Our contributing analyst Jason Goepfert at sentimentrader.com -- whose excellent, detailed work on sentiment is available for subscribers on our web site -- had a great line in his daily commentary yesterday. He said that "after a very good 2002, 2003 has been a struggle as far as sentiment and market performance conforming to historical norms."
Jason's comment is certainly true. I've always known that at some point in the bear market, the "smart money" was going to get roughed up too. And there is some bizarre stuff going on right now, regardless of whether you are bullish or bearish. Number one on the "wacky list" is the bond market vs. the stock market. Traders in these markets are reaching emphatically different conclusions.
The yield on the 10-year note is down to 3.29%. Wow. Bonds are zooming up (they move opposite to yield), as traders in this particular market are looking forward to disinflation at the very least, and deflation at the very worst.
They are also looking forward to further rate cuts from the Fed, as the Fed Funds futures and the yield on the 2-year note are suggesting an imminent cut. This morning the ECB cut 50 basis points. These things don't imply strong growth.
Yet stocks are off on a speculative joyride that has not been witnessed since the heady days of late 1999, early 2000. At that time the Fed was pumping incredible amounts of liquidity into the system to stave off imaginary Y2K gremlins. Now they're doing it again, in a monumental effort to re-inflate the economy. But when companies don't need or want money, because they already have excess capacity, then excess liquidity starts flowing downhill into asset markets -- stocks, bonds, real estate, whatever.
Right now money is flowing into yesterday's darlings. It's puzzling that the putative bull is being led by internet, tech, and biotech stocks. Common sense would tell you that's not the way it's going to happen when a real structural shift is taking place.
It's actually pretty clear what's going on. The markets are building an "echo of bubbles past". It's a 1990s bull market reunion party. And the only style that works in a bubble, or a mini-bubble, is to just buy and hope that somebody wants to buy it higher from you later. It's buy high, sell higher.
Personally, I don't have the stomach for that version of "musical chairs" anymore, as you never know when the market is going to pull all the chairs away, and at that point it gets scary in a hurry. But obviously there are still lots of people that still want to play that game, and are enjoying great success at the moment. How long the Fed-orchestrated jam session keeps going is unknowable, but the band is definitely way overdue for at least a break.
The frothiness now in this market has reached breath-taking proportions. Everybody is expecting a pullback (me included) that just never comes. It will come, no doubt, but only after everybody has decided that it's not coming. But this incredible extension to the upside should serve to ultimately exacerbate the strength of the down move. When the pullback hits, and after the first dip-buyers don't get traction, then it's likely the markets will blow straight back down to the 910 area on the SPX.
Last night I looked again in detail at the chart of the Nikkei in 1992 - 1993. I'm fascinated by the process of the markets working through massive amounts of fear, greed, hope, and confusion. The backside of a bubble is a unique place for the markets to be. When everything is disconnected from fundamental reality (the bubble, and the anti-bubble) the emotional feedback loops invariably push the market to extremes in whatever direction they are going.
None of the great technical events in the Nikkei in 1992 ultimately made one wit of difference. The market charged up, pulled back, made another charge up, and then sold off sharply. Then it rallied again for many months (not shown). Then it sold off again even harder. It was a giant multi-year whipsaw. The market succeeded in cleaning out everybody, bulls and bears alike.
The similarities here are eerie to our current market. This is a perfect road-map to keep in mind, as individuals much smarter than I have shown that these anti-bubbles play out in characteristic, repetitive patterns.
I've put an arrow where the equivalent point is for today's mini-bubble. This makes perfect sense. This is calling for a quick, sharp pullback, followed by a run back up to the highs as the dip buyers come in. This initial sequence is followed by a much bigger drop, again followed by a longer retracement back to the highs.
Then we get the big move down, back to the low end of the range. Again, it's just a road map, but this is what happened at the equivalent point in the Japanese anti-bubble, at a highly similar point to what we're seeing now in the US markets.
As far as the Rydex position, I'll be honest. What I really think we should do is double up, and really stake out a bigger position against the crowd. But with the liquidity spigots wide open and investors wanting to "party like its 1999", it's too risky, at least at the moment.
So we may indeed need to take a loss on the Rydex position -- at least during this go-round -- but the zinger here is that ultimately such a position will end up being extremely profitable. It just may be too hard to hang in there for those gains. This market seems hell-bent on shaking out every last bear standing, and we may end up tossed out as well. We'll use any pullback towards SPX 974, that holds above this level, as a chance to de-leverage this position, at least until the frothiness is over.
Sentiment Dashboard
by Adam Oliensis
SENTIMENT TANK: The tank drained by 1 point down to 7% full of negative sentiment on Wednesday.
SHORT-TERM: Unreadable with the VIX caught in an extremely narrow range between 21 and 23. I could go on about how it's slightly this or that, but I'd be splitting hairs too fine.
MID-TERM: The mid-term gauge progressed by 2 points to 53% in its decline phase Our Confidence Diffusion Index (CDI) is at 0.
LONG-TERM: The weekly gauge remained unchanged at 2% in its decline phase but with a zero reading also at 0 on the CDI. This is more neutral than anything else.
BOTTOM LINE: With the VIX stuck between 21 and 23 for the most part and with the 20-dma of the Put/Call Ratio having flattened out to completely directionless I do believe the "cable" that connects the dashboard to the rest of the machinery has snapped. If it hasn't broken then it is simply beyond my power to interpret.
The SENTIMENT DASHBOARD measures sentiment by quantifying the price of options and the demand of puts relative to calls, and normalizing that over the prior year. Over the past 3 years there has been a very high inverse correlation between the level of the tank and the price of stocks. Over the past 6 weeks, however, the tank maintained an uncharacteristically flat level while stocks have trended up. In gross terms the tank is low and prices are high. That much of the correlation continues to work. However if we try to achieve greater granularity and measure the shorter-term waves and ripples the extreme lack of volatility in the level of the tank has rendered this tool "unhelpful."
The DASH will begin to work again when the TANK breaks definitively over 10% or else when the VIX breaks below 20.50.
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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