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.
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