Markets have rebounded feebly from their early November bottom, with speculative interest focused in fewer sectors than in earlier risk binges. The hot money is now concentrated in big-cap US stocks over small-caps, and in gold over silver, reflecting a shift in preference for quality over junk.
With upside momentum taking a breather, we’re in another distribution zone, where assets move from early buyers to late comers. The put:call ratio, my favorite indicator of complacency, has backed off its recent highs and could approach the extreme lows we’ve seen recently if stocks remain at these levels for a few more sessions. That would be another excellent short-entry signal.
Souce: indexindicators.com
Here’s the last month of trading in the December S&P 500 futures contract:
Source: Interactive Brokers
If precedent holds, we could chop around up here for another week or so and test the highs a couple more times before rolling over. What’s important is that we have made no net progress for three trading days, and that we have a clear stop for a short position.
The moonshot in the Dow has not been confirmed by any other indexes, though a few of them have made minor new highs. The Russell 2000 remains the laggard, remaining well under the October and September highs. The Nikkei is similarly weak, and crude oil has just been working its way down a channel:
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I also suspect that gold’s run is over or nearly so. I’ve never heard so much talk of gold on the financial news and in other contexts. 19 traders are bullish for every bear. This is about as lopsided as it gets, and we’ve had a huge parabolic rise. It is hard to nail down where these ramps will end, but like oil in 2008, when their momentum stalls, they can fall extremely fast.
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For another take on things, here’s the ratio of gold to the US dollar index:
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Clearly the above trajectory is unsustainable. This is the kind of market action that draws everyone in and forces most shorts to cover. When that process is over, an asset can fall under its own weight. Conversely, the most fear and despised currency appears due for another bull run in 2010, in large part because of all the new debt that has piled up this year in the corporate bond frenzy and renewed carry-trade (borrow dollars and buy anything).
That said, gold should continue to outperform most every other asset class for years, since as professor Roy Jastram showed, its purchasing power increases in deflation when there is a gold-standard and when there is not (it is money, after all).
Mish Shedlock’s Version of “Lloyd’s Prayer”
Our chairman who art at Goldman
Blankfein be thy name
Thy rally’s come, God’s work be done
In the Dow as it is in the Nasdaq
Give us this day our daily gain
And forgive us our frontruning, as we punish those who frontrun against us
And bring us not under indictment
But deliver us from regulators
For thine is the cashflow, and the power, and the bonuses, forever and ever. Amen
Earlier version:
OUR CHAIRMAN
WHO ART AT GOLDMAN
HALLOWED BE THY NAME
THE RALLYS COME,GODS WORK BE DONE
WE HAVE NO FEAR OF CORRECTION
GIVE US THIS DAY OUR DAILY GAIN
AND BANKRUPT OUR NEAREST COMPETITORS
LEAVING NO ONE LEFT TO STAND AGAINST US
AND BRING US NOT UNDER INDICTMENT
FOR THINE IS THE TREASURY
AND THE HOUSE AND THE SENATE
FOREVER AND EVER
GOLDMAN
Buffett, Gates tell students worst is behind us ….
http://finance.yahoo.com/news/Buffett-Gates-tell-students-apf-2360295920.html?x=0&sec=topStories&pos=4&asset=&ccode=
Really?
I read the articles by Landis, Saville and Sheehan (refer to Mike’s link). They make good points, and I’m still trying to digest their arguments, but I have to say that Landis lost me at the following sentence:
“Finally, consider how long today’s public would tolerate a central bank that failed to carpet bomb it with fresh fiat once a credit contraction gets under way: about as long as an average American Idol audition.”
Seems to me that the public mood has swung the other way during the present credit contraction.
One of Jastram’s conclusions is that gold is a poor hedge against major inflations. I wonder if that is because nobody “needs” gold in the same way that he needs wheat, cattle and crude oil.
Speculators covering their short USD postions ….
http://www.dailyfx.com/forex/technical/article/cot/2009-11-06-2142-USD_Short_Covering_is_Dollar.html
We might just see a selloff in Dec …. Marry Xmas!
I do not think the rally will end yet…
http://seekingalpha.com/article/173361-global-markets-in-review-stocks-still-in-rally-mode-for-now
People are still bearish on US equities. Stocks do not crash when people are defensive. I also read in the Wall Street Journal that companies have a relatively high cash to asset ratios. I suppose one reason to be bearish on stocks is if investor’s portfolios changed where they do not possess enough cash. Has the “dip-buying,” commodity and foreign asset buying resulted in investors having less cash in their portfolios?
Maybe long US equities as a hedge for long dollar positions. I also remember Ned Davis saying that stocks could reach a P/E of 20 before peaking and we are about at 18.
According to the S&P website, the as-reported P/E ratio of the S&P 500 is a mind-boggling 137.98, about double what it was before the dotcom bust. Be that as it may, sure, stocks could continue to rise. But Mr. Gravity always wins in the end.
Stocks seemed to be pricey (relative to the past) right now based on the S&P website:
http://www2.standardandpoors.com/spf/xls/index/SP500EPSEST.XLS
3rd Quarter Top Down as reported earnings is at $14.91 and the S&P is at 1100.
1100/(15*4)= 18.3.
The highest reported quarter for top down earnings was 2nd quarter of 2007 with 21.88.
1550/(22*4) = 17.6
If we use the earnings 14.91 and price 1109, the market has the same earnings, price, and valuation similar to 2004. Of course, this does not appeal to any value investor, but from a superficial analysis, one could say that the market is not overvalued. However, it seems like that market prices have forgotten what happened in 2008.
Of course, sentiment is important as it determines short and medium term market movements. Since the long-term is a concatenated string of short-terms, using sentiment analysis can lead to superior long term results. But I want to know the allocation to cash in investor portfolios. I think Ritzholt posted a Barron’s fund manager survey that shows their sentiments regarding cash.
We at Seeking Alpha think your blog is great and would love to have you join our team. Please contact me at contributors@seekingalpha.com.
Thanks,
Becci
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Seeking Alpha was better when it was less cluttered. Now, conflicting advice and thin commentary make cutting through the crap more difficult. This blog is certainly one case where “less is more.”
Thanks, Leonard. I don’t know if I’ll write for them or not. I’m more likely to just submit some stuff to Tim Knight, since he’s started publishing others on slopeofhope. Zerohedge has gotten a bit diluted lately as well, but it’s still not bad.
I just finished reading Richard Russell’s latest letter last night. In my mind, Russell, at age 85 and going strong, is the single viewpoint I respect the most.
His latest quote: “Gold is the only bull market I believe in.” He goes on to make a very compelling case for a continuing rise in gold right in the midst of worldwide DEFLATION, which he also believes in.
helpful article!