Weeekend Oct 26 2013
Several readers have forwarded remarks about how overbought the market is, buoyed by extended positive sentiment. Michael Gayed sums it up citing the low percent of bulls in the sentiment survey.
As one reader put it, Looks like the “little guy” is back in with the AAII survey showing a drop to 17% Bears, lowest in about 3 years. Also Investors Intel, Advisor sentiment at 18.5% Bears, about as low as it gets.
We agree and will attempt to identify a top for you over the next couple of weeks.
If you have not read the last two posts, please do so now. We compare 2013 with January 1973 forty years ago. We have been writing for some time expecting a parallel between the market action for the next two years and the disastrous 1973-74 experience. Then the DOW declined 50% in two years.
And we have a look back at our stock market training under Ross Perot. We will be serializing that experience in our weekend updates.
The Stock Market Short Term Count
Walter Murphy mentioned the SPY being in a fifth wave from the october low, looks like he is right.
Hedge A Bear Fund shorting Actual Stocks
Hedge is not a fund designed to trade directly opposite the SPX. Rather it shorts in diovidual stocks. Still it shows a fairly close correlation in the oposite direction to the SPX. If the SPX is topping in the next week or two, we whould be preparing to scale in HDGE.
Non confirmation from NASI
While the QQQ has gone to a new high, the NASD summation index has not. This is a glaring non confirmation of the new highs in various tech indexes. Participation is failing as the overall price index grows higher. We noted GOOG stockholders celebrated with a move to new $1,000 on its chrome book launch.
the Volatility Index has made its third higher low while stock indexes went to new highs. One would think this indicator would be at a new low but it is not. So there is some sense of apprehension out there.
Sootheby's usually displays a high correlation to the stock market. As an auctioneer of expensive items, this is another casual way to gauge risk on risk off sentiment. It has actually been going sideways since 2010 but is climbing once again. what a huge recovery from near nothing in March 2009.
Our conclusion is simply that stocks are nearing five year anniversary highs. Negative sentiment is swelling, in advance of that high, see social mood section later. We have been expecting a high in early November. Recall that Tom McClellan expected a high in early January (1/2/14) based on tax selling and top to bottom stock market moves.
I am going to hazard a guess that the Dollar makes its third higher low this next week or two. That should coincide with a high in stock prices and possibly gold and silver.
TLT a fund of 20 year government bonds
The rebound to the 125 day moving average and the 38% FIB re-tracement level looks like the correction of an oversold market. Some closed end municipals are still trading at discounts to Net Asset Value. If it is all one market, bonds would roll over and head down in price again with stocks. It will be interesting to see if that happens or if investors decide bonds are that flight to quality hide out in a stock sell off.
Janet Yellen and Barack may be surprised to discover they are not in charge. See the graphs posted yesterday courtesy of our friends at EWI. it shows a huge increase in the FED balance sheet from buying bonds but no bump in PPI or CPI, where is the inflation. About all we can say is that this bears watching.
Complacency on Parade Crude Oil Volatility Index
As the price of oil has risen from $35 to $110 and now fallen to $97.90, the volatility index has fallen to new lows. Hence complacency abounds. The conventional wisdom is therefore that oil prices will remain high. Regrettably I cannot locate a copy of the cover of Texas Monthly magazine latest issue. It proclaims Another Oil Boom, Want In is asks. This is of course exactly the style of magazine cover one sees at the TOP of an oil boom. it literally assumes the boom will continue.
Research however indicates magazine covers tend to be contrary indicators. Read this story to learn that after long periods of any upmove in some market, positive magazine covers emerge reporting the story. the timing of such covers often coincides with or near market tops.
Crude Oil remains in an uptrend. it is testing the weekly MAs. It has fallen along with the dollar. If we are right and the dollar strengthens, will crude overcome its dollar based pricing and rally? Like bonds this will be interesting to watch. As we say sentiment is over the top.
Since the dollar high in July and subsequent reversal, gold has rallied. If the dollar firms expect gold to turn down again, We remain bearish. LIke the TLT chart this looks more like a rebound from an oversold condition.
The downtrend has apparently resumed. The article above mentions higher wages and the inevitable slowdown just as Japan, Korea, and the Asian tigers experienced is setting in.
All One Market Revisited
In putting together the weekend letter I noticed the similarity of gold silver copper tlt long bonds and a closed end municipal bond fund. All look to be making weak rebounds in downtrends. Will the downtrends resume with a Dollar rebound, I expect so.
The Bottom Line
Stocks should peak in the next two weeks. That should be coincident with a bottom in the US Dollar. That may then begin a resumption of the downtrend in gold, silver, bond prices, will oil fall as well?
If you can't run a country, declare a Vice Ministry of supreme Social Happiness, really, now in Venezuela the poster boy for failed socialism. Meanwhile the resource rich country runs short on milk and toilet paper.
Page B 5 Stock Funds Rake in Cash
Cash poured into US stock mutual funds and exchange traded funds at the fastest clip in more thana month...S & P jumping to record high. Recall that extreme expressions of social mood occur at the end, not the start, of a move.
See our opening references to all time low bearish sentiment, another contrary indicator
The Remakening - Friday WSJ Section Four Arena
Behind the horror boom: film makers rea reinventing the genre dialing back the Gore nd emphasizing old fashioned story telling.
Carrie from 1976 has been re made. Insidious 2 made for $5 million, grossed $81 M. Horror films have taken in $495.7 million this year, 52% more than at the same time last year. While socionomics is not an exact science, but this is a startling indicator of the embrace of horror in just one year.This would be typical of a mood change preceding a change in a market direction. As the article puts it
Almost any way you slice it, horror is surging.
The White House is clashing with Congress over Iran sanctions, the Health Care Roll Out Has Dems in red states on the run, Germany and France bristle that the US hacked Merkel's cell phone, Tunisia riots, the Saudis publicly rebuke the US and decline UN Security Council Membership (after the US ambassador sent congratulations) the interview in the weekend WSJ is with a Chinese economist who got tossed from his University, and so it goes.
There is plenty of negative sentiment to fuel a market down turn.
Thanks for reading The Market Perspective
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