drop in a way where only a minimal amount of people can capitalize. It will do this by first squeezing a lot of shorts if the short side gets crowded before heading down, just like it did mid week. Notice how cruel the market was by closing above 1100 on Thursday probably triggering a bunch of buy stops only to gap down big the next day not allowing bears that got stopped to get a comfortable entry point. That's the meat grinder folks and that's why I often refrain from day to day or intraday trading and stay in cash or hedged if ST bearish.
Probably about the only bullish thing about today's decline was that there's now a nice gap in the chart which suggests the market will fill at some point. I'm still watching and waiting on the sidelines but getting antsy….
It seems apparent to me that there's going to be more shoes to drop in Europe and this crisis is going to drag on some more. Eventually we are going to hit a point where the market discounts the absolute worst and we bottom even before all the issues there are resolved. I don't think we are at that point just yet. Yes, there's still very encouraging bullish signs building up in the market which I believe will ultimately lead to an important bottom but I've seen my fair shares of meltdowns and I've learned that if the market acts in a way that suggests it wants to go lower still, it's best to ignore contrary signals no matter how strong they may be. Once you see the market act in a way which either suggests a) exhaustive panic selling followed by a reversal or b) a clear mutli day or week reversal with bullish market action (simply going up doesn't necessarily constitute bullish action) then it would be wise to listen to the contrary signals.
Using market sentiment is very much an art as it is a science. Just what constitutes an extreme in bullish or bearish sentiment depends on the circumstances. For instance, in the fall of 2008 our financial system was literally collapsing. Therefore a high degree of bearish sentiment is only naturally to be expected. I saw a lot of "sentimenticians" get run over in September 2008 trying to play the bullish contrarian because they noted how bearish sentiment was similar to that seen at the lows of the bear market in 2002. The mistake they made was that they didn't consider the differences in the contexts. The financial landscape was far direr in the fall of 2008 compared to the lows in 2002 which therefore required an even greater extreme in bearish sentiment for it to be considered "too bearish". We did eventually get to that point when everyone including my grandmother (literally!) was bracing for a depression.
Given what I just said above, it's logical to assume that based upon what we are experiencing now in Europe we will likely need to see sentiment register bearish extremes that exceed what was prevalent at previous correction lows of the past 12 months because the circumstances of this correction are more serious than those of which occurred previously.
These sorts of contagions pose a systematic risk to everyone given how interconnected economies around the world are. It's not as bad a situation as in 2008 because it's primarily European Banks that have direct exposure to PIIGS debt whereas in 2008 most banks around the globe it seemed had direct exposure to the failed mortgage products and institutions of the US and the US is the leader of the global economy. In addition, the economies around the world were already weakening well before the meltdown in 2008 happened whereas prior to this crisis, the economies had been strengthening.
This crisis could simply only be an aftershock to the financial earthquake that happened in 2008 as opposed to a new leg in the crisis of 2008 which the bears would have you believe. We are going to find out which path is taken before the year is over. I think it's the former but until the market confirms what I think I have to be prepared for the possibility of the later. Stubborn convictions will be the death of you in this game. Just ask any bear last year and early this year. Many of them got wiped out and most that still remain are probably crippled and are still in the red even despite this drop (the funny thing is, based upon what I observe a lot bears missed a great deal of this move down covering way too early and getting whipsawed).
The market is intermediate term oversold but only mildly ST oversold (it was ST neutral coming into Friday). Considering the damage today, the put/call ratio was far too low which suggests further downside in store. The market continues to trade "broken" with wild volatility and euro making a fresh 4 year low. The euro has been a leading indicator which suggests this move down isn't over yet.
I've noticed there have been too many bottom picking attempts by weak handed technical types. What I would like to see is a breakdown below well known support levels, moving averages ect, which causes complete bullish capitulation from the weak longs. Of course, the market often doesn't give me what I want. Instead we could see yet another dead cat bounce...even a huge one back above 1100+. The wild volatility makes it difficult for one to try and bet on a further decline. This game of chicken between traders as I like to call it ensures that the market will drop in a way where only a minimal amount of people can capitalize. It will do this by first squeezing a lot of shorts if the short side gets crowded before heading down, just like it did mid week. Notice how cruel the market was by closing above 1100 on Thursday probably triggering a bunch of buy stops only to gap down big the next day not allowing bears that got stopped to get a comfortable entry point. That's the meat grinder folks and that's why I often refrain from day to day or intraday trading and stay in cash or hedged if ST bearish.
Probably about the only bullish thing about today's decline was that there's now a nice gap in the chart which suggests the market will fill at some point. I'm still watching and waiting on the sidelines but getting antsy….
Tuesday, June 1, 2010
Sticking with the wait and see approach
As per my previous post, I see some bullish signs building up in the market and I believe ultimately it seals the fate of the bears...at least on an intermediate term basis. But the market continues show "poor action" as I like to call it.
Have you noticed how significant volatility has picked up during the past few weeks? Even intraday volatility is huge. As one who believes in a bullish resolution to this I have to be honest and say that this behavior is similar to what we seen in bear markets. The intraday volatility is particularly troubling. It tells me there is a lack of long term institutional support in the market and instead it's being dominated by short term traders who are playing a game of chicken with each other. This is what people often refer to as a "broken market". Also, anytime the market has shown big strength lately it was done via a huge gap up and grind type days. This type of strength in the midst of downtrend is the signature of a dead cat bounce which ultimately leads to full retracement and lower lows even if there is some initial follow through. We saw the opposite of this happen during the uptrend.
Take for example the big rally that happened late last week. It was one of those big gap up and grind days. And the reason for this....China confirmed it would not dump their euro holdings. Wow, that's a pretty lame excuse for a 3% rally don't you think? How does this bear any importance to the crisis at hand? It doesn't count for a damn thing. As a result of the dead cat bounce signature and weak excuse of Thursday’s rally I will be very, very untrustworthy of any strength in the market until a retracement back to at least 1065 occurs. I couldn't care less about sentiment surveys and such. Market action trumps everything. Paying attention to market action is what made me refrain from premature bottom picking during the crash of 2008 like a lot of "pros" tried doing (even some well regarded bears) who then got ran over because they didn't pay attention to the action which suggested the market wanted to go lower while bounces had the dead cat signature as described earlier above.
Ok, let me clear about something. I'm not calling this a bear market....at least not yet. The action is indeed bearish but this also what you see during bull market corrections not just bear markets. As I mentioned coming into this year, I believed that we would see the end of the first phase of the bull market sometime during the first part of this year. It is completely NORMAL for bull markets to see a serious correction after about the 1 year mark give or take a few months because that's exactly what bull markets in the past have done! Let keep in mind folks that we had about an 80% rally in 14 months from the bottom. 80% fucking percent! So, is it really so ominous to see a correction of 10, 15 even 20% after such a run? Could it simply not be just a breather? Remember, the market always looks for excuses to go up or down and after an 80% run in 14 months you can't keep up that pace....an excuse will come up to for people who bought in early to take profits. A correction and multi-month consolidation phase typically follows and so here we are.
I'm trying very hard as always to keep an open mind and view the market objectively trying to decipher its message. I have no problems doing a 180 turn from any previous stance I've had if the evidence suggests it.
Here's how I see it. Longer term, the bull case is still very much alive. A big correction and consolidation after about the 1 year mark in a bull run is normal. Even a 20% drop from the high isn't really all that bad when you consider how far we've ran up. In addition, just prior to the correction there were plenty of LT skeptics of the market as I have been noting for several months. Retail investors were only just beginning to embrace the bull market via equity inflows but since then those inflows have been completely reversed.
Regarding the ST, although the market is quite oversold and can bounce big on any kind of flimsy excuse (like Thursday) it continues to exhibit bear market signatures and until those go away and the market starts acting bullishly or until you see "whites of the eyes" fear followed by a upward reversal it would premature to bottom pick just yet. That gap at 1065 has a high probability of being filled given the very weak excuse that created it. I expect to see a lot of meat grinding for short term traders bull or bear.
The ducks are certainly lining up for the bulls for an IT bottom until those ducks start quacking I'm stepping aside here because I don't want to end up a dead duck. Extremes can get to even greater extremes when market action is poor. I've been very heavy in cash for about a month now. If I missed the bottom so be it. No regrets.
Have you noticed how significant volatility has picked up during the past few weeks? Even intraday volatility is huge. As one who believes in a bullish resolution to this I have to be honest and say that this behavior is similar to what we seen in bear markets. The intraday volatility is particularly troubling. It tells me there is a lack of long term institutional support in the market and instead it's being dominated by short term traders who are playing a game of chicken with each other. This is what people often refer to as a "broken market". Also, anytime the market has shown big strength lately it was done via a huge gap up and grind type days. This type of strength in the midst of downtrend is the signature of a dead cat bounce which ultimately leads to full retracement and lower lows even if there is some initial follow through. We saw the opposite of this happen during the uptrend.
Take for example the big rally that happened late last week. It was one of those big gap up and grind days. And the reason for this....China confirmed it would not dump their euro holdings. Wow, that's a pretty lame excuse for a 3% rally don't you think? How does this bear any importance to the crisis at hand? It doesn't count for a damn thing. As a result of the dead cat bounce signature and weak excuse of Thursday’s rally I will be very, very untrustworthy of any strength in the market until a retracement back to at least 1065 occurs. I couldn't care less about sentiment surveys and such. Market action trumps everything. Paying attention to market action is what made me refrain from premature bottom picking during the crash of 2008 like a lot of "pros" tried doing (even some well regarded bears) who then got ran over because they didn't pay attention to the action which suggested the market wanted to go lower while bounces had the dead cat signature as described earlier above.
Ok, let me clear about something. I'm not calling this a bear market....at least not yet. The action is indeed bearish but this also what you see during bull market corrections not just bear markets. As I mentioned coming into this year, I believed that we would see the end of the first phase of the bull market sometime during the first part of this year. It is completely NORMAL for bull markets to see a serious correction after about the 1 year mark give or take a few months because that's exactly what bull markets in the past have done! Let keep in mind folks that we had about an 80% rally in 14 months from the bottom. 80% fucking percent! So, is it really so ominous to see a correction of 10, 15 even 20% after such a run? Could it simply not be just a breather? Remember, the market always looks for excuses to go up or down and after an 80% run in 14 months you can't keep up that pace....an excuse will come up to for people who bought in early to take profits. A correction and multi-month consolidation phase typically follows and so here we are.
I'm trying very hard as always to keep an open mind and view the market objectively trying to decipher its message. I have no problems doing a 180 turn from any previous stance I've had if the evidence suggests it.
Here's how I see it. Longer term, the bull case is still very much alive. A big correction and consolidation after about the 1 year mark in a bull run is normal. Even a 20% drop from the high isn't really all that bad when you consider how far we've ran up. In addition, just prior to the correction there were plenty of LT skeptics of the market as I have been noting for several months. Retail investors were only just beginning to embrace the bull market via equity inflows but since then those inflows have been completely reversed.
Regarding the ST, although the market is quite oversold and can bounce big on any kind of flimsy excuse (like Thursday) it continues to exhibit bear market signatures and until those go away and the market starts acting bullishly or until you see "whites of the eyes" fear followed by a upward reversal it would premature to bottom pick just yet. That gap at 1065 has a high probability of being filled given the very weak excuse that created it. I expect to see a lot of meat grinding for short term traders bull or bear.
The ducks are certainly lining up for the bulls for an IT bottom until those ducks start quacking I'm stepping aside here because I don't want to end up a dead duck. Extremes can get to even greater extremes when market action is poor. I've been very heavy in cash for about a month now. If I missed the bottom so be it. No regrets.
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