This post will be rather long, so buckle up.
As you may be able to tell, I focus a lot on investor psychology to determine where I believe the market is heading. To me, there is no better way because I believe whole heartedly in the motto of this blog "The main purpose of the stock market is to make fools of as many men as possible."
The collapse last year made certain people gain celebrity like status. Roubini, Whitney and Schiff come to mind. I wrote the following in April:
A comment on analysts Whitney and Roubini who have recently achieved super star status: From my experience anytime an analyst or strategist or whoever become market sages they inevitably will fall from grace usually shortly after the point when everyone worships their every word (we could be at that point already with these 2). These 2 will WITHOUT A DOUBT one day become goats. Mark my words.
After incorrectly calling for a resumption of the downtrend several times over the past few months, Roubini semi-capitulated a few weeks ago claiming that the worst was over for the markets for now but he believes a double dip recession will occur in 2010. The goat horns are already sprouting on his forehead and if we don't get a double dip recession (which is a low probability event given that it happened only in 1980 and 1982 I believe). Roubini may become hated and laughed at like the permabulls were recently. The same goes with Whitney who capitulated on her bearish stance on Goldman Sachs just prior to their blow out earnings release.
Slowly, these "celebrity bears" are starting to fade from the picture. And guess who have been the best forecasters these past several months? None other than Jim Cramer and Abby Cohen who are the laughing stock of the trading community and still are. Cohen predicted the SPX would hit 1000 a few months ago and probably only a few crickets listened. Cramer's roasting on the Daily Show in March was in hindsight one of the biggest contrary indicators ever for him. Maybe one day Roubini will get the same treatment.
But it wasn't too long ago when Cramer and Cohen were held by most people as market sages. Cohen in particular used to move markets with her calls. She was once the queen of the bulls in the mid/late 1990's correctly remaining bullish even though the market had some sharp and scary corrections. She fell from grace by remaining bullish all throughout the 2000-2002 bear.
When a particular market strategist or guru has been right about the market for a consistent amount of time they begin to attract a large following as people believe that this guru has found the "holy grail" in predicting markets. And just when these gurus are looked upon as gods by the masses, Mr. Market pulls the rug right from underneath their feet and the guru along with their flock of sheep followers get served a large serving of humble pie.
There's a few bear sites out there which I won't mention that gained a very large following and they just experienced what I just described. The retail trading community, in particular the rookies, are still for the most part bears, even if they play the long side. Let me ask you this, how many bullish orientated sites do you follow? Do they even exist now? The most common site I see Joe six-pack retail trader get information from is zerohedge.com which is a bearishly biased site. With the market 50% off its lows and the economy showing signs of improvement the fact that the bear sites are still popular with the dumb money tells me that this run isn't over. Of course there will be corrections but they'll likely be modest until at the very least I see some TRUE CAPITULATION from the stubborn, underwater bears out there.... not this "I've learned my lesson" after getting blown out of the water and then going short the next day. All I see from the burned bears out there is anger and stubbornness. I very much doubt this run will be over until they become silenced and truly humbled. I noticed this same behavior from the permabulls after the tech bubble burst. It took them about 1 year or so for them to become silenced and humbled and even then markets still tanked.
I realize there's some signs of giddiness out there like with CNBC but what do you expect after a 50% run? Some giddiness is only natural. With the natural flow of bull and bear markets you tend to see counter-trend rallies/consolidations when you see sentiment get a bit giddy in favor of the primary trend. That's probably close to where we are right now. AAII sentiment and II sentiment are both close to hitting a 2:1 ratio in favor of bulls vs. bears.
Bottom line: We're likely going to see a significant consolidation with this market soon. I'm thinking there's still room for a little bit more upside (1-3%) but not much before the market will start to cool off and go sideways for a few weeks. I still see a lot of bears out there who have been getting slaughtered still very confident that we are going to crash again in the coming months....some of them I noticed are still in major denial angrily dismissing any positive market data as government lies and upwards moves in stocks as manipulation. How can you not continue to fade these guys?
The following is a message board post of what I believe is the common perception of many retail investors.
"I do not trust this rally. The rally is a contradiction of what the economy is telling us. Fannie Mae just asked for another 10.7 billion dollars. Half of the states are on the verge of bankruptcy. Unemployment continues to be negative. The treat of tax increases looms. National debt has exploded. The baby boomers will soon start withdrawing money for retirement. Thousands of soldiers will be returning home to no jobs. Foreclosures are still rising. Commercial real estate issues have not hit yet. On and on. Until I start seeing companies hiring again, I will not trust this rally. "
This is the wall of worry folks. By the time this guy sees all the data he's looking for the market will be at much higher levels.
Saturday, August 8, 2009
Thursday, August 6, 2009
Barbarians at the gate
By trading sideways for the last few days, the market has worked off a lot of the extreme ST oversold condition I mentioned a few days back. This could very well be the “pullback” that everyone was expecting....not quite as deep as everyone thought it would be isn't it? Maybe the pullback is still to come but the market now has the green light to go ahead and make news highs…in other words, we won’t see another ST overbought condition until the market goes up to about 1050 or more.
Market action suggests to me that it wants to go higher because with the market having been so overbought bears had every opportunity to knock it down hard, but instead, they did what that kid did in American Pie when he had that hottie naked in his room....blew their load and got nothing to show for.
What I'm noticing is that bearish signals from the indicators I follow have had much less potency. This is classic bull market behavior. For instance, I warned here around June 10 of a top and we got one but the correction that followed was rather modest and the market went on to make higher highs shortly after. Similar bearish signals occurred in 2007 and 2008 which led to nasty down legs.
The bulls have the bears by the balls right here. When the market got extremely overbought a couple days ago, the bears had their chance to take the market down and they blew it big time. Now they have paved the way for the bulls to go for the jugular and take the SPX to new highs. I still see plenty of bears to squeeze to help fuel such a move. I also noticed tonight the NASDAQ/NYSE volume ratio was quite a low 1.29 today which has ST bullish implications.
Bottom line: The road has been cleared now for the bulls to make another charge. I'm not sure if it happens tomorrow but it's looking like they are going to bust through that SPX 1000 gate soon. Even a move back to 975 wouldn't put this thesis in jeoproday. I move towards 960 would though.
Market action suggests to me that it wants to go higher because with the market having been so overbought bears had every opportunity to knock it down hard, but instead, they did what that kid did in American Pie when he had that hottie naked in his room....blew their load and got nothing to show for.
What I'm noticing is that bearish signals from the indicators I follow have had much less potency. This is classic bull market behavior. For instance, I warned here around June 10 of a top and we got one but the correction that followed was rather modest and the market went on to make higher highs shortly after. Similar bearish signals occurred in 2007 and 2008 which led to nasty down legs.
The bulls have the bears by the balls right here. When the market got extremely overbought a couple days ago, the bears had their chance to take the market down and they blew it big time. Now they have paved the way for the bulls to go for the jugular and take the SPX to new highs. I still see plenty of bears to squeeze to help fuel such a move. I also noticed tonight the NASDAQ/NYSE volume ratio was quite a low 1.29 today which has ST bullish implications.
Bottom line: The road has been cleared now for the bulls to make another charge. I'm not sure if it happens tomorrow but it's looking like they are going to bust through that SPX 1000 gate soon. Even a move back to 975 wouldn't put this thesis in jeoproday. I move towards 960 would though.
Wednesday, August 5, 2009
The comming correction will be the most anticipated ever
This is such a bizzare situation right now. Everyone knows that the market is so overbought and much overdue for a pullback but when we get it, it will be the most anticipated one I have ever seen. A lot of traders have been jumping the gun shorting the market but they keep getting denied and as they cover it simply adds fuel to the raging fire of this rally.
I know exactly what kind of agony underwater shorts are thinking. They are banging their heads against the wall in utter disbelief as to how this market can be so strong and not even close 1 day in the red. They are fighting their instinct to cover and stop the pain but fear of regret i.e. ego, won't let them because they are thinking that the moment they cover the market is going to have the big drop they've been waiting for. I have found that most bears who have capitulated have done so only by force i.e. they got wiped out. Others capitulated in some form, promised to be a better trader (bargining stage of 5 stages of grief) and yet STILL went short and lost again! It's almost like a crack habit with these guys.
I have found that when everyone expects a correction because a market is overextended, 1 of 2 things happens
a) the correction is a lot shallower than people expect and the market makes even higher highs shortly after before the REAL correction happens
b) the correction is actually the start of a much nastier downturn and people buy back in and shorts cover after the dip only for the price to go down a lot further. Case in point - Oil last summer. When it hit around $130 or so, a lot of people were talking about a correction...barrons even had a cover story about it....but they like others said it would be a good buy again at about $100.
So, what's it going to be this time around? I'm leaning towards a) unless I see a signficant change in attitudes and expecations from the trading community.
I know exactly what kind of agony underwater shorts are thinking. They are banging their heads against the wall in utter disbelief as to how this market can be so strong and not even close 1 day in the red. They are fighting their instinct to cover and stop the pain but fear of regret i.e. ego, won't let them because they are thinking that the moment they cover the market is going to have the big drop they've been waiting for. I have found that most bears who have capitulated have done so only by force i.e. they got wiped out. Others capitulated in some form, promised to be a better trader (bargining stage of 5 stages of grief) and yet STILL went short and lost again! It's almost like a crack habit with these guys.
I have found that when everyone expects a correction because a market is overextended, 1 of 2 things happens
a) the correction is a lot shallower than people expect and the market makes even higher highs shortly after before the REAL correction happens
b) the correction is actually the start of a much nastier downturn and people buy back in and shorts cover after the dip only for the price to go down a lot further. Case in point - Oil last summer. When it hit around $130 or so, a lot of people were talking about a correction...barrons even had a cover story about it....but they like others said it would be a good buy again at about $100.
So, what's it going to be this time around? I'm leaning towards a) unless I see a signficant change in attitudes and expecations from the trading community.
Tuesday, August 4, 2009
For any speculators out there check out this site...
www.intrade.com. This is an online gambling site which will allow you to bet on a variety of things but it works like the stock market whereby you can go long or short and trade intraday whereas if you go to a bookie and make a sports wager for example, you either win or lose when the game is over.
intrade.com has what's called "financial contracts" which provide a variety of different ways to speculate on the Dow Jones. I focus only on the Dow Jones daily close contracts which allows you to bet on where you think the Dow Jones will close for the day.
For example, the DOW +25 contract will payout if the Dow closes up 25 points or more. You can go long or short any contract and there's a market maker that provides liquidity along with market depth to see all outstanding orders. The contracts (i.e. the event you are betting on) are what's called binary options - you either win or lose if you hold them to expiry. Every contract will expire at either $10 (for a win) or $0 (for a loss).
For example, if you went long 10 contracts of the DOW +25 and the Dow closes at +40
you would get paid out $100 (10 contracts x $10) if you held until the close. You could always sell them intraday if you wish at the going price. The going price will depend on where the Dow is at the time. If for example, there's 10 minutes left in the trading day and the Dow is at +35, the going price for the Dow +25 contract will likely be about $7.5 (the quote by the market maker will actually show 75).
These contracts offered by intrade which I just described are 1-day binary options.
They provide a unique risk/reward tradeoff which if properly used can act as an effective weapon to the speculator's arsenal.
It can also just be used as a cheap way to speculate on the market or experiment with ideas on an intraday basis. It can also be used as a cheap way to test and sharper your instincts.
I must warn you however. There's not that much difference, if any, between gambling and trading these contracts. USE ONLY A VERY TINY AMOUNT OF CAPTIAL if you want to try these things out....no matter how good you may do initially....because it might be just pure luck.
I believe the most you can start off with is $250 as an initial deposit amount from your credit card...and depending on where you live and what credit card you use, you may not even be able to deposit money from it because of online gambling site laws/restrictions that are applicable to you.
And please, please, please don't blame me if you decide to trade intrade contracts and lose money. Don't be like all the burned shorts who are blaming Goldman Sachs for their loses. Use the site at your own risk and take responsibility for your actions.
I should also mention that I'm not affiliated with intrade nor compensated by them in any way.
intrade.com has what's called "financial contracts" which provide a variety of different ways to speculate on the Dow Jones. I focus only on the Dow Jones daily close contracts which allows you to bet on where you think the Dow Jones will close for the day.
For example, the DOW +25 contract will payout if the Dow closes up 25 points or more. You can go long or short any contract and there's a market maker that provides liquidity along with market depth to see all outstanding orders. The contracts (i.e. the event you are betting on) are what's called binary options - you either win or lose if you hold them to expiry. Every contract will expire at either $10 (for a win) or $0 (for a loss).
For example, if you went long 10 contracts of the DOW +25 and the Dow closes at +40
you would get paid out $100 (10 contracts x $10) if you held until the close. You could always sell them intraday if you wish at the going price. The going price will depend on where the Dow is at the time. If for example, there's 10 minutes left in the trading day and the Dow is at +35, the going price for the Dow +25 contract will likely be about $7.5 (the quote by the market maker will actually show 75).
These contracts offered by intrade which I just described are 1-day binary options.
They provide a unique risk/reward tradeoff which if properly used can act as an effective weapon to the speculator's arsenal.
It can also just be used as a cheap way to speculate on the market or experiment with ideas on an intraday basis. It can also be used as a cheap way to test and sharper your instincts.
I must warn you however. There's not that much difference, if any, between gambling and trading these contracts. USE ONLY A VERY TINY AMOUNT OF CAPTIAL if you want to try these things out....no matter how good you may do initially....because it might be just pure luck.
I believe the most you can start off with is $250 as an initial deposit amount from your credit card...and depending on where you live and what credit card you use, you may not even be able to deposit money from it because of online gambling site laws/restrictions that are applicable to you.
And please, please, please don't blame me if you decide to trade intrade contracts and lose money. Don't be like all the burned shorts who are blaming Goldman Sachs for their loses. Use the site at your own risk and take responsibility for your actions.
I should also mention that I'm not affiliated with intrade nor compensated by them in any way.
Monday, August 3, 2009
Just about as stetched as it gets in the ST
As a result of today's move the market is now just as overbought as it gets on a ST basis so I'm expecting to see the market cool off here either by going sideways for a couple of days or pulling back.
I made a post a few weeks ago saying that conditions were beginning to remind me of March 2002 which led to a multi-month decline and new bear market lows. However, I did say that not all conditions were in place yet to make the comparison complete and conditions never did fall in place and to this day have not. What I expected to see when that H&S failed was full fledged capitulation from wrong way bears and a big spike in bullish sentiment as underinvested longs completely dropped their guards. Instead what we have seen is the same wrong way bears hold steady with their shorts or added back shorts quickly after getting stopped out while others simply got blown out of the water by force because they were already "all in". Although more sidelined money is coming in, you are also seeing longs quick to take money off the table and some have even turned to the bear side. I'm sorry, but that is not what you see at major tops. Everything I just described is the psychology you see in a bull market. The media is starting to talk more about a housing bottom and recovery but the average Joe Sixpack still isn't close to embracing that the worst is over. I still see commercials on TV that begin with "in these tough economic times". Main street media has been and always will be late to the party in recognizing a financial trend...by the time they recognize it, it's just about over or already is.
Unless I see a significant change in attitudes and expectations, I believe SPX 1100 at the very least will be seen before year's end. It's going to be tricky though from this point forward because the market is so overbought. In a strong market overbought can become even more overbought but we are at the point right now where historically on a ST basis the market has rarely advanced further without at least a bit of a breather. I see only a maximum of a 1.5% advance from here if the market just keeps going up from here without any retracement at all.
I made a post a few weeks ago saying that conditions were beginning to remind me of March 2002 which led to a multi-month decline and new bear market lows. However, I did say that not all conditions were in place yet to make the comparison complete and conditions never did fall in place and to this day have not. What I expected to see when that H&S failed was full fledged capitulation from wrong way bears and a big spike in bullish sentiment as underinvested longs completely dropped their guards. Instead what we have seen is the same wrong way bears hold steady with their shorts or added back shorts quickly after getting stopped out while others simply got blown out of the water by force because they were already "all in". Although more sidelined money is coming in, you are also seeing longs quick to take money off the table and some have even turned to the bear side. I'm sorry, but that is not what you see at major tops. Everything I just described is the psychology you see in a bull market. The media is starting to talk more about a housing bottom and recovery but the average Joe Sixpack still isn't close to embracing that the worst is over. I still see commercials on TV that begin with "in these tough economic times". Main street media has been and always will be late to the party in recognizing a financial trend...by the time they recognize it, it's just about over or already is.
Unless I see a significant change in attitudes and expectations, I believe SPX 1100 at the very least will be seen before year's end. It's going to be tricky though from this point forward because the market is so overbought. In a strong market overbought can become even more overbought but we are at the point right now where historically on a ST basis the market has rarely advanced further without at least a bit of a breather. I see only a maximum of a 1.5% advance from here if the market just keeps going up from here without any retracement at all.
Bulls not even giving bears a chance to breathe
Well, I was right to suspect a bear trap but wrong to think that we'd see a little dip first. As I type this the bulls have already made a few attempts at 1000...I don't think the bears will be able to hold them off for much longer.
It's going to be very, very interesting to see where this market closes today. If I had a gun to my head I'd say the market closes near the highs of the day
It's going to be very, very interesting to see where this market closes today. If I had a gun to my head I'd say the market closes near the highs of the day
Saturday, August 1, 2009
A bear trap in place? There's a good chance
Look, I know the market is very overbought and it would be piggish to press longs here, but I gotta tell you, be very careful here on the short side if you intend to hold for more than a day or 2 because I think a painful bear trap is being set up here just like with the failed H&S. A lot of people are taking about the 2 "doji" candles that are showing up in the charts. These candles take place when there is a reversal in the intraday trend, in this case a downside reversal.
These dojis are giving trader types the confirmation that the upside may have finally exhausted itself and therefore are going to play the short side. I've even noticed some bullish traders turn bear now too! On the downside last fall we saw the same thing happen in reverse...bears turned bull around SPX 1100-1000 but yet the market still dropped another 25% before making a ST bottom in October.
I've talked about the rydex ratio as a timing indicator. It has worked very well in spotting bottoms in particular. The rydex ratio is the ratio of exposure rydex traders have in bull funds + sector funds vs. bear funds + money market funds.
One of the best components of this ratio to watch is the level of money market funds because it doesn't get distorted by changes in NAV. Big spikes and drops In MM funds coincide with ST or IT bottoms and tops respectivily. Typically and naturally, the level in money market funds should drop as the market rises indicating a decline in fear but look at what's going with MM funds.
MM fund levels have actually spiked instead of dropped like they should be doing and are approaching record levels! This is very bullish from a contrarian pespective because its showing huge skepticsm/fear in the face of a rising market i.e. wall of worry behavior. Notice MM fund levels are almost as high as they were at the March lows!
With current levels of MM funds it suggests at the very least downside will be quite limited and at face value suggests another big upleg in the market is going to happen again in the not too distant future. I know this is only 1 indicator but it has been a very damn good one. The only way I see this working out in the bears favor is if on a dip we see MM funds collapse. That could happen but it's not likely.
Bottom line: The odds of another bear trap being set are high. We saw the market stop at the predictable level of 1000 and it appears as if the trading community continues to fight this rally tooth and nail. I know it's piggish to press longs here after such a run up but to go short for more than a day or 2 is out of the question for me given what I've just discussed. If the market dips to fill the gap and can hold 970ish the bulls could very well be setting up for another charge higher...it probably won't happen instantly though....a little bit of base building will probably take place.
These dojis are giving trader types the confirmation that the upside may have finally exhausted itself and therefore are going to play the short side. I've even noticed some bullish traders turn bear now too! On the downside last fall we saw the same thing happen in reverse...bears turned bull around SPX 1100-1000 but yet the market still dropped another 25% before making a ST bottom in October.
I've talked about the rydex ratio as a timing indicator. It has worked very well in spotting bottoms in particular. The rydex ratio is the ratio of exposure rydex traders have in bull funds + sector funds vs. bear funds + money market funds.
One of the best components of this ratio to watch is the level of money market funds because it doesn't get distorted by changes in NAV. Big spikes and drops In MM funds coincide with ST or IT bottoms and tops respectivily. Typically and naturally, the level in money market funds should drop as the market rises indicating a decline in fear but look at what's going with MM funds.
MM fund levels have actually spiked instead of dropped like they should be doing and are approaching record levels! This is very bullish from a contrarian pespective because its showing huge skepticsm/fear in the face of a rising market i.e. wall of worry behavior. Notice MM fund levels are almost as high as they were at the March lows!
With current levels of MM funds it suggests at the very least downside will be quite limited and at face value suggests another big upleg in the market is going to happen again in the not too distant future. I know this is only 1 indicator but it has been a very damn good one. The only way I see this working out in the bears favor is if on a dip we see MM funds collapse. That could happen but it's not likely.
Bottom line: The odds of another bear trap being set are high. We saw the market stop at the predictable level of 1000 and it appears as if the trading community continues to fight this rally tooth and nail. I know it's piggish to press longs here after such a run up but to go short for more than a day or 2 is out of the question for me given what I've just discussed. If the market dips to fill the gap and can hold 970ish the bulls could very well be setting up for another charge higher...it probably won't happen instantly though....a little bit of base building will probably take place.
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