Today's big announcement is the unemployment rate for May, and it's likely this is going to provide the catalyst for some outsized volatility in the stock markets.
The likeliest thing is, of course, that the markets will again rally furiously off this number. Good, bad, or ugly, that's just what the markets want to do now. We are in a true blow-off top, the likes of which has not been seen since the early months of 2000.
As I mentioned yesterday, that was when the Fed was flooding liquidity into the monetary system because of phantom Y2K fears. This time they're doing it because of (so-far) phantom deflationary fears.
The aftermath of that liquidity party should still be fresh in your mind. After every short got squeezed (Qualcomm at $600?) and every single market participant the world over was rip-roaringly bullish, the market set about to find its true equilibrium point -- which was 50%+ lower than the top.
I could go on and on right now about overbought this and overbought that, but nobody wants to hear that anymore. That's yesterday's news. This market has been able to successfully silence even the Cassandras.
We've now had 10 straight up days, and strong ones at that. The way these blow-offs and breakdowns end is usually with one last monstrous thrust, which is dramatically reversed intraday. We saw this many times during the panic sell-offs over the past 3 years. The market would gap down after a major decline, sellers would panic, and that would set the stage for a massive intraday turnaround.
A massive whoosh up today would set the stage for just such a turnaround. We can expect it, actually. Right around the point where you find yourself muttering "Holy cow" (or something similar), the market will reverse. The bigger the move up, the likelier this is.
Now, here's an interesting and surprising fact: this rally -- and the entire trading range since the July low -- has lived within the confines of 3 weeks of price movement from the collapse back in July 2002.
We're now at the high of the first big red weekly candle from that breakdown. While the rally has gone far and has been more-than-impressive, it's remarkable that it's still regaining ground lost in only 3 weeks of a bear market panic decline. That's a "big picture" consideration that not many are considering.
Subscribers will find the latest edition of the McClellan Market Report posted to our web site this morning. Tom McClellan makes a great, detailed case for the stupendously overbought nature of this market, and he's expecting a sizeable correction into his timing signal bottom due around June 24th.
Tom also picks up on something I've been fascinated by, and that's the incredible parallel between our "anti-bubble" and that of the Nikkei back in the early 90s. The dips and spikes are coming at the exact same time. Professor Sornette told me in our interview that he's seen these same "decorations" on the charts of the 50+ bubble markets he's examined closely. Here's the chart from Tom McClellan:
What's amazing is the rally at this point in the Nikkei was actually stronger than the one we're seeing now. It was an absolute moonshot, which got everybody fired up that the 3-year bear market was over.
Tom also makes the case that we should see a quick, scary decline to re-introduce the concept of fear to investors, to be followed by a rally back to higher highs. I totally agree with this. With the monstrous strength seen on this rally, the buying urge is not likely to disappear so quickly this time around. It's very likely we'll see a return to these levels, or higher, after an oh-so-necessary correction.
Actually, the quicker and scarier the drop, the more likely it is that the markets will return back up just as quickly. The most bearish scenario is a "slow-bleed" back down, that keeps everybody bullish and buying the dips. But that's not the way these blow-off tops generally play out. They usually fall back just as quickly, and then grind back up slowly.
The Nikkei road-map is calling for this, and this is definitely the likely way for the market to go. That means we'll look to take off the Rydex Tempest position after the correction. This position may end up a loser, or we may blow right back down to the 910 area on the SPX and give us a chance to get out gracefully. We'll see how that goes. But in the meantime, I recommended de-leveraging this position yesterday with a SPY buy as a hedge, while we await the final blow-off. It could come today on the expected positive reaction to the unemployment report. Conversely, a negative reaction and a move back below SPX 980 should run some stops to the downside, which will likely cause a quick move back down to SPX 960 to 965.
Sentiment Dashboard
by Adam Oliensis
SENTIMENT TANK: The tankfilled 2 points to 9% full of negative sentiment on Thursday.
SHORT-TERM: The hourly gauge moved into a weak-ish decline phase.
MID-TERM: The mid-term gauge progressed 7 points to 60% in its decline phase. The Confidence diffusion Index regressed to a BULLISH 1, on the wrong side of zero and tugging on the gauge to reverse.
LONG-TERM: The weekly gauge is drifting down from 100% but is essentially neutral. The weekly CDI remains close to 0, though it progressed to 1 on Thursday.
BOTOM LINE: The tank is in a pretty trendless state at a very low level. It'll have to solidly break over 10% to start to look "trendy." Meanwhile the stock market is going up. In the current "phase" teeny little intakes of fuel are enough to get some decent mileage on the SPX. As long as that pattern holds it's bullish. We'll keep an eye out for that pattern's breaking down. When it does (and it certainly will at some point) there's a darn good chance we'll get a good decline phase. But until it does (break down), hats off to the current regime.
Se não receio o erro é porque estou sempre pronto a corrigi-lo
There's no bull side and no bear side. JUST THE RIGHT SIDE!
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