Friday, January 1, 2010

One for Estrader and MG really

Apologies but this looks important to me

My new year resolution is not to post any market related stories but only comment on them. However as i have said a while now i do think the easiest - but even thats not that easy - way to determine the change in HPs is to assume the correlation between HPs and equities will continue. On that basis calculating the top of the bear market rally in equities, seems a good place to look. This is a link to investors intelligence. I draw your attention to the Bull / Bear [BB] ratio chart in particular. I will also (for those that are interested) copy a rather long article by a blogger - who i think is pretty good (apart from the spelling mistakes i could have wrote it). It gives you a feel for how market people think, and how difficult it is to go against the herd. Lots of angst!!

Posted by techieman @ 12:26 PM (1461 views)
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11 thoughts on “One for Estrader and MG really


    That actually links to the investors intelligence numbers as shown.

    “I think everyone is eagerly awaiting what 2010 brings to the table. I think sentiment-wise bears are scared. Actually indifferent is probably a better word.

    Yes perhaps the market doesn’t have retail investors on board in droves but how many times do you think you can fool the common Joe? A crash in 2000, a crash in 2008. Most have seen enough. But worse yet, most don’t even have money to invest anyway. And the young people who were not of investment age in the 90’s are not involved as the older folks.

    Regardless, the rules they have placed on so many 401K accounts actually hurts the Ponzi. For instance where I work, we are limited to a mere 12 transactions a year between funds and 30 day hold rules. If I wanted to invest in an upswing market, I better darn well be sure its not going to crash in 30 days or else I can only watch my savings plunge.

    Talking about sentiment and bears, I think we can all agree that the market has trained us to not short. Or at least not aggressively. There is a “buy the dip” mentality ingrained. Now that won’t keep the market up, but its sure to support a plunging market and its sure to cause doubt every step of the way.

    Most bears have resigned themselves to the fact that the market is manipulated to the point that it can be outright controlled. Or that we cannot “fight the Fed”. Sure. Ok. And when the Fed “drains liquidity” they control it then too. There is a correlation of course. It takes real money to provide real market moves this is no doubt.

    But isn’t everyone convinced Brother Ben will continue to throw the kitchen sink at the market from here to eternity? Stop and think about the conventional wisdom about how the Fed controls everything. How do you square the logic of The Fed draining liquidity and also keeping their primary “plunge Protection” schemes going full blast? Are not these diametrically opposed actions? Which wins out and why and can you foresee it?

    Do they really control interest rates or do they react to what the market does? When interest rates go up via natural market forces, will they not raise the rates they do control in response? So which is it?

    None of it is logical. For if the Fed could control things why did the market crash 900 SPX points in 17 months in the first place? Couldn’t they have just kept things afloat and avoided all this?

    Let me tell you a secret: Ok here it is: The Fed, bought a lot of fraudulent MBS junk and they are in a pickle. They are hiding the biggest Ponzi ever to exist on the planet. It resides in dark pools and there is a hydra monster lurking inside. Secret number 2: Congress is utterly clueless. The nation’s brightest do not reside in the Capitol. They enable the Ponzi to grow at an exponential rate every year and we the people are becoming aware that its all a shell game. Secret number 3: No one is in control of anything.

    Law of Nature: No one can control social mood.

    Yes they rigged the Ponzi as much as they can, but until they outright confiscate and ban people from selling assests, they cannot stop the coming plunge in the stock market. There is simply too much debt to go on functioning in any kind of basic, rational manner. It is beyond insanity . It is a nightmare. And much of it is criminal.

    Let me ask you a question: If the market were to go up to 1160 SPX would you short it? Yes? then why do you think its going to give you the opportunity to do that? How about 1200?

    If I told you in February that the market would finish the year at 1115 SPX, and if I asked would you aggressively short it, what was your response? First a laugh then you naturally would have said, you would borrow your Grandma’s money to short it. Now here we are. Whats the prevailing attitude among even the permabears?

    It is one of defeat, remorse, regret even though, in general the market hasn’t done a whole lot at all in 3+ months. Must I remind you the SPX hit 1080+ in mid September and now we sit at merely 1115 and only after a low volume holiday rally? Did that 35 points crush your wallet or was it merely the churn? True other indexes and individual stocks flew but shorting FAS at $92 still looks pretty good yes?

    Ah but the pyschology. Its not that the market has advanced in great stages since September its that it hasn’t dropped that is so demoralizing to bears. So the sideways net churn has pushed the bears right out of the market. And now a lot of upper targets to 1160 or 1200 + are still painted even though the wave structure nor technicals doesn’t necessarily seem to agree.

    And what about technicals? I show this SPX chart and it sure looks bearish to me! Why all of a sudden do technicals merit the talk of “being strong”? Is it based on old paradigm stuff like 20 month MA crosses or monthly BB hits or whatever? Is it the advance/decline issues that, by the way, appear to be at an all-time peak which means they are ripe to crash? Hello? Bubble anyone???

    I mean every technical adviser I read on mainstream news stories has a “well, longer term I’m bearish, but for now I see strength” or some such crap. What is it? You bearish or bullish? It seems to me that depressionistic undertones have set in but old school thinking keeps him looking for upside, particularly after a glorous 10 month rally. I say thats bullish. Cause he’ll buy the big dip….always…

    Can anything technical be trusted when those old bull market, cycle-wave technical “sure-things” became the “norm”? Yes they are useful, but they are not all-knowing. My basic point is this: technicals will not prepare you for a crash nor even warn you. But yet in my book, they are warning. Its just that at sentimental peaks we ignore the warnings and focus on the stuff that will keep the current trend going in the same direction of the current trend.

    The churning out of debt and the debt promises illogical math can be spotted by a 5th grade math student.

    Indeed I spotted the same when I was merely 12. I used to think, and it bothered me, how can we ever pay back $200B? (mind you this was 3 decades ago) Well we cannot. And now its trillions as a couple hundred billion seems to be chump change. But of course its not.

    But again back to sentiment. Yes we all “admit” to being bears, but admitting and acting upon it are two differing things. How many times have you heard in the last 3 months that “so and so” is long term bearish but he or she can see short term strength through “X” quarter of whatever?

    I am excited. I was waiting for this time.

    When in September, I met a person I didn’t know and he was a retail investor who I perceived didn’t know squat about the stock market yet “talked” like he knew it all and traded on the side apparently a bit. This person told me that “there is a big crash coming in September, everyone talks about it”, I knew right then that this year was likely doomed to a long slow churn as I had dreamed up back in the Spring. I mentioned this stuff back in September in a few posts and it always gnawed on me since.

    Here was a rather flippant guy (hehe kind of like me I guess) who thought he knew what he was doing (not that I do, but hey he didn’t know much about anything really) that was going on and on about how the market was going to crash and how everyone knew it, I realized that bears were likely in for a long year. I mean when I heard this guy talk, my heart shrank knowing that if he was so damn sure that it was coming down in September or October or latest November, then surely it won’t.

    Am I sure its coming down starting in January? Well of course not I’ll tell you. But I have a strange confidence that I felt back in early March when I started to buy 401K long holdings. This isn’t wishful thinking anymore and I have had some of that for sure. Indeed I wish the market rises from here to complete another wave and put a bow on top of it all!

    But I have learned that waiting for that final up or down wave may not come if the previous wave came out of a triangle. And so I suppose it to be so here too. As far as the larger count, this is sharp historic rally that smacks of Primary sized waves that fits nicely into a known EW structure of a triple zigzag. The .618 ratio of corrective P2 versus P1 is almost perfect as is the retrace value of 50%+.

    Technicals are actually weak in my book and my gut tells me that its time.

    Heck, the logic tells me its time. What fund manger wants to hang out and be the last sucker out of the door come January? Is there no profit taking in this rally?

    You can only use the “well everyone expects it to drop so it won’t excuse for so long”. Eventually it peters out and loses strength. Thats what the sideways 3 month grind did and that guy in September that was sure the market was going to crash likely has changed his tune. I don’t see any more media stories on questioning if equities have come “too far too fast” as they did back in September and October. Now that the juiced ecomomic numbers have come out, it is no longer questioned much at all.

    Now the focus is on how much rally we can expect out of 2010. How about a crash?

    Yes its something that cannot be ignored. We had 2 crashes in less than 10 years, you really cannot make people forget or ever push the thought out of their minds completely I imagine. But what the market can do is take all the bears and put them in a state of “permadoubt”.

    How many fund mangers are licking their chops at buying equities at 1000 again? How about 900? 800? 700? Yes lots if not all. A permanent market above some fictisocus XXXX number is always sited. What number do you think the Japanese sited in their ongoing 20 year bear market? “stocks will never go below 20000 again for the Nikkei? 10000? They are still asking…

    Yes one more spasm squiggle on Monday would be just fine by me and make a nice complete waveform. But I suspect its not coming to a new peak. It just feels right.

    I ask, again, would you short stocks if they went to 1200? How about at 1150 and willing to hold through the pain? Well why would the market give you that opportunity?

    Happy New Year everyone!

    Log Scale suggests its over. Look at that perfect line kiss. Also note the double negative divergence on the SPX. First at the 2007 top, and then the same telltale signs at this week’s high.

    You ever see a day where the high of the day is the opening and the low of the day is the closing?

    Ever see a year open at high of day and close at low of day?

    My prediction is 2010 will be like one big bear day….”

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  • then there is a really pretty picture to illustrate:

    This is a log scale chart.

    To me this just looks too perfect – which is why i think we may have a little more upside to drag out the last of the bears. But i emphasise a little more. The action yesterday was a surprise but it was on pitiful volume so i think that it was just a bit of profit taking.

    Of course my definition of “a little more upside” may be quite different to everyone else.

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  • mountain goat says:

    TM – I don’t know why the bears are terrified, but the housing bears on here also seem to be or have left. Confusion reigns about QE and inflation. The government never gets anything right and now they are running the economy and the housing markets.

    I like the bit in the article you posted The churning out of debt and the debt promises illogical math can be spotted by a 5th grade math student (and Greg Pytell). Indeed I spotted the same when I was merely 12. I used to think, and it bothered me, how can we ever pay back $200B? (mind you this was 3 decades ago) Well we cannot. And now its trillions as a couple hundred billion seems to be chump change. But of course its not.

    Me? Well I think the wheels are about to fall off, I thought that all through 2009 and even more strongly now, but then maybe I’m just a perma bear forced to watch on the sidelines as the world plays its shell game.

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  • oh MG – easy to understand why the bears are a bit scared. Thats because most bears sell on a retracement after an initial move down. Very few have the courage to sell into a rally without some kind of confirmation. Particularly when the rally is sharp.

    After a few toe dips and getting them eaten off by the piranhas, emotionally the bears start to believe the bull hype, i.e. “buy on the dips”. The bears will, again typically, miss a bear signal and then find they were vindicated in doing so by the move being another false move. So they breathe a sigh of relief but then are put off of going short again by the psychology.

    As some bulls have said all along – near the bottom – this is a great place to buy the market, and they continue now that the low in March was THE low, some bears move across to be not so vociferous or even bullish.

    Then the previously bearish bulls are proved right, as the market continues to climb. I told you the story before of the guy during 87 who kept shorting the FTSE even though he lost what you and i would consider to be an absolute fortune doing it ( a few million), and as the market rallied he grit his teeth and just sold more…… until the 87 crash came.

    There is of course an alternative count that the bottom in 2009 was the “C” wave bottom and we have more gains to come. These counts have been coming out more and more lately. That is typical – as the first Investors Intelligence chart shows… but common sense really says why would you be bearish lower down but become bullish the further the market moves higher? It makes no sense… or does it?

    That is why as Prechter says financial markets dont behave as other markets behave. Remember most bears expected a retracement off the March lows – well there or there abouts. Its the strength, length of time and degree of that retracement that has surprised most.

    Much like the move back in the HP indicies has surprised – no shocked – most on here. As Mr P says ANYTHING can happen and we know that historically the bears have taken a beating, the market is skewed to the upside, of that there is no doubt. That is why it is a brave move to call a bear move in the first place.

    I obviously agree with you. Where we go from here is interesting, as you know i think the market does everything it can to shake out most of the people most of the time.

    Personally i am flat at the moment (except for a 5% of my original long $/ short £ position – where i had looked for 1.5815 to liquidate before this move back to now about 1.61 and change). I am looking to short the equity markets soon and to hold on to and increase the size of the short position, so as you say i think the wheels will fall off in 2010. When EXACTLY that is, is what keeps me interested.

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  • Things like this have a habit of going on for a long longer than anyone thinks possible…until the ‘new paradigm’ explanation. Then they change fast.

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  • mountain goat says:

    TM thanks, I hadn’t quite clocked his “buy the dips point”. If right then the market could keep going sideways for a while yet as hpwatcher points out as the bears grow new claws.

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  • True MG – but the charts on the link are pretty extreme now. Looking at the first chart there was some divergence at the March low, so we could have divergence at the top – ie a market top without a move to a top in sentiment. The readings of the BB ratio are the highest they have been on the chart and the % of bears the lowest.

    Its a shame there is no overlay of the S&P or Wiltshire on these charts… or i suppose even the Dow. … an dont get me started on the PE!!!

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  • mountain goat says:

    TM – with this BB ratio it’s surprising stocks going sideways not up (apart from NASDAQ). Surprising until you look at the 51.6% bulls chart 3, which is not massive. Low volume means bulls are spent? So this really is about the huge number of hibernating bears. Which might be similar to the UK housing market, bears being the forced sellers. Repo amnesties (nationalised banks told to back off) and low IR propping up the insolvent mortgage owners.

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  • Interesting stuff techieman. I however don’t view the market in terms of bulls and bears as such. I ‘see’ 3 major participants

    1) The Strong Hands – They know exactly what they are doing all the time
    2) The Weak Hands – They sometimes know what they are doing and sometimes take guesses
    3) The Public – Haven’t got a clue, easily manipulated and (as good as) always wrong.

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  • estrader : i dont know if you will look at this – i was out for the rest of yesterday. I accept and agree with what you say. But the point is this what can you use to determine whether or not the 3 participants are bullish or bearish??

    The link i posted has a definition as follows:

    “Each week the service Investors Intelligence surveys some 140 financial newsletter writers to determine whether they are leaning bullish or bearish in their opinions to subscribers. The resulting Investors Intelligence Survey compiles the data to arrive at a weekly percentage of bulls v.s. bears. The Survey is considered a contrarian indicator, since extremes in either direction are signals of reversal of the market’s current trend”

    So the theory is the actions of the public are supported by the newsletter writers. if they then are all bullish the public that use them are also all bullish – so it indicates your 3. above, which then means you should look to fade them (which is of course why i posted this in the first place).

    In terms of the “strong hands” i dont know if you use the Commitment of Traders reports at all? In fact it sounds like you do because it would correspond to “Large Specs” “Commericals” “Small Specs”.

    If i am talking a foreign language these sites may help – again sorry of i am trying to teach grandma to such eggs!! [this is a commerical indicator based on the COT reports – i dont have it myself but it shows you sort of what the indicator looks at].

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