The e-mails are piling up asking for the latest update on the early 90's Nikkei road-map -- which is not surprising, as the post-bubble charts from these markets are remarkably similar. So here goes...
According to the unfolding timeline, and the relative field position on the two charts, I'd say the SPX is now doing exactly what it should to keep up this uncanny analog. The SPX has now broken down below first support, just as the Nikkei did at roughly this same point in time in late September/early October 1993 -- after having made an important top in mid-September.
If this guide stays true, then the SPX should waffle around now below that line -- roughly around SPX 1015 -- for most of October. There will be quick but short-lived ups and downs. The real whammy doesn't hit until the end of October, at which point the Nikkei lost about 20% in about a month -- a truly startling decline.
While nothing in the markets is pre-determined, it would be pretty silly to just dismiss this precedent. It's rare to have such an accurate map of how speculators behaved when faced with highly similar market circumstances. One thing that we do in fact know is human nature never changes, and post-bubble markets are ruled more by emotions and herding than any other trait. The chart of the Nikkei at a similar point in its post-bubble progress tells us how the herd reacted back then -- it can be nothing more than that. But it certainly will be interesting, and potentially highly profitable, if the current active herd of traders and investors continues to act in the exact same way as that previous herd in Japan.
If this road map continues to hold up, the market should now trade in a range between, say, SPX 975 and SPX 1015. If things get a little more volatile, or there are some more shockers to the downside, then the range could notch down to SPX 965 to 1000.
This has been a ripping six month run to the upside, and it will take some extraordinarily bad news to knock the SPX down below the old "neckline" at 965 without some sort of fight. (If it knifes through there, and the 40-week exponential moving average with it, then there's no need to hesitate -- just short 'em.)
Overall, I just don't see this as particularly great market environment for position trading, especially for those with a contrarian tilt. Bullishness, complacency and a widespread feeling that "the worst is over" is all-pervasive -- a sentiment mixture which should have sent the market reeling months ago -- yet it just hasn't happened yet. There are powerful forces at work (the Fed) pulling out all the stops to try to get this market higher. The market is now a "policy tool" for the Fed, and for the Administration.
Plus, there still seem to be large pockets of short-term traders ready and eager to short the lights out on the first hints of weakness. This makes for a tough slog on the downside, as these short-term bets need to be constantly worked off.
What we need for a big mid-term downtrend -- one worth betting on -- is a market where there is heavy, sustained selling pressure, as the bullish majority is forced to surrender their positions to a cascading market. There's no need to jump the gun right now in this, as the bulls still haven't come under much heat.
One thing worth watching closely now is the plight of the U.S. dollar. It's on the verge of breaking down to new lows. If the dollar breaks down -- and it almost certainly will before too long, with the current fiscal course we're on -- then it will undoubtedly drag the stock market down with it this time. A full-blown dollar crisis is the likeliest reason for a big washout to occur in stocks.
And in a big, big picture perspective, I want to correct the recent impression that I'm a "perma-bear". I was actually big-time bullish back at the October 2002 bottom -- and taking a lot of heat for it, I might add. It's my opinion that the market has to make one more shocking, cleansing washout to dramatic new bear market lows in 2004, fully cleaning out the surplus of bullishness. At such a scary low -- when despair and fear are palpable -- then you can "bet the farm" that a major multi-year bull cycle is about to come charging in.
Unfortunately, history also shows that we'll likely see about 15 more years of this secular bear market, so we'll have to play the major cycles -- both up and down -- for everything we can safely get.
Sentiment Dashboard
by Adam Oliensis
SENTIMENT TANK: Filled 13 points to 34% full of negative sentiment.
SHORT-TERM: Hourly gauge is now in a neutral posture with a decline bias.
MID-TERM: Progressed 5 points to 73% on the decline side. Confidence popped 2 points to a bearish 2 (out of 7).
LONG-TERM: Weekly gauge progressed 5 points to 41% on the decline side. Confidence increased 1 point to a bearish 1.
BOTTOM LINE: The mid-term gauge is approaching the key 75% level on its way down. Past that number and it's out of the central (yellow) zone, in which case we will likely be into a market selloff that's more than just a tidy bout of profit-taking. Likewise the Sentiment Tank, now at 34%, would be in a more serious decline if it moves above 42%. (That resistance level has been drifting higher as the Tank normalizes itself to the prior year.)
The Dashboard's readings fit hand-in-glove with our recently trusty 5-dma of the Put/Call Ratio. This chart shows the SPX (black), the P/C 5-dma (thick blue), and the "1 standard deviation from the 200-dma" of P/C Ratio (thin blue).
The P/C 5-dma is at 0.92, almost up to the +1SD line, now at 0.95. We're close to a "very" high reading. In a flat or in an uptrend then the P/C 5-dma will force an SPX bounce. In a virulent downtrend the high P/C 5-dma won't stop the bleeding. The TRIN closed above 2 yesterday for the second time since 9/24. The significance of that? Essentially that we're either pretty washed out to the downside and very very close to a short-term bounce or else this market is falling off a much bigger cliff. All the above internals are telling us that CRUNCH TIME IS IMMINENT.
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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