Graphite here.
Although it’s easy for this kind of contrarianism to turn into unhelpful navel gazing, on Friday the level of despondency seemed to hit a new high (or is it low?) on the bear blogs. Posts and message boards are chock full of buzz about perpetual asset inflation powered by the Fed’s magical money machine and an ample supply of that tricky thing called “liquidity.” Visions of the 1990s and 2000s are offered as proof that the market can disconnect itself from any fundamental or technical backdrop and power to endless new highs. The January highs are trotted out as “points of no return” for the bears, as though the market is guaranteed to launch higher if it manages to cross that threshold. And with the market seeming to shrug off every negative news item from sovereign defaults to bank failures to continued hemorrhaging of jobs in the U.S., traders are unable to conceive of a “trigger” that could send stocks lower.
Meanwhile, take a step back and look at the technical picture the market is presenting at the moment. After a several-week buying frenzy in stocks, we have new highs in the high-beta Nasdaq and Russell indices, unconfirmed (so far) by the Dow and S&P. Friday’s 5:1 NYSE a/d ratio was cause for concern, but hardly a match for the 35:1 down day seen in the February selloff. The 17 handle on the VIX shows complacency in the option market. Bonds and the dollar remain very well bid, despite the imminent end to Fed purchases and the best efforts of politicians to dismiss the euro’s and pound’s woes as the unnecessary manipulation of nefarious speculators. After a period of sideways movement the currency DSI sentiment has backed off somewhat from its recent extremes. Sterling in particular seems to have taken over whipping boy duties from the euro for the moment, and may have just finished a failed breakout from a channel on the 1-month chart. I have entered a short position with a stop above the upper channel line:
Source: Interactive Brokers
If it tops here, crude oil will have put in a right shoulder on a ponderous 6-month H&S formation. A close today below 81.79 in the April contract would also create a bearish outside reversal bar (not shown):
Source: Interactive Brokers
Over the weekend Marketwatch ran a segment prominently touting “The Year of the Bull,” complete with an upward sloping line starting from March 1, 2009.
If immediate new highs are in store for the major indices I would expect them to be muted at best, following Friday’s buying frenzy and the outpouring of bullish sentiment and resignation from the bears. If all the indices turn and fail right here I would think we will put in a stronger, swifter leg to the downside than we saw in January. And with entries in various markets offering tight, well-defined stops at multi-week highs, risk/reward favors the battered bears for now.
