Rebel Traders – Analysis Without The Hype

Bob Prechter from ElliottWave International is making the call that the market is approaching a “super cycle top”

[...]  Among the many sentiment indicators he watched, Prechter cited the very low levels of cash at mutual funds, which is approaching levels seen near major tops in 1973, 2000 and 2007.

“Nobody should be taking risk right now. This is a time to be safe,” he says.[...]

The following interview is from February 24, 2010

Well that is what Jason Zweig writes in the Wall Street Journal today…

Don’t be happy; worry.

The Dow Jones Industrial Average is up 46% since March 9, when the world itself seemed to be coming to an end. In the entire 113-year history of the Dow, only six rebounds have been bigger and faster. But the swiftness and magnitude of this bounce-back aren’t reasons to be cheerful; they are reasons to be cautious.

In March, stocks traded as low as 11.7 times their average earnings over the previous 10 years, adjusted for inflation, according to finance professor Robert Shiller of Yale University. That put the market at its lowest valuation since January 1986. Today, however, stocks are selling at 18.4 times Prof. Shiller’s measure of earnings. That isn’t only up hugely from March but is above the long-term average of 16.3 times earnings.

Robert Rodriguez, chief executive of First Pacific Advisors in Los Angeles, says that in March, investors feared getting crushed in a further decline. Now all they seem afraid of is missing an even greater rally.

Mr. Rodriguez is convinced that the consensus — economic recovery by early next year at the latest — is wrong. “People are talking about whether the shape of the recovery will be a ‘V’ or a ‘W’ or even a ’square root,’ ” he says, “but I think we are in what I call a ‘caterpillar economy.’ It will be up and then down, up and then down. We will be far from normal for a very long period of time. People deploying capital will end up destroying capital.” [...]

[...] In August, corporate insiders — officers and directors of public companies — sold nearly 31 times as much stock as they bought. From last September through this past March, in the depths of the bear market, that ratio was just 2 to 1, according to TrimTabs Investment Research of Sausalito, Calif. The long-term average is about 7 to 1.

The people who run companies don’t know exactly what the future holds, but they do know more about their own firms than outsiders do. If they are furiously selling, how eagerly should the rest of us be buying? [...]

[...] The market’s latest hot streak makes the future feel predictable, but it isn’t. The Dow had an uncannily similar 46.5% gain in the 117 days that ended April 9, 1930; it lost almost 51% over the next year. Another 47% upswing in 1971 led to a long, choppy decline of more than 37%. The market also could go nowhere, as it did for months after a similar-size gain in 1975. Or it could hit new heights, as it did in 2004 after rising 47% from the lows of 2002. [...]

[...] to buy more of what has gone up, precisely because it has gone up, is to fall for the belief that stocks become safer as their prices rise. That is the same fallacy that led investors straight into disaster in 1929, 1972, 1999, 2007 and every other market bubble in history.

The market’s light has turned yellow. Don’t try to run it.

Yep…

An excellent, excellent and extremely funny post on panic buying by Joshua Brown, from the blog “The Reformed Broker” (hat tip to Carrz for finding it!). A quite useful (and funny) reminder as our further progression (if any) is now taking place in tense waters. Dedicated to all the bears who lost their money valiantly fighting the greatest rally in history (me included).

The Five Stages of Panic Buying!

1.  Denial (Late March/ Early April)

“Ha, another Bear Market rally…wait til the foreclosure/ new home sales/ confidence data comes in!  Right back to 6500, maybe lower…bagholders”

“Dude, the stress tests are coming out next month.  B of A may be done-ski.  Sell the May 10 calls, you’ll never have to cover.”

2.  Anger (Mid-April)

“What the f@&% do you mean the goddamn banks are cheap based on normalized earnings?  They will never ever earn anything again, ever!  Idiot!”

“You gotta be kidding me with these retailers running now.  RETAILERS?  Are you nuts?  They’re FINISHED!”

“If one more consumer discretionary name rallies on a less-than-expected loss, I’m gonna kick this Bloomberg down a flight of stairs.”

3.  Bargaining (May-June)

“Okay, I can stomach picking up some large cap tech and I’ll nibble – NIBBLE! – at discount retailers, but I will absolutely NOT buy Goldman Sachs at 130.”

If China would just pull back 5 to 7% I’d get in, but I can’t chase it here…except Sohu, and I guess a little Baidu and I’ll just take a quarter position in China Mobile just in case.  But I’m not chasing here.”

“(whispered) Dear market god, please stop the tape.  Just give me one crack at the Nazz and some banks and I will never doubt the solvency of the US balance sheet or the wisdom of the Troubled Asset Relief Program ever again.”

4.  Depression (July)

“I can’t believe I missed it.  Those D-bags next to me are high-fiving after every earnings report.  Hate those f@&%ing guys.”

“How could Las Vegas Sands do this to me?  I’ve been watching this stock go up for 900% now.  Couldn’t just give me one chance to get in.  I suck.”

5.  Acceptance (Early August)

“That’s it!  I don’t give a damn anymore, GET ME IN NOW!  Forget the big ones, they’re already up too much, are there any $5 stocks left that haven’t done anything yet?

“I gotta blow out this stupid GLD, it does nothing, sick of it and sick of hearing about inflation.  Even Paulson blew it out.  Get me some $2 biotechs and some midwest regional bank stocks, I gotta get poppin’ over here!  We’re going to 10,000 baby!”

If hearing these words and phrases from somewhere outside of your own inner monologue was at all cathartic or helpful, then you’re welcome.  I don’t care how smart you think you are, at some point this spring/ summer, we’ve all had to chase something.

To panic buy is to be human, just make sure you weren’t the last one in and keep your eyes on the exits.

(Reproduced with the kind authorization of Mr. Joshua Brown)

On ‘better than expected jobs data’ the market attempted to break the 38 fib retracement level (from the 2007 highs to the intermediate lows on March 6), but there was not enough left in the bulls to push it over the edge. The bear market rally has met its match.

From the intermediate low established on March 6th the S&P has advanced close to 50% in a span of time that is characteristic of bear market rallies, not healthy bull markets. From a seasonality perspective the market is entering the most bearish months. According to data going back to 1964 (traders almanac) when rallies reach a peak in the August/September months there is a high percentage likelihood that the fall months will be declines.

When peaks occur in the August /  September time frame there were only two times since 1964 that the market continued the rally, all other years (43 of them) registered bear trends in the months that followed.

It is my opinion that what we have experienced over the past months has been a ‘bear market rally’ and that the upcoming weeks and months will be back to the downside.

At least I am not alone in this view: Tudor Calls Market Bear Rally

I understand that my view of where the equity market is going to go next is considered ‘unpopular’ and against the mainstream media pump monkeys. But I am entitled to my opinion and macro economic views of the broader economy.And it is this broad analysis that makes me believe that the equity markets are extremely over valued at these current levels and that the ‘expectations’ for forward growth are too aggressive to sustain a further rally.

—–

S&P 500 charts:

(click on charts for larger view)

S&P 500 Long Term View

S&P 500 Daily

S&P 500 5 Minute Chart (Today's action)

As I have discussed in my nightly videos and chart analysis, the bear market rally that we have experienced over the past six weeks is approaching (if not already overdue) for a significant decline.

On this weekly chart of the Dow Jones Industrial Average we have multiple indicators that say why it is I have advised that taking ‘longs’ off the table, and to consider ’short’ positions.

Hanging Man

The Dow chart reveals that the index is below the ‘lower triangle’ line (resistance) and is also below the down sloping ‘upper triangle’ line. Additionally, we have the presence of two ‘hanging man’ formations. A hanging man formation refers to the candlestick charting technique and the name hanging man is a type of ‘candle’ that when appearing at the top of a bullish price advance indicates a danger zone for bulls. These types of ‘candles’, when they appear, are typically regarded as the earmark that a trend change is possible. Given all of the other technical factors combined this is why I have maintained that the market is set for a pullback at a minimum.

(Click on image for a larger view)

Like I describe in my nightly videos, signs of a down move in the broad markets is in ‘the charts’.

Chart reading (technical analysis) goes beyond just looking at the prices of individual stocks or indices. It includes looking at ‘cycles’ of various price indicators. In this case it is the measure of individual stocks that make up the S&P 500 index that are above or below their respective 50 day moving average.

Ron Griess over at the Chart Store spends numerous hours tracking some of the other aspects of chart analysis and he does a fantastic job. Ron has provided me permission this morning to include one of his charts for me to show to you how cycles within other forms of indicators can be used to gauge the overall market.

(Click on image for a larger view)

This chart provides us with yet one more indicator that the broader market is in an ‘over bought’ situation. I will have more market analysis in tonight’s video.

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