Weekend June 2-3 2012
Investors are even more fearful of Fall 2008 than they were in Fall 2008. Ten year treasury yields are 50 basis points lower, and TLT is considerably higher now than then. Yet the similarities to the market lows of last fall seem to have escaped the media, as usual.We showed the bullish percent and summation indexes were approaching those same lows. So let's get in our Time Machine and re visit October and August 2011, apparently so long ago that no one on CNBC bothered to check.
Day Date Open High Low Close Volume
Fri 07-Oct-2011 11123.41 11232.05 11051.13 11103.12 935017600
Thu 06-Oct-2011 10939.87 11132.60 10858.67 11123.33 1025864128
Wed 05-Oct-2011 10800.47 10950.89 10738.10 10939.95 1145720960
Tue 04-Oct-2011 10651.44 10825.44 10404.49 10808.71 1387509760
Mon 03-Oct-2011 10912.10 10979.19 10653.34 10655.30 1207355648
Fri 30-Sep-2011 11152.32 11152.39 10909.52 10913.38 854350912
Thu 29-Sep-2011 11012.79 11271.14 10965.45 11153.98 910333184
Wed 28-Sep-2011 11189.10 11317.08 10996.98 11010.90 812494720
Tue 27-Sep-2011 11045.23 11369.30 11045.23 11190.69 949432384
Mon 26-Sep-2011 10771.78 11057.49 10771.78 11043.86 95508787
We usually show charts but sometimes a table of numbers can be instructive.
Run your eye down the last two columns, what do you see? The volume peak coincides
with the low in the market October 4. What happened leading up to that Tuesday?
Friday Sept 30 Range of 243 points
Monday Oct 3 Intra day Range of 326 points
Tuesday oct 4 Intra day Range of 421, but managing to close 150+ points over the open.
Next let's examine similar behavior at the August low.
Fri 12-Aug-2011 11143.46 11346.67 11142.18 11269.02 1088445824 Thu 11-Aug-2011 10729.85 11278.90 10729.85 11143.31 1615814400 Wed 10-Aug-2011 11228.00 11228.00 10686.49 10719.94 1802669568 Tue 09-Aug-2011 10810.91 11244.01 10604.07 11239.77 1930980992 Mon 08-Aug-2011 11433.93 11434.09 10809.85 10809.85 2176846080 Fri 05-Aug-2011 11383.98 11555.41 11139.00 11444.61 1758963840 Thu 04-Aug-2011 11893.86 11893.94 11372.14 11383.68 1372052224 Wed 03-Aug-2011 11863.74 11904.91 11700.34 11896.44 909154624 Tue 02-Aug-2011 12129.77 12130.30 11865.56 11866.62 912042880 Mon 01-Aug-2011 12144.22 12282.42 11998.08 12132.49 771479296Friday Aug 5 416 points
Monday Aug 8 625 points
Tuesday Aug 9 640 points but managing to close over 400 points over the open.
With this recent history in mind, what is happening now?
Friday June 1 2012 recorded a range of 284 points, above the range of Sept 30 but below August 5
Now consider what has to happen mechanically to generate a market low and then a reversal
First, the greater number of players are short the market, though there is a buy for every sell
the larger number of sells drives the market down
Second, finally more and more sellers enter the market, fearful of a waterfall decline that ends in zero
Third, all the sellers have finally entered the market and sold, the selling starts to dry up
Fourth, at that point the professional short sellers close their positions by buying an equal amount
of stock, those that simply sold are now out, too fearful of buying back
Fifth, the shorts now double lup, buying an equal amount of their short position for the expected
move up
This explains why the widest range occurs on the final day of the bottom Massive volume is generated
by the shorts first covering by buying to close their positions and then buying their positions a
second time to go long
Interestingly the headlines of course proclaimed
Stocks have Worst Day of the Year, now Negative for the Year
rather than the more logical
Gee this is just like the two Fridays last fall just before the bottom
But that's fickle social mood for you.
Recall that way back in October, 1987, that Friday was down and then hit the Crash Low that
Monday
So there is a pattern of a Friday down day followed by a day or two of cascading prices,
then a sharp reversal.
While we cannot depend on history to reliably repeat with a down Friday leading to a low the
next two trading days, this is a remarkable similarity to the same sort of past events.
Now add to the mix
- did anyone notice the Euro was up Friday
- the declines in bullish percent and summation index which we have shown
- the rush into Treasuries yielding little to nothing (not to mention the principle risk of any
rise in rates)
- Gold jumped $50, a move in gold precedes stock market lows, and
uniform negative headlines about Europe, India, China, Brazil, you name it. å
And that is show the market forms a low in social mood.
Has The US Dollar Made A Temporary Top ?
We are using UUP an ETF for the long Dollar, and UDN an ETF for short dollars. Stockcharts shows ETFs in 60 minute form
which we have done above. The pink lines emphasize the exhaustion moves at top and bottom, the top and bottom, and then a decline in
the dollar and a move up against the dollar, which is to say the EURO
Bullish Percent
Very Important, note the big declines October 3 and August 8 in the tables Pleaes go back to the top of this
post and examine them again. And here
note the collapse in this indicator going into the final low in August. So there is still
plenty of potential for a larger decline this Monday to match the past August configuration. Top to
bottom there was a 12% collapse in August over seven trading days.
If you have followed our guidelines you are out of stocks, except for CEF and GDXJ which
rallied Friday. So you should be watching the panic safely from the sidelines.
SPX
Recall that most hedge funds use computerized software to generate trading decisions. And most of those like stockcharts
default to 50 and 200 day MAs. The closes below the 200 day MA not doubt generated more selling Friday, see the sharp
drop. This group think mentality of all the computers entering the same sell order is what causes the cascade final decline
one can see last October in both charts above. Please scan these two charts carefully as well as our somewhat ragged
in appearance table of what happened last August and october.
The best one can do is to align the current situation with similar situations in the past. The stars seems aligned for
a massive plunge in price with little follow through, and that is how bottoms are formed.
A Look Ahead
Notice that just since last October the market went form 1075 to 1425 making top and has now declined to 1278 but is probably
headed to 1225. Our point is that the violent swing of social mood has invalidated a buy and hold strategy. Expect more of this
stair step up and down, mostly down, action the next two years on the way to new lows.
Summation index
The summation index like the bullish percent could indeed fall further but we are within 200 points of
the same condition that existed at the last August low. So the potential for a lot lower on this indicator is simply not there.
Most of the decline has been rung out of NYSI. But NYSI declined for two months while the price averages
held up. So price is now falling rapidly to match what the internals have told us for two months.
The Bond Market
While the Dow Industrial are 1750 points higher now than on Oct 3-4, TLT is a full ten points higher.
So the fear level is greater now at a higher level of the DOW! And despite the stock rally,
note that TLT has stayed in a high range sicne late December. We were quite surprised
but clearly lots of brokers did not want to get caught in another Fall 2008, However they are about
to be caught in very low yielding bonds which are now much much more susceptible to a sell off.
GDXJ CEF
We remind readers that all markets do not bottom simultaneously. It appears GDXJ and CEF
have bottomed first which is historically what happens.
Here is a comparison of three ETFs involving Steel Producers SLX, Copper Miners COPX, and
Metal and Miners XME. This sector appears to be near its previous lows recorded last October.
The hysteria over slowing economies from Greece to China to Russia has most convinced that
the prices of commodities will fall further. But commodities are priced in Dollars in the US.
A lower dollar will rally these markets.
Crude Oil
In our weekly newspaper article two weeks ago we allowed that crude could fall to its uptrend line, well here we are! Yes the chart can be extended further back to the 2008 $35 low but that seems unlikely now. Crude is following gold in making a low, at least that is the better probability.
Strategy
One reader e mails that she never places orders outside of market hours. Actually the the better idea is to place orders outside market hours. One is not near as likely to be emotionally affected. And in the frantic moments of a spike down and reversal only the best of luck and fortune will insure a properly placed order ready and waiting. The low may only last a matter fo minutes or seconds. Only having placed the order prior to that low will insure its execution.
Here is an example using the XES Energy Service ETF.
XES
As best I can tell, the Energy Services are the strongest shovel ready sector in the economy, it certainly is not DELL or HPQ! In the last couple of months XES has dropped 25% from 40 to 30. It seems reasonable to expect a test of the uptrend line. If one wants to participate, a succession of small orders beginning below 29 and extending well below the 27.5 uptrend makes sense. The previous lows in 2009, 2010, and 2011 did not last long. The early and patient shoppers placing orders in expectation of bargains
likely got them. Those that thought they would be a Master of the Universe, sense the exact moment of the low, somehow enter an order on what is likely to be a Market Not Held Day, adn then get it completely filled on a record volume day, well, those folks are likely dreaming, real life does not work like that. We suggest you target your favorite bargains, well below Friday's close but at or below long term uptrends and enter multiple small orders at lower and lower prices.
Socionomics
A cursory examination of the Weekend WSJ reveals headlines and stories like this
A man assails firefightersin the grocery for buying steak rather than say hamburger, page A1
President Hosni Mubarak gets life in prison, at age 84, but escapes the death penalty
The Chinese Underground Railway is run from, of all places, Midland, Texas page A13
On page A15 Catholic Bishops are suing the President
On page B5 Raw Materials in Free Fall, this of course ignores that they are simply re visiting the Fall lows, see SLX COPX chart above
In Texas long time Lt Governonr Dewhurst is in the race of his life with Ted Cruz
No race better illustrates the Throw the Bums Out Mood that that of Donna Camplbell now in a run off against long time State Senator Jeff Wentworth. Campbell who has never held office spent a mere $110,00. Former Texas RR Commissioner Elizabeth Ann Jones spent over a million dollars but lost to Campbell. (the RR Commission regulates oil and gas in Texas, a huge political position)
Voters world wide are angry, and not taking it anymore. We have tirelessly predicted the rise of negative social mood in an attempt to prepare you for it, it is here now. Mayors in Chicago and New Orleans are battling alarming murder rates among their own citizens-a Mad Max moment in display.
But the social mood of wealth on display is hardly over.
A Ferrari GTO has sold for $35 M making it the most expensive car in the world.
End of the Book
Pretty much the same conditions that marked the final decline into the two big lows this past Fall in August and October are evident again. Price has lagged bullish percent and summation indicators. Expect even larger swings the next few days. Amateur investors will likely sell on the open Monday, omputerized trading will not doubt accelerate as prices fall further below the 200 day MAs. Trying to predict day to day movements is near impossible but a multitude of factors seem to be coming together to duplicate last Fall.
Gold has probably bottomed, the Dollar may have topped for now, expect crude oil and stocks to bottom a bit later.
Place your orders wishing for low prices, otherwise you won't get them. Do not place an order unless you are willing to hold the investment. Expect extreme volatility. Prices could easily drop hundreds of points on the DOW, this was the case as shown in the first two tables.
As with any forecast this is a matter of speculation. If you are not suited to extreme volatility, plan to enjoy a show of world wide socionomic extremes the next few days. Only buy and sell to the point you can comfortably sleep at night.
Thanks for reading The Market Perspective
Dennislelam@gmail.com
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The Market Perspective bases its information on techniques and sources that have been found to be reliable in the past, and The Market Perspective tries to base opinions on sound judgment and research, however, we do not guarantee that future results will match past performance ands no guarantee can be made that advice will be profitable. The Market Perspective accepts no money for stock recommendations and is purely motivated by its own research in recommending any stocks. Put another way, the responsibility for decisions made from information contained in this letter lies solely with the individuals making those decisions. The editor and persons affiliated with The Market Perspective may at times have positions in securities mentioned. Nothing contained herein represents an offer to buy or sell securities. The Market Perspective encourages investors to be diversified, and to maintain sell stops and risk control over their valuable investment capital. No guarantee can be made to the accuracy of text or charts.
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