I analyze macroeconomic issues from a fundamental perspective, and I analyze market behavior from a technical perspective. Original macroeconomic analysis can be found here and both macro analysis and commentary can be found on my Caps blog. If you like or appreciate my analysis, please add yourself to my Following List

Friday, May 21, 2010

Sliding Down A Slope of Hope

In mid-March, I wrote this post: Putting my last post into perspective: Bears and Idiots - http://caps.fool.com/Blogs/ViewPost.aspx?bpid=355132. What I did in this post was to review why the January pullback was just a correction, what the signs were (and there were lots of signs). And to show some very obvious (and troubling) differences between now and then.

From the last post:

So what happened next? A nice fat very bearish selloff:  Looks Like Hibernation Time Is Over / The Real Deal? (Div....... But was it a crash? Nope. And could we have known at the time that it wasn’t

…. Yep. And I did, but I was being stubborn in my call. …. In short, I was being an idiot.

First indicator: Sentiment. It shifted from extreme bullishness to extreme bearishness *much* too fast. When the next crash begins in earnest (assuming of course we have one, which is *not* a given) it will be in denial. The bulls will be denying the new downtrend just as vehemently as the bears have been denying the uptrend (just as I have done many times). The fact that everything got bearish should have been a huge red flag.

Why? Like I said above: Markets climb a wall of worry and fall down a slope of hope. Changes don’t happen when they are expected, and they certainly don’t happen when the crowd is “on to it". When cab drivers start offering stock advice again (or hell, even engineers for that matter :) ) then we will have a top. Not before.

Second Indicator: The move was not an impulse. I saw this. I tried to rationalize it. I tried to justify it. But it was not one. I was so *sure* that the trend had changed that I ignored clear and valuable technical evidence to the contrary. Until we see 5 clear waves down in a impulse structure, with acceleration down on the 3rd wave, that is absolutely an unambiguously discernible on a 60 minute chart, there will not be a crash. That is the opening salvo. And even if we do see this, it DOES NOT guarantee a crash. But there is *no way* a crash will commence without this pattern.  P3 is an impulse, and the move from January to February was not an impulse. …. And I knew it. Shame on me.

Third Indicator:  This is the one I am really kicking myself over. Subconsciously, I knew the correction was over (which I should have know consciously). I knew it the day before the new uptrend started in earnest. I even got out of shorts. But I did not have the balls to go long. See this post from Feb 12: And the Hits Just Keep on Coming. I then tried to justify some BS expanded flat as a wave 2 and went short much too early.  

Lets talk about indicator #1: Sentiment

As I was saying above, everybody turned bearish in January. The comments that were made, blogs posted, and especially sentiment surveys showed a very sharp change in mentality. Everybody was onto the change, and major peaks don't happen in conditions like those.

Now compare the action of the last few weeks. You see all over the place in the blogosphere, and especially on Caps, statements like: "This is the correction were were looking for, just another dip to buy, look at all the beaten down blue chips, Time to load up!, selling pressure is easing, look at the VIX spike it is so abnormal, etc."

My point is: worry right now is NOTHING like it was in January. Even professional sentiment surveys agree. Bullish sentiment dropped only a few percent last week compared to the peak at the beginning of May. You are still seeing bullish (bordering on arrogant) pitches and comments.

On top of that, the macroeconomic picture now compared to January is far more imminently bearish and the technical damage done the last few weeks is far more destructive than January.

So looking at the technicals for a minute:

As I pointed out last week (No Whammies!) we had break through down and then a failed retest of the 20 day MA, 50 day MA and the support trendline going all the way back to March 2009. On top of that, we closed down yesterday below the 200 day MA in almost a year. Institutional investors watch that last one like a hawk. That is not something the market lightly shrugs off and catapults to new highs.

I think you should prepare yourself for a very serious pullback, not something that just gets mopped up in a couple of days. There is more downside before this trend is complete. My $0.02.

blog comments powered by Disqus