Throughout the bear market, there has been a strong correlation between the movement in stock prices and the yield on a 10-year treasury note (Note: yields move opposite to bond prices). The dollar has also been part of the troika that's been moving in sync for a long period.
Over the past month, the close-knit relationship between these three markets has broken down. The yield on a 10-year bond has dropped, and the dollar has cascaded, while at the same time stocks have had an extended move up.
Bond traders and currency traders are not sharing in the optimism shown by stock traders regarding the future economic path of the United States. Who is right? Bulls will proclaim loudly that stocks always lead the economy, which is certainly true. Eventually, that is.
The easy comeback to that is the rallies in August 2002 and November 2002 were bigger and stronger than the current rally, and they didn't pre-sage economic strength. They were short-covering rallies which caught enough momentum to squeeze every last bear out of the market.
That's what we're seeing again. There's certainly not enough evidence to call an economic boom right here. But luckily, we don't have to guess about these things. If there were bullish forces gathering strength in the economy, we'd know it from the Weekly Leading Index from the Economic Cycle Research Institute, which called the recession way back in late 2000 when everybody else didn't have a clue. The WLI is saying that the projections for economic growth are flat:
There's also this recent quote from the New York Times: "We do not see a healthy recovery," said Lakshman R. Achuthan, the managing director of the Economic Cycle Research Institute in Manhattan, which also foresaw the 2001 recession. "We just don't see business investment returning anytime soon."
Economic forecasting is really, really difficult, and there aren't many groups that are successful at it. The ECRI is the best, by far.
So there is an overwhelming amount of evidence from every market except the stock market that the economic recovery is muted at best. Stock investors will have little to fall back on once something comes along to knock out the bullish vibe.
The long-term VIX is showing an extremely interesting -- and potentially very alarming -- pattern. The "MACD" is a tool for measuring momentum in a market. The weekly MACD on the VIX just hit its lowest level as far back as my data goes, back to 1994, showing sentiment reaching bullish extremes in a short amount of time.
This MACD also shows the expanding oscillations in the momentum of sentiment. You can see clearly how the amplitude of each wave on the VIX has been growing larger as we progress through the bear market. This matches up well with the bear market waves seen in Professor Sornette's "anti-bubble regime", which I've shown often.
Prof. Sornette's forecast is calling for one more very large down wave to sweep through and fully cleanse the market of all remaining bullishness, after an extended benign period that could last into the middle of this year. The pattern of the long-term VIX is giving a good confirmation of this scenario. What might the market look like if the coming swing back to rising bearishness takes the momentum of the VIX into a higher amplitude wave?
But that is the story for later. Right now, the squeeze continues, as shorts are really on the run. As I mentioned yesterday, the bulls are in the driver's seat, and the bears are under tremendous pressure to cover short positions much more quickly than bulls need to liquidate longs. So everybody trying to "pick a top" here is getting blown out, time and time again. This process looks set to continue with relatively muted reactions to the Fed and Cisco.
This is an extreme moment for sentiment, and these end-stages are tricky. The instructions for the stop-and-reverse trade remain intact. If you're anxious to participate on the long side, you can buy on a move over SPX 938 that sticks for a full 30 minutes. But you have to sell any longs and go short on a decisive move back below 935, especially a sudden move down accompanied by a spike up in the VIX.
While everything else is looking weak, the stock market just keeps chugging along. Even though it is extended, there may indeed be some more points to the upside, as a equal point move to the first leg up off the March low projects to SPX 947, which is near the underside of the "neckline." But this is not a time to get complacent with long positions.
Sentiment Dashboard
by Adam Oliensis
SENTIMENT TANK: The tank filled by 1 point to 5% full of negative sentiment on Tuesday.
SHORT-TERM: The hourly gaugeremained in its neutral band with an upward bias. It flirted with going green after the Fed's announcement, but the VIX moved back into its narrow range between 23 and 24.5.
MID-TERM: The mid-term gauge progressed a teeny fraction to 4% on the decline side. But price and the CDI are moving the wrong way.
LONG-TERM: The weekly gauge remained unchanged at 99% in its advance phase. The weekly CDI clicked up one point to 3.
BOTTOM LINE: The market is thus far not taking advantage of this mid-term opportunity to decline. The market is overbought on both price and sentiment, but is able to remain so. That's starting to attest to the strength of the underlying reflationary (up) impulse. The indices are taking out more (and more important) resistance ideas. SPX 965 will be key.
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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