It's a widely-held notion among market participants that the U.S. is "not like Japan", and our bear market couldn't possibly resemble the multi-year rout of the Nikkei.
And certainly our structural problems are different, and our financial cultures are very different. But one important thing is the same, and that is both countries experienced a tremendously over-inflated asset bubble in equity prices. And asset bubbles tend to unwind themselves in highly characteristic ways.
I don't know how anybody could look at this next chart and not think that the Nikkei and the U.S. markets are trodding the same path. The following chart again comes courtesy of contributing analyst Tom McClellan, whose chart of the Nikkei is much better than my feebler efforts.
This chart shows the trajectory of the Nikkei and the Nasdaq composite with the exact bubble tops aligned, which was back in March 2000 on the Nasdaq. This means, almost unbelievably, that we're more than 3 years into our "anti-bubble" and prices are still tracking the Nikkei nearly to the day. We may not be exactly like Japan, but you wouldn't know it from looking at the charts.
Even with such incredibly compelling visual evidence, some people just don't have room in their minds to accept that markets can behave in such similar ways. Why not? People react in similar ways when provided with similar stimulus. When the markets are decoupled from reality -- as in a bubble and its aftermath -- then price action itself is the principal driver of future price action. It's clear from this chart that feedback patterns emanating directly from trader's short-term reactions and emotions can cover both old ground and new ground at the same time.
Look at this chart again. The correlation is astonishing. Every little dip and squiggle is there in both. (Note: this chart was from last week, so it doesn't reflect yesterday's push up in the Nasdaq.) Even the magnitude of the moves is similar. Obviously I wish I had been more in tune with this correlation at the bottom in March, or I wouldn't have skipped the long trade. (I made the foolish mistake of listening to my political representatives and believing that there was actually a major risk from the war and weapons of mass destruction... I won't make that mistake again).
This is obviously the road-map that we need to watch closely. Right now this pattern is calling for a broad topping pattern, followed by a multi-week correction of about 10%. Tom has calculated this bottom as scheduled for August 6th, but that's just a guide -- you can't take these parallels too literally. A 10% correction from here would take the SPX down to about the 900-910 range.
Such a pullback would be followed by a rally back to the highs in August and September, and then the "big one" hits with all its fury in the fourth quarter. On the Nikkei, this was a swift and sudden drop of 25%. Such a move would take the SPX to new lows under 750, provided there isn't significant upside from here, which this pattern is not calling for.
I actually think our markets may overshoot this to the downside during this scheduled wipeout, as we have incredible levels of bullishness which continue to swell amid the self-reinforcing positive feedback loop. Higher prices are making more and more people bullish. There is, literally, nothing else around to support a bullish case except higher prices and momentum. That's why the inevitable reaction will be severe.
So looking at this chart, the upside should be limited from here. After yesterday, it's now likely that we'll see some further thrusts higher, and possibly a quick push up to the 1021 level, as I outlined yesterday. If the SPX gets beyond that level and sticks, then we'll temporarily exit our half-position in the Rydex Tempest fund on our hard stop at 1024. If that does happen, it should just be a temporary move, and we'll look to re-enter as soon as it drops back through that same level. It's likely that I'll recommend moving to 100% allocation on such a move, in fact. Conversely, if the SPX flops back down without pushing higher, then we'll throw in the other half on a move below SPX 974.
Now is not the time to succumb to the bullish cant, but to instead plan on taking the opposite side of the crowd -- right when few are even considering it.
Sentiment Dashboard
by Adam Oliensis
SENTIMENT TANK: Filled up one point to 6% full of negative sentiment.
SHORT-TERM: Trapped in a pretty-neutral state.
MID-TERM: Neutral at 68/32. Our Confidence Diffusion Index (CDI) is also neutral at 0.
LONG-TERM: Weekly advance phase reasserts itself, pulling the gauge up out of neutral, + 3 points to 98% in a mature advance phase. Our weekly CDI is at a low level of 1 (on a scale of 0-7).
BOTTOM LINE: The tank filled with just a bit of fear as the market rose, probably because actual volatility increased on the upsurge in price. With the tank trapped between 0 and 20% there's nothing to contradict the bullish trend in Price unless/until we get a bona fide sell signal. The rush of liquidity back into the markets continues to provide fuel for price appreciation despite the low levels in our sentiment measurements.
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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