I thought I’d make a quick post here to update some of my thoughts on the markets. Here’s the S&P 500:
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Most major world markets and US indexes look more or less like the above. Every one has rolled over since mid-October, and some made their highs several weeks before that. Based on measures of breadth and volume, this has been a strong and broad decline over the last two weeks. Fear has returned in pretty good measure, as witnessed by a 50% jump in the VIX and a breakout from its downward trend. Oil and precious metals fell, and the dollar broke its own downtrend, though it still needs another boost to confirm the move.
I was positioned very short equities, oil, metals and long the dollar, but over the last couple of days I’ve been tightening stops, closing positions and hedging the remainder. I believe we’ve seen the start of a major trend change, but for the next few days I would not be surprised by a minor stock rally. If one develops, I’d expect weak breadth and plenty of divergences if the primary uptrend has indeed been broken. That could be an excellent entry for short positions.
Tops are generally rounded affairs, though occassionaly declines from peaks will morph into waterfalls just when you’d expect them to ease up. We definitely have that potential here, and I will be expecting some fireworks on the other side of any little rally. It is entirely possible that the March lows could be revisited early in the new year, if a decline matches the aftermath of the 1930 and 1937 rallies.
Still too much bullishness … however, the buy on the dip is reducing now … people just have to forget how bad it was … negativity is the bullish propellant … in a wierd way … so, the more time we get away from the initial crash, the more time the media has to be bullish again and paint a rosy picture …. Iwith a minor bottom comming up in Dec … I still think the market will go higher in Q1 and then it’s downhill after that … but who knows!
My sense is that the general public is bearish. The labor market is still terrible. Even though business is up, nobody is hiring. The near-death experience has made corporate management ultra conservative (which incidentally, will be good for profits).
I agree with Max… this market experience told me not to follow the (bearish) crowd, and put fundamentals before sentiment and technicals. I think one has to focus more on the short term and use tight stops when the crowd agrees with your macro views. BTW, Mish (and the deflationists) are no longer a contrarians; they are the crowd. Look at the hit counter on Mish’s blog… 29 million hits. PZ’s blog (for comparison) has 61 million hits although he was popular before the credit crisis.
Also, go to Market Oracle, and Seeking Alpha. Count how many bullish articles are there. The real dilemma is that stocks are “fairly priced” if one uses the assumptions of mild deflation (which would occur slowly enough to allow borrowers to pay their debts thus reducing the need for mass liquidations, cash would be valuable since everyone wants it to pay off debt and its value isn’t eroded by inflation, and lower nominal interest rates which would increase the present value of future cash flows.) Going long on stocks isn’t a value play, but it is contrarian. One has to look for good technical and sentiment set ups before switching to a long position.
I have a short/medium term bearish bias, but I think it is quite likely that we will retest the new highs before a real crash happens. It seems the market wants to go down and create another bear trap but the good news seems to be keeping it up.
Aki: Good points …. once we have massive bullishness … it has to be pervasive … that is the BULL trap …. not yet IMO … we need to get far away from the death fall last year for people to forget it … however, my fear is that the bearishness has become pervasive as you mentioned with the number of hits on Mish etc … unemployment … etc …
Precheter’s got some Balls for sure:
http://finance.yahoo.com/tech-ticker/article/367008/Bob-Prechter-Bear-Market-Rally-Is-Over-Stocks-Headed-For-New-Lows
Bob Prechter: Bear Market Rally Is Over, Stocks Headed For New Lows
As of this morning (Nov 5) that chart for gold could hardly be more bullish.
It remains my view that we can have a waterfall decline in the stock market while the gold/dollar exchange rate continues to favor gold.
Why? In my view, because the entire world of paper money is engaged in a battle of competing currency devaluations…who can run the biggest deficits, hand out the most candy, etc. The FED’s ZIRP (zero interest rate policy) pretty much assures a dollar decline vis a vis gold.
AXclr8,
Prechter has balls, no question. The problem is, he doesn’t have any brains!:)
I realize you’re kidding, Paul, but actually Prechter belongs to the Triple Nine Society, which requires an IQ of about 150 (thus making him smarter than “99.9%”).
USD ready for a major rebound folks? What say ya?
USD is sure a tease, I’ll give it that. Hochberg’s been mentioning 74.50 as a secondary bottom target so I’m sure that’s where we’ll start higher