Doesn't look good for a turnaround today

the put/call ratio is too low here and bonds are dropping. SPX is now at 887 which is the low point hit about a week ago thus providing temporary support. There could be a weak attempt at a bounce here but I don't expect it to hold today unless we see a major shift in the put/call ratio today which could very well happen given the fickleness of traders these days.

Green shoots withering? too early to tell yet....bears have the edge for time being

Friday's payroll data turned out to be a disapointment with greater than expected losses. This was the obvious reason markets tanked. Prior to this release the number of jobs lost was decreasing each month as you can see in the graph on the right.



One counter trend data point doesn't confirm a change the trend has occured. Think about the whether for example. When it transitions from winter to spring the days get warmer and warmer on average but you still get the occasional cold spell and sometimes even a signficant snowfall. Notice how this is the 3rd time now since the peak of the market in mid June that we have seen a heavy gap down and flat line day.
In fact, practically all of the downside since the peak was accomplished by 2 of these sharp gap down and flatline days alone. This is not how bear markets typcially act. Bear market declines tend to consist of relentless down days interupted by brief, sharp rallies. It's possible that the market will start acting this way going forward but untill we see that, it would be premature to think the bear has returned. However, as I had pointed out before, an IT top is likely put in and so the bears have control for now. I'll say this again....if we get a 10% pullback you better watch out because a lot of people are hoping for this to happen and if the market gives the herd what they want it almost always results in the herd regreting that they got what they wanted.

I warned about the risks of emerging markets before. Here's what I was talking about.

July 3 (Bloomberg)

Inflows into developing-nation equity funds last quarter topped the previous record of $22.4 billion set in the fourth quarter of 2007, the research firm said. The MSCI Emerging Markets Index reached a peak on Oct. 29, 2007, and subsequently dropped as much as 66 percent.

I also read an article which talked about how extremely correlated sectors and even asset classes overall have become and how it has reached a 5 decade high. This is not a healthy sign. It also diminishes the benefits of divesification. It appears as if a herd mentality is dominating the market. Perhaps it is due to the proliferation of all these ETFs out there which I believe is turning the market into a giant casino wherby everyone is now a short term trader. I've also noticed that turning points in the market tend to come in the way of V bottoms and tops with many gap and run type days. This has been frustrating for me at times because it forces you to have to pick tops and bottoms as opposed to getting a confirmation via a retest of some sorts which prior to the last 12 months would often occur. I believe this action is a symptom of the casino like nature of the market. As a result, I belive now more than ever, investor psyocology is a dominating factor. If you think that your stock picking abilities make you money in the past 3-4 months think again. Practically every stock had massive rebounds. Did they all deserve to? Probably not, but then again not all of them deserved to get crushed like they did last year and early this year. Perhaps the market will sort out the winners from the losers in the months ahead and begin to normalize.

Ok, on to the short term prospects of the market. Everyone including my grandmother is talking about the head and shoulders pattern seen on the S&P.





Therefore, there's a good chance we see a false breakdown from this pattern. I think there is going to be a weak bounce on Monday followed by more downside later in the week. If the bear is in fact back, it's not going to make it easy for people to profit from it mark my words. Traders will either get whipsawed to death or take profits way too soon....whatever happens, I just hope the markets get exciting and don't go back to summer doldrum mode.

downside trade looks a bit crowded today

I did call for a down day today but the trade appears somewhat crowded given the high put/call ratio so far. The longer the market meanders at only marginal weakness, the greater the chance for a squeeze higher as bear traders get nervous in addition to not wanting to hold over the weekend. Once again the fickleness of traders is quite evident. They are like dogs who keep chasing their own tail.

Traders getting whipsawed.....downside likely tommorow

This market is chewing up traders and spitting them out. Today's surge caught a lot of people off guard. There was no real solid explanation for it...the most likely one is simply that too many people went short when the market broke 900 earlier this week on the SPX and they scrambled to cover when it went back above it. As I said before, you will get murdered if you chase breakouts/breakdowns. Buying dips, shorting rips is the way to go. The market is now overbought on a short term basis again and the fickleness of traders is evident as now the NASDAQ/NYSE volume ratio is back to 2 which is bearish again for the market. Keep in mind this is all short term stuff here. The VIX is now at 26 making a new low even though the market is at a lower high. This is a bearish divergence signaling complaceny.

I believe the market will pullback tommorow....in fact, bears have an opportunity to do some damage for the next couple of days. Be careful though because as I said, traders have been quite fickle....on a very short term basis they are going from exessive greed to fear and vice versa from one day to the next.

A split in sentiment....danger for Chinese stocks

Something quite unusual has happened. The most recent American Association of Individual Investors survey is showing 28% Bulls and 49% Bears which has solid bullish implications for the market. However Investor's Intelligence sentiment is showing 44% bulls and 27% bears which is almost the exact opposite and hence has bearish implications. So which message should you listen too? The answer could be both. AAII sentiment tends to be much more fickle than II sentiment and tends to be more useful for short term market timing whereas II is more for intermediate term timing. Therefore, the conclusions drawn here are that the market looks bullish in the shorter term (1-2 weeks) bearish in the intermediate term i.e. any gains from here will be limited. …SPX 940 is doable. This fits with a host of other indicators I track.

I believe that the damage done to the market last year and early this year has created a recalability trap in traders which is a fancy way of saying that they are being unduly influenced by their bad experiences in the market. Anytime the market has a dip they think that it's going to be the start of another 20-30% drop. Until enough people drop their guard I doubt the market is going to see such a drop. Traders behaved this way after the rebound from the 911 crash and it took a 3 month rally and 3 months of topping before the final downleg ensued. By then most bears were too crippled to take advantage or they covered shorts far too early after getting repeatidly punished going for the kill in the months prior.

Another warning sign I've noticed pertains to Chinese stocks. On BNN (the Canadian equivalent to CNBC) there's a commercial running for a website that researches Chinese stocks. Last year around this time they had commercials running for Potash companies with the catch phase "feed the world". A major top for potash and commodities stocks followed shortly. I'm not suggesting you bet your house on shorting Chinese stocks just because of this one commercial, however, when you combine this contrarian indicator with the more powerful contrarian indicator of massive inflows into emerging market funds which are at levels that match those seen at the major top in that sector that occurred in 2007 you get a much stonger confirmation that a top is immanent. I also find that the financial media and it's pundits all seem to be saying that if you want exposure to equities go with emerging markets because they offer the most growth potential and they should lead the recovery.

Therefore, as per the contrary indicators I mentioned and the motto of this site, I think the message is clear....emerging markets are dangerous right now at least for the medium term. In fact, they may have already peaked.

Bottom line....look for rising markets in the short term (1-2 week time frame) but I say this tentatively because danger lurks in the intermediate term. We could very well be forming another major top here but that top could be several months in the making and it could be as long as September-October before the top is complete. All in all, it looks as if the summer doldrums have arrived.

World Bank brings down markets

The catalyst for today's smackdown was World Bank's downgrade in their economic outlook. This was the excuse the market needed to go down....it was a weak excuse but it doesn't matter. I believe had they not came out with this announcement some other catalyst would have eventually caused the market to drop. I recall the day when the market bounced off the November bottom. The reason for the massive rally that day was the announcement that Geithner was going to be appointed by Obama....which wasn't really suprising news nor meaningful from an economic standpoint but it didn't matter because the market was heavily oversold and shorts had their finger nervously on the buy button waiting for any reason to cover and protect protect profits. Ultimatley that rally failed.

The market was showing signs that it wanted to correct as I had stated about 2 weeks ago. When a market wants to correct or rally...it often needs any flimsy excuse to do so.

I was unsure of the exact timing of this latest peak in the market and I felt there was still a possiblity of one last move higher but I did warn about a correction of at least 5-7% was comming. So now that we got it, now what? Notice how once again the downside action was acomplished via a big gap down and flatline type day. This is the second time we've seen this since the market made it's peak in early June. This is still indicative of nervous profit taking behavior similar to what the shorts quite often did last year (with the markets often showing the gap up and flatline type action).

Therefore, I believe we are not about to embark on a new bear market downleg at this time. This is simply a correction in IMO.

Recall how I warned about the NASDAQ/NYSE volume ratio which was showing signs of froth. That ratio plummeted today to 1.43 which is approaching the opposite extreme.
The VIX got a good pop today and the bears are dancing in the streets congratulating themselves.

After today's action I find that the wall of worry is being rebuilt very quickly. I don't believe we will blast off to new highs anytime soon however...there will probably be sideways action for a few weeks.

If this market is going back to bear mode, I doubt it's going to occur so predictably like this. More than likely, we will see several false breakdowns and subsequent sharp rallies to shake off most of the traders who I believe still haven't capitulated from their perma bear mentality.

There will likely be a bounce attempt tommorow morning...be careful though playing bounces because the IT trend has now turned down and so they can fizzle quickly just like the last one did. Don't chase....buy/scale into weakness.

Short term it's a coin flip

I have no strong inclination as to where the market goes in the next couple of days but I do believe that any upside from here will be limited. There's an open gap to fill at about S&P 940 so a move to there would not suprise me but that would likely make for a good shorting opportunity.