The song remains the same

Hope, despair, hope, despair. Big gap up, big gap down, big gap up, big gap down. That's been the pattern in the market for the past few months. This has been a very frustrating, annoying and dangerous market.

Let's forget about indicators, sentiment, opinions about the bailouts, Merkel and what-not and just try to look at this market using objectivity and common sense. I've said before that bull markets don't have the type of volatility we are seeing. What we are seeing reminds me a lot of  the months that followed the Lehman crash. About a month ago I saw this chart posted on tickersense.com which proves what I'm talking about. This is a very important chart.



The red areas highlight prior instances when the market had the type of volatility we are seeing now. These signals all previously occurred in bear markets. That's the bad news, but there's good news too as you will see.  Whenever we saw such instances of  "high volatility" as per the above chart, it signaled the start of the puke stage of the bear market. Significant and immediate damage lied ahead in the weeks that followed but that ended up marking close to where the bear market had finally bottomed - that's the good news. However, the bottoming process took about half a year to complete the previous 2 times we got the signal. Even last summer's flash crash (arguably a mini-bear) which didn't trigger a high volatility signal, took about about 4 months to complete.

So, let's consider the current situation. Just like with the two previous high volatility triggers, we saw significant and immediate damage occur. The signal was triggered on July 27th.  The good news is that if history repeats, there's a good chance the worst of damage has already taken place. The bad news is that the bottoming process is quite likely not be complete and some sort of retest of the lows, whether it's a higher low or lower low is in the cards. We made the first significant low on August 9th. Therefore, it's quite likely that the bottoming process won't be complete for another 1-4 months - if we are indeed in a bottoming process. But let's be careful not to be dogmatic about this....there's no law that says the market can't bottom sooner.  It's been just under 4 months now since the bottom in August and so I suppose that might be considered long enough time to have completed the bottoming process.  I'm doubtful about that but I'll keep and open mind and be on the lookout for the return of bull market behavior (which is characterized by a upward grinding market with low volatility)..

There's also the possibility for a grim resolution this time around. Bears will argue that massive policy intervention stymied the last 2 bears and if not for that the damage would have been a lot worse. As a result, the heightened volatility could have been an indication of the beginning of the "end game". According to the bears, all the authorities did was delay the end game creating even more imbalances. This time around authorities have largely exhausted their "bullets" to thwart the end game and so that leaves us much more likely to experience it this time around than ever before. It's still an unlikely outcome but IMO, the odds are higher than anytime since about 1996  when many of today's permabears first started calling for it. If this ends up happening I can guarantee you most bears will not even come close to fully capitalizing on it since the market would likely go down in an almost straight line down fashion for months.

A few words on today's rally. The market was quite oversold heading into this week and so it's not surprising to see it go up like this on rumors about the IMF helping Italy or whatever. Anything could serve as a excuse because most shorts by nature are weak and fickle and focus on the ST and they have been clown raped so many times during the past couple of years that they are now conditioned to cover when the market gets oversold. There's room for the market to go higher still even after today's run up but if you bet on it just remember you're likely playing the game of chicken. This seems like yet another hope rally doomed to fail if you ask me.