I’m again very bearish short-term, basically taking the approach that we’re topping until proven otherwise. I think we’re about to roll over like we have three times since early August. Indicators show that each recovery since then has further disheartened the bears and encouraged the bulls, which is as it should be, making each top more likely the final top. It’s a process: the market shakes out as many players as possible, so that the fewest number of bulls and bears benefit.
I’ll start as I often do, with the equity put/call (10-day average) vs. SP500:
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Take a look at the similarity between the CPC and price action from January to July ’07 and that of May ’09 to today, and note the last time the 10-day average dipped below 0.55: July ’07.
The VIX is also indicating complacency, with its RSI well into “oversold” territory:
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I’m also noting the relative weakness of the Russell 2000 and Nikkei in this latest push upwards. The Russell has only recovered back to its September highs, lagging the SPX and NDX, and the Nikkei remains well below its August levels (as does Shanghai, which topped in early August):
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Multiple signs are pointing to an equity sell-off dead ahead (starting this week or next), probably at least of the magnitude of that in July-August 07 or June-July 09, which means 10%, more or less.
Whether we then recover to chop around up here another few weeks like in Sept-Oct ’07 or fall straight down like 1930 and 1938 is anyone’s guess, but CPC, VIX, DSI and Treasuries all say there could be a major top in this vicinity. For an indication of what support follows that top, you can look at technicals and fundamentals. The first major technical support is the SPX 900-950 area, where we peaked in January and June ’09 (and bottomed in Sept ’01), followed by 750-800 (bottom in Oct-Nov ’08 and Oct ’02 and March ’03), and then of course 666.
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Fundamentally, there is no value above SPX 450, a humdrum 11.25X multiple on expected 2009 earnings. Contrary to popular belief, $40 in earnings is not at all a depressed level relative to the last 15 years, but only compared to the very peak of the bubble in ’04-’07. At 450, the market would yield a bit under 5% on today’s dividends (which are still being cut and are only at 2005 levels). A 5% yield would be no huge bargain, but a lot better than the 2% investors are getting today.
For an indication of how quickly parties like this can end, take a look at what happened to the Brazilian stock market today:
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This US-traded Brazil ETF was down over 6% before noon today, leaving the previous four trading days as an island top. (I am short Brazilian stocks and the currency.)
If the US market does roll over here by 100 SPX points or so, keep an eye on the put:call ratio. I’ll be ratcheting down stops and very wary of a retest once the 10-day average gets a standard deviation above the mean (we must be 2 SDs under it right now). That said, it wouldn’t do to get stopped out on a 30% retracement only to see the market make an Acapulco cliff dive like in ’87, ’29, ’30 or ’38 as the crowd realizes that things have only gotten worse since last year. If this turns out to be a big third wave, it could take us straight to the March lows three months after the peak.
So it starts, the beginning of a downturn in Social Mood:
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Here it starts: http://www.showdowninchicago.org/index.html
The same financial institutions that caused the economic crisis and took billions in taxpayer bailouts are back to earning incredible profits. Meanwhile, Americans face shrinking pensions, rising foreclosures and unemployment, state budget cuts, predatory lending, outrageous overdraft fees, and sky-high credit card interest rates.
The American people want oversight, accountability and common-sense financial reform NOW. This is the classic David vs. Goliath fight, with Wall Street spending millions and millions on lobbying to defeat reforms that would protect the American people and our economy.
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People are getting it …. cheap financing is going to dissapear .. and the general standard of living is going to go down …
On another note, I am findiing that I am getting more e-mails for headhunters …. tech hiring is coming back but people are being more picky and the wages of a typical Sales Engineer is 120K base + 60K at plan … total 180K …. this is about 40K less than in 2006 … some in tech who were laid off that used to make 150K are now taking jobs for 90K … so, for sure, wage deflation is occuring …
So once again, the rich survive and prosper and those who have to bust their balls to make a living have to start all over again … don’t you love America?
I’m anticipating the end of the month because I’m curious to see what kind of PER we’ll get on the indices.
With the profits falling so much and market players ignoring any negative information, it’s going to be juicy.
There’s also such a massive misinformation with all the talking heads talking about operating profits and ignoring the actual net profits (sometimes losses!)…
And so much for the Russell, it retraced all the way up.
Still, I really think that the markets can go up through mid Dec for end of year Fund Manager performance … nothing stopping the train untill the bad news starts to come out on Q4 ….
That was interesting about Germany capping deficits. That’s about the only thing that government gets right these days. The country has been zombie for 90 years now, ever since the Great War. The only reasons they have done comparatively well under socialism are their inherent frugality and work ethic, and the US export market.
Pej, the Russell hasn’t done anything today — it hasn’t topped yesterday’s level, and is basically where it was a month ago.
It may also be painting a down channel since last week. I added to my TF short at 621.40 today.
Ahaha, love your analysis of Germany. But frugality and work ethics are important things that I do not find in the UK.
And from what I have seen, people have been way better off in Germany than probably anywhere else in the past 10 years: mild deflation, no house bubble, good quality of life… sometimes I’m telling myself that I should move there…
Yes, you’re right on the russell. I’m short as well and have been adding to my s&p 500 shorts in the past couple of weeks.
Russell soon, if it keeps on rising
Pej, the point is that the Russell has stopped rising for now, and has made no headway since September, unlike the Dow, NDX and SPX. If RUT does start up again, I’d get out of the way.
Before things can fall, their uptrends have to be broken. You usually get 1-2 weeks of sideways action on high sentiment readings (CPC, VIX, DSI) before stocks fall, so if you short every new high as soon as it is printed you assume a large risk of the trend continuing with no end in sight, when you really don’t have to. If you wait for a few days of sideways action, you then have a clear stop as well as a greater chance at getting the timing right.
We’re now into our 6th day of sideways action in the Russell, with DSI in the 87-90% range.
Thanks for the advice Mike-the-sage
Also, it seems like even Bernanke the Cheerleader is getting skeptical about his own green shoots… wait&pray