Weekend Ramblings

What can I say about Friday's action....unmerciless bear destruction for one. I saw quite a bit of bear capitulation today. It seems anytime the market makes a new rally high it blows out a new cohort of bears. I have underestimated just how much bag holding bears are still out there. I read a post today by someone who was taking the advice of a popular bearish blog....let's call it ztrends. This person claims to have followed the trades made by the authors of the blog since March when she was first made aware of the blog. She started off with about $650K which was all of her and her husband’s savings. She finally threw in the towel today with only about $125K left. She posted this on the blog but it was quickly deleted by the blog owners. I luckily had a chance to see it before it was deleted. She claims her life is ruined...I'm sure she's not alone. I've made mention of these types of horror stories before of people who have lost their ass betting against the market. The only other period I can recall such horror stories was when the tech bubble burst in 2000 except at that time people got killed being long the market, in particular, tech stocks. This just further reinforces the bizzaro year 2000 post I made a few days ago.

I said before that I believe we are in a consolidation phase and I still maintain this view even though the SPX made a new rally high. Notice however, how the leading sectors of this bull run Emerging Markets and tech have been lagging a bit. That's a bit of concern. I mentioned Thursday that if the market had another 1% move to the upside it would render a maximum ST buying climax reading. Well, we got that and more and a maximum ST buying climax was in fact reached Friday.




I mentioned Thursday that if such a reading was reached it would all but guarantee a good whack down Monday or Tuesday. You can see by the above chart that this is not necessarily the case. The last time we such a buying climax the market still found a way to grind significantly higher after only a couple of days of sideways action.

I've touched on the following point before - I have found that bearish omens given by the indicators I follow are having much less bite than bullish omens. For instance anytime a similar buying climax reading as the above was reached in 2008 and early 2009 when the market was in bear mode, significant and often immediate downside ensued. The same goes with other indicators such as insider activity, overbought/oversold readings and what have you. Therefore, the market is acting like how a bull market acts: bearish signals often result in marginal weakness or ignored entirely while bullish signals often result in substantial gains. Bull markets often ignore overbought readings, bear markets often ignore oversold readings. When the market transitions from bear to bull and vice versa it tends to crush a lot of short term traders because they were conditioned to buy/short when certain indicators hit certain levels and they fail to adjust the parameters of these indictors according to the new trend. This is why trading is more an art than a science and why mechanical trading systems will often fail.

Before making a ST call I want to see how the rydex jokers reacted to Friday's rally. Monday, however, should be flat or down based upon the extreme in buying climax. Even though the SPX made a new high I still believe we are in a consolidation mode here. This period kind of reminds me of when the market made a new rally high on June 1st. Ultimately those gains were retraced but downside was quite limited.