Stock sentiment readings have reached extremes. Friday's STU outlines how many of the market's internal extremes are "stunning." The market enters the Santa Rally "severely overbought and deeply overbelieved." This should not be surprising, since as the The Economist notes, this year has done much better than expected:
Global output has probably risen by close to 5%, well above its trend rate and a lot faster than forecasters were expecting 12 months ago. Most of the dangers that frightened financial markets during the year have failed to materialise. China’s economy has not suffered a hard landing. America’s mid-year slowdown did not become a double-dip recession. ...
Earlier this year investors were too pessimistic. Now their breezy confidence seems misplaced.
Fractal Finance notes how markets ratchet from one extreme to the opposite, rather than behaving rationally. When fear gives way to greed, sentiment runs hot quickly, faster than reality. You can see how the market has rushed from overbought to oversold and back rapidly over the past year (chart courtesy Bespoke, showing the S&P above/below its 50 DMA):
The ARMS Index (TRIN) is at its most overbought since 1956. As ZH so colorful puts it, the TRIN is an indicator of market breadth which "essentially tracks lemming like momentum-chasing behavior." They add that historically any short-term gains after such extremes get "erased during the months ahead." The Big Picture notes that the ARMS Index has a pretty decent track record, and then supplies the following chart with this juicy comment:
This suggests that the Fed's QE2 and euphoria over tax cuts and FICA holidays are up against a rather overbought condition.
The Friday STU continues with a whole series of extremes & inter-market divergences, worth reading if this drives your trading decisions. While they don't peg a level for the top, they say at current levels it satisfies normal relationships - for example, the S&P is slightly above the 62% retrace of the whole drop in 2007-09. Some bloggers have fixated on Sp1246, where this final wave 5 is 62% of wave 1 (of the C wave that begun at the July low of Sp1011). Other relationships could emerge, such as 1291, where wave 5 would equal wave 1.
Picking a top is a difficult game. Neely called for a short on Wed but it got taken out. His wave structure should not breach 1240. And a drop may not be the top, yet. The bullish Carl Futia expects the market to hit strong resistance at 1250, and further expects a 50-75 drop "imminently" before heading back above 1300. Even more ebulliently bullish is a self-described "former bear" over at ZH who thinks the market has a ways to run:
Bears continue to get firehosed by the infinite fiat spewed forth by "The Ben Bernank"
He points to the lack of full retail participation in the market, which normally accompanies a top. Indeed, the small investor has been steadily abandoning this market rather than piling on, not normally a characteristic of a bull market either. So his indicator could be used either way: not a top, or not a bull.
Precious metals remain on a tear but also may be hitting resistance. Silver has been phenomenal since the late August confirmation of QE2. It has risen above $30 and breached a long-term resistance line, suggesting a pullback over the next week. It had hit that line in early November and fell hard off it, before continuing back up. If stocks reverse hard here as well, the STU believes this might mark a long-term top in silver. Of course, they have been bearish silver and gold during this whole rise. They think gold too is at a top, as the USD seems to be on a tear itself, and normally Dollar strength would result on Gold weakness.
(There is a lot of hoopla in the blogosphere that silver is rising due to a massive short position by JP Morgan, but this JPM Massive Silver Short story appears to be bunk.)
A final indication of extremes is that investors hold the biggest commodity positions on record. Speculative contracts in commodities are 17% higher than at the prior peak in June 2008, right when oil hit $147/bbl and fell down to $32 before bouncing. This is apparently not just a bet against the Dollar, but against fiat currencies in general. The CFTC may try to kill this, which will cause a fast reversal. Despite the speculative fervor, the CRB remains below the 2008 level:
Here is the type of person we need in this country:
http://www.youtube.com/user/Signalxfmdublin
Hock
Posted by: Hockthefarm | Sunday, December 12, 2010 at 05:51 PM
crude, gaso, and usd are all ya need to figure where the short term is going.
short term(a few days)
92-93 crude
2.46 gaso
79, maybe 78 usd
wave rust
Posted by: Wave Rust | Sunday, December 12, 2010 at 07:22 PM
I'm not seeing anything predictive whatsoever in that trin chart above.
Posted by: OracleLurker | Sunday, December 12, 2010 at 07:59 PM
So the STU expects the long term top in silver to occur on what would essentially be the first significant reversal in silver stocks after making cyclical bull market highs. Really? Straight up and straight down. Has that ever happened? If history is any guide whatsoever we should expect enormous gains to be accompanied by equally great volatility during the final phase of the silver bull market. Most silver and uranium mining companies are up around 100% this quarter and just now flirting with their pre- '08 meltdown highs. Now perhaps the risk adjusted return on this sector is just terrible, although I doubt it given the amount of leverage you would need to duplicate that return in an index fund, but I'll admit the volatility does somewhat limit the exposure you can allocate there - even using stops.
Nevertheless if you are just trading you're own account I'm not sure that risk adjusted return is necessarily the be all and end all of trading during all market seasons - particularly the third wave of a cyclical bull market in which billions upon billions are being pushed further out onto the risk curve. What was Livermoore's risk adjusted return when he margined himself short prior to the '29 crash? How about Soros when he bet the house against the pound? I'm all for back-testing (and believe me I've spent all weekend doing it) but there will be periods, albeit very infrequent, in which an amateurish approach to the markets will make a mockery of even the most sophisticated index trading system. Of course the amateur's problem is they never recognize when the game is up...
Posted by: OracleLurker | Sunday, December 12, 2010 at 08:42 PM
ZeroHedge is so hazardous to your financial health, that I don't even know where to start.
Anyone that actually trades the markets for a living knows full well that the Most Active list on the NYSE has been dominated by the likes of Citicorp (764 million shares) and Bank of America (240 million shares) and even General Electric (224 million shares) for awhile now...
In otherwords, the TRIN is being "skewed" by several of the financials, just as the TRIN was on the way down during the collapse in the markets in Q4 of 2008 and Q1 of 2009.
There's no predictive value there.
Posted by: Michael | Sunday, December 12, 2010 at 08:48 PM
Wave:
"I have never met a smart, educated woman that can even stand to have a conversation about her"
""I have met many.""
Rusty: I am going to assume that you are kidding here.
""But I well remember how evil most educated elitist people thought Reagan was before he decided to run.""
I'll admit that I defended Sarah P when she burst on the scene and eventually ran as vp. I thought the media and "evil elitest women's groups" were particularly hard on her. But the fact remains that she is not particularly bright, more of a gym teacher mentality in a small town. I think we got enough of that from Dubya and frankly I don't think we could take another 4 years of intellectual stupidity. If it is SP, then Obama keeps the job.
And while Obama's borrowing scares me, he is one very bright individual. It is nice to look up at a president for a change.
As for Ronnie:
At the state level he let every institutionalized nut out on the street. Ask people that work in that field what they think of him.
He was the first modern president to understand that you could run up massive deficits just as long as you opened every speech with "the evils of big government spending". And 30 years later, look where we are. Same old stuff, just a lot bigger.
Hock
Posted by: Hockthefarm | Sunday, December 12, 2010 at 08:57 PM
Wave:
"Common sense and picking the right people to run the government is the key to some success as a pres. Not foreign policy experience, or legal experience, etc. imho."
I agree in part. But isn't the real mark of a leader someone who checks up on the appointees, absorbs what they are doing and makes changes as needed? That takes a lot of brains imo, to absorb stuff quickly and correctly. Dubya was like the average 8 year old in this regard. In fact I don't think he ever checked up on anyone. And look where Sleepy Time got us. I don't think Obama is spending his time sleeping.
Hock
Posted by: Hockthefarm | Sunday, December 12, 2010 at 10:39 PM
Hey Visitors,
Its really nice blog. Would like to add that Share market is very volatile now a days. Apart from regular traders and investors FII are also there. FII and other investment houses are big fish who can easily eat up smaller fishes. Here fishes refer to normal traders and investors .
Now the question is how to avoid losses? Well answer looks simple by timing market, by following certain strategies, by keeping eye on happenings and with the help of technical research.. But Is it as simple as to mention here?
Profitable trading requires lot of things. One has to master in many fields. Everyone can’t earn from speculation one has to trust on technical analysis for regular profit. One should remember Learn and earn is the funda of the stock market trading.
Regards
SHARETIPSINFO TEAM
Posted by: sharetipsinfo | Monday, December 13, 2010 at 04:05 AM
ES CHART
http://niftychartsandpatterns.blogspot.com/2010/12/s-500-futures-before-opening-bell_13.html
Posted by: Account Deleted | Monday, December 13, 2010 at 06:12 AM
Hock
sorry, but i see no evidence of 'brightness' in oblahblah ,,, at all. no history of it academically or behaviorally. nor any current evidence since he assumed the office.
but if you want cunning, oblahblah shops at the same megalomaniax-R-us store as maddoff, trump, and soros.
the old saw applies ,,,, you can con some of the people some of the time ,,,, etc.
and, no I wasn't kidding about Palin. Lots of people like and lots have written her off.
Presidencies are filled by human beings, full of flaws and hopefully some strengths. W was way better than gore or kerry.
remember gore running around the west wing freaking out about the 'blue dress'? imagine what he would have done on 9/11.
electing pres's is a pretty good process. the flawed humans running have to convince the 100 million flawed American human voters across the country twice, primaries then general election, to give their flawed human ambitions a chance to govern.
flawed humans make mistakes when voting. Oblahblah is a great example of that mistake. most of the time the flawed human beings who vote get it right. when they don't get it right, like now, they resist.
wave rust
Posted by: Wave Rust | Monday, December 13, 2010 at 06:37 AM
the FOMC annual gift exchange is tuesday
what do you get the ben-bernank this year if you drew his name?
a bond crash?
a commodity crash?
a market crash up?
a chinese poo poo platter, with a side of Bond sauce?
a euro crash?
a basel bagel with a cheezy yen?
a weekend on jekyl island?
any suggestions out there? :))
wave rust
Posted by: Wave Rust | Monday, December 13, 2010 at 06:52 AM
Hock, Wave, I don't expect you to agree with me.
Fundamentally, here's the setup: The government induced la-la land is rolling over. The markets are starting to recognize this and the baton is being handed to weak hands. The economic crisis is starting to resume, and it won't be slow and grinding, as some bears have predicted. It will be very wicked, unbelievably wicked. The problem is much worse than it was in 2007.
Neo-Mamma
Posted by: Mamma Boom Boom | Monday, December 13, 2010 at 06:58 AM
Neo-Mamma:
"Fundamentally, here's the setup: The government induced la-la land is rolling over."
I don't disagree. The fundamental back drop for the Prechter/Dent arguement is that credit bubbles must eventually get cleared via the price mechanism.
OblahBlah(good one wave) and the Bernank are fighting that fundamental by creating massive debts for future generations to pay off long after they have gone fishing.
My conclusion is that the ketchup will eventually flow out of the bottle. Good luck picking the when.
That Irish diatribe I posted earlier was really aimed at the rat Greenspan. As soon as someone creates a product people don't understand, you can rest assured that the big sale is on. And boy was it ever. It really speaks to how institutionally weak we are as a people. Someone should have stepped in. We had a rat and an 8 year old at the plate. Good luck figuring out when it ends.
Hock
Posted by: Hockthefarm | Monday, December 13, 2010 at 07:41 AM
>Good luck figuring out when it ends.
Hock<
That's why we have 'technical analysis'.
Posted by: Mamma Boom Boom | Monday, December 13, 2010 at 07:54 AM
That's why we have 'technical analysis'.
Right. As I said: good luck figuring out when it ends. For the last year the STU has done a great job waving exactly where gold has been. Right down to the minutia.
My conclusion, instead of bashing Prechter and Dent is that weak government with unlimited power bring a whole new degree of freedom to the table. Chit happens, but just not when you think it should happen.
Posted by: Hockthefarm | Monday, December 13, 2010 at 08:13 AM
@mama:
"The economic crisis is starting to resume, and it won't be slow and grinding, as some bears have predicted. It will be very wicked"
Your comments are interesting since, from my following this site, you've not been a perma-bear or bull.
I'm supposing the jump in interest rates is signaling (and will be one of the factors) in the roll-over? As an aside, I filled up my gf's car this weekend -- I generously said, I'll take care of it -- and was shocked that it cost $47! I hadn't realized gas has run up to $3.15. I'm not particularly price sensitive, but, this was a wake-up.
So, do you think skyrocketing interest rates, commodity inflation and a dropping dollar will be the roll-over dynamic? Such forces could comprise a vicious feedback.
Posted by: rc | Monday, December 13, 2010 at 08:20 AM
4/23/10 will be revisited in a week or two, maybe sooner !
Be careful
Posted by: Hank Wernicki | Monday, December 13, 2010 at 08:23 AM
>So, do you think skyrocketing interest rates, commodity inflation and a dropping dollar will be the roll-over dynamic?<
Interest rates should continue up, debtor quality is falling rapidly. The dollar will rise for some time, the Euro is toast. Commodities are peaking out. IMO
---------------------------
Hank, tell me more!
Posted by: Mamma Boom Boom | Monday, December 13, 2010 at 08:43 AM
"...and, no I wasn't kidding about Palin. Lots of people like her and lots have written her off." - Wave
Sarah Palin is a quitter.
She QUIT on the people of Alaska to go out and do a book deal and book-signings. America does not like QUITTERS.
Politically, she's toast.
Posted by: Michael | Monday, December 13, 2010 at 08:54 AM
Most reliable signal I've seen is Prechter shouting his warnings. Such moments have almost always marked bottoms. History may not be any guide but, if you think it is, there is no better guide than Prechter shouting fire.
Hank, didn't you call for another May 2010 style crash a month or two ago? What makes you think you're going to be right this time?
Posted by: Not So Silent Cal | Monday, December 13, 2010 at 10:22 AM
>Moody's Warns It May Cut US Rating if Tax-Cut Deal Becomes Law<
Posted by: Mamma Boom Boom | Monday, December 13, 2010 at 11:23 AM
Speaking of Prechter and EWI...
I remember his new service that caters to labeling individual stocks with wave counts recommended shorting FCX around $83 in September.
Now trading $117 today.
LOL!
Posted by: JT | Monday, December 13, 2010 at 11:39 AM
EWI has adopted my long-term count on gold.
On silver they have this rally as being a gigantic B Wave off the 1980 high.
They think this because silver is about 60% of it's all time high.
Strangely enough, that count looks like the best fit. If so, then gold is probably in a B Wave too. According to this I have a good target low if anyone wants to know...
da bear
Posted by: da bear | Monday, December 13, 2010 at 03:52 PM
How many times have the folks at EW used adjectives such as "stunning", "eye-popping", "eye-opening", "once in a lifetime opportunity" to describe current market conditions? It almost seems they have abandoned using wave counts and instead rely on gut instincts to time market turns. I think we are ripe for a correction now, but will probably see new highs sometimes next spring. A whopping 85 percent of S&P stocks are above their 200 day MA. Although that's a deterioration from a record 96 percent in Aug of last year, still too high of a number to mark tops and still indicative that market breadth is strong.
Posted by: Paul | Monday, December 13, 2010 at 05:21 PM
michael
thanks for that opinion about palin.
I'm saving that one. :)
wave rust
Posted by: Wave Rust | Monday, December 13, 2010 at 06:24 PM
mamm
you are right.
i don't agree.
but i have the advantage of having seen the current movie before.
review the tepper interview if you want some input.
short answer ,,,, the economy isn't rolling over ,,,, and even if it was, that would make me even more bullish about the stock market.
what does the bond market mini-crash mean to you?
frikin stock markets everywhere are going to rock.
bank it.
i'm not a perma bull, except in bull markets. you aint never seen nothin like diss bull. never. nobody has ,,,, not even an old fart like me. this is going to be like a whole herd of Secretariats eventually.
heck, i remember being one of the very very few who was bullish in march 2009 (it's a bit vague now, my memory lasts about as long as a swing trade LOL).
wave rust
Posted by: Wave Rust | Monday, December 13, 2010 at 07:08 PM
There are indeed non-confirmations in the 52 week high readings. While the NYSE made a new high, the number of new 52 week highs did not take out the early November highs - a definite divergence. This would likely mean a correction coming soon.
Posted by: Paul | Monday, December 13, 2010 at 07:54 PM