Nov 30

60-min system is still on a buy signal, but that signal is weakening. Monday should be a telling day either way (is this consolidation before a new breakout above the 50 DMA, or has this sharp move up exhausted itself?).

Stepping back and thinking about the bigger picture: I have been of the opinion that we are now in an Intermediate degree correction, and I have been saying that this pullback will be like "the Apr-June 2010 pullback and not the May-Oct 2011 pullback" in terms of severity.

But I think there is a case to be made that it might be similar in form as well. Here are my current thoughts as to how this pullback might count like:

And here is a look at the Apr-June 2010 pullback. While the recent move down is not analogous to the 2010 'flash crash' in terms of severity, it is certainly similar in form (fast move that accelerated into a spike bottom without even a hint of divergence on a daily chart). The current move up is a sharp retracement to alleviate the deeply oversold condition from a local perspective, and I think it is similar to the move up in early May 2010:

Nov 28

The 60-min System buy signal that was issued Friday 11/16 is still intact. I am still of the opinion that the recent low is a pause before more selling off occurs. Current thoughts:

VIX: Why I don't think this was 'the top' and also why I think the correction is not over

There are many reasons why I don't think we saw 'the top' with the recent peak. See these posts for why:

Thoughts on the Fiscal Cliff
Update on Long Term Projection (08/17/12)
Long Term Projection, Macro, and an Analysis Retrospective

Let me add another to the list, which I have talked about before (see: Yet another reason why I don't think we saw 'the' top (3)), the lack of a long term VIX divergence. The VIX keeps making new 'recovery lows' as the SPX keeps making new 'recovery highs'. This is completely counter to what we saw at the 2000 peak and the 2007 peak where there was a very pronounced VIX divergence that was several months long.

So count me firmly in the camp that we have not seen the end of this cyclical bull market.

That being said, the VIX has also not spiked up on the current pullback the way it has on all the other pullbacks so far in the current cyclical bull. It seems to me that option traders are getting 'clever' with the market. That they think this pullback is already 'overdone' and they won't panic and are ready, if not eager, to preemptively buy this dip.

As I have been saying this past 2 weeks, I think that is the incorrect position to take. I was of that opinion in October, but since November there is too much technical damage to buy the dip now. I think the evidence (including what is shown below) is clearly on the side of the bears for the near term. And I think option traders are on the whole trying too hard to be 'cute' with the market.

I think we will get a much better entry after some more panic early next year.

My take at any rate.

(Update 11/19 7:30) Wow, this projection is very similar to what I am thinking as well. Read all the way to the end: http://pragcap.com/goldmans-kostin-stocks-will-fall-8-further-before-year-end

Nov 16

I still think we are in the middle of this Intermediate Term correction and not near the end of it. Daily chart is still suggesting more downside if I am looking for the correct setup. The 60-minute system issued a buy this afternoon and we are very oversold for the short term. If the market is trying to stage a bounce here, it might try to retest the 200 DMA before continuing down:

Here is my current best estimate for how this wave is playing out, for anybody that cares:

Thoughts on the Fiscal Cliff

Everybody should read this post by Warren Mosler: more on the cliff. I very much agree with all of the macro observations he is making regarding the cliff and what it means for the stock market going forward. I do not think this was 'the top', I think that after a correction we will have a very nice dip to buy.

So, why do I think we will correct more? Why don't I think we are bottoming now? A few reasons: Because of the *uncertainty* associated with the fiscal cliff. Many pundits are saying that there will be some sort of 'deal' / the 'Grand Bargain' struck either before the end of the year or perhaps at the beginning of the year. The latter is the more interesting and 'uncertain' option being waved out. Basically the Democrats want us to go over the cliff 'just a little' to scare Republicans into some sort of deal. This is completely idiotic on two accounts:

1) The political machine has broken down and is playing chicken with the economy to pass legislation. In this regard the markets are reacting commensurately to this action, no one has any idea what to expect for tax planning going into the end of year. What will tax rates be for 2013? How long does this game of chicken get played? What if there really is no deal struck and the full force of the cliff goes all the way through 2013? Combined with a very dismal earnings season that started bad and got progressively worse (and a massive deficit reduction / full force of the fiscal cliff in 2013 would be bad news for corporate profits) has investors nervous for any delay in some sort of deal

2) There is no 'crisis' to begin with regarding the deficit. The private sector is still retrenched and is still saving (spending less than their income) due to the excesses (spending more than their income) accumulated during the housing bubble. They are rightfully repairing balance sheets. Unemployment is still very high but has been slightly coming down, which means that the private domestic sector is starting to come out of it shell but just barely. It is still fragile. Couple this with the fact that we have a trade deficit. Now in the macroeconomy there are three sectors: Government, Private Domestic and Foreign. The Foreign Sector is running a surplus (which is our trade deficit) and the Private Domestic Sector is running a surplus (saving more than their income to pay down debts) then by definition the Government Sector is running a deficit. And since the US won't magically start running trade surpluses any time soon and combined with the fact that the private sector is nowhere near done with its deleveraging cycle, the government will need to continue to run deficits for the next several years. This goal of trying to cut the deficit in the name of 'fiscal responsibility' will deprive the private domestic sector of income while they still need it desperately. The US Government is not a 'super-household', it issues its own currency. It never faces a 'solvency' constraint. The concept of 'fiscal sustainability' is inapplicable to the US Government. And because we have high unemployment and spare capacity (see the summary at the beginning of this post) we can 'afford' to continue these deficits before we start hitting the real constraint, which is inflation. There is no nominal constraint. For a very good and succinct presentation regarding the budget deficit, see this video by Stephanie Kelton. It is well worth 19 minutes of your time. (Update 11/16: Also read this well-timed post by Warren regarding the deficit).

Back to the markets, I still think there will be some sort of deal put in place regarding the fiscal cliff. Even mainstream economists agree that the full force of the fiscal cliff will put GDP negative in 2013 and virtually guarantee a recession. And while the parties are willing to play chicken with this issue, no one will want to accept responsibility for causing a recession.

Therefore I agree with Warren that the deficits although potentially lower will still be high enough to support aggregate demand (and corporate profits) and with the private sector still slowly coming out of its shell will also support aggregate demand (or be less of a drag as was the case in 2008-2011). Combined with the 'certainty' of a deal we should see a resumption of the cyclical bull market sometime early next year.

My take at any rate.