The S&P 500 (SPX) moved up and through 876 yesterday, which in the current context is bullish. I say "current", because when it comes to this 876 level, you never know what the context is.
Since July 15th 2002 -- the date the SPX first dropped down to tag 876 -- it has spent an incredible 25% of the trading days in contact with this level.
More specifically, of the 182 trading days since July 15th -- 45 of them have touched 876 at some point in the session. (I counted it out this morning bleary-eyed, so I may be off by a day or two, but you get my point.)
Furthermore, over this period nearly half the days have been above this level, and half below. For nine months, the market has lived in a well-traveled range. Nobody knows anything!
But there is a big problem with this sort of range, which involves human nature. We get comfortable with things that are familiar. 876 is no longer the scary level it was when we came crashing down into it back in July. In fact, now it's a level for bullish jubilation as we come roaring up through it -- for the fifth time.
The VIX is reflecting this new comfort with our trading range. It's been declining broadly over the last nine months, reflecting investor's decreasing fear while we trade back and forth.
What once was scary has now become routine, or even cause for bullishness. That's not good.
This brings me again to the work of Professor Didier Sornette, whom I've discussed before. He's a wicked smart academic -- actually a mathematician/geologist/Ph.D-type, who is pioneering a new field dubbed "econophysics".
Professor Sornette and his associates have modeled a forecast for the "anti-bubble regime" on the S&P 500. Essentially it's an algorithm they've developed that models and predicts the back-slope of a mania bubble in financial markets. If you read their papers -- and I suggest you do if you want to learn more, or re-but their arguments (warning: it's tough going) -- you'll see how their models hold up extremely well in every bubble market they studied.
(Interesting side-note: they just examined the U.S. housing market for signs of a bubble -- and didn't find any evidence. This is great news, as I've read their papers and books and that would have made me nervous. But in the U.K., they are seeing evidence of a housing bubble.)
So here's Prof. Sornette's current forecast for the S&P 500:
Uh huh. It's not good for the bullish case. According to this, we should see a continuation of this sideways-to-up period before another massive cascade down, ending in 2005. Unfortunately for those who would refute this model, it's developing pretty much perfectly for this scenario to play out.
We've got the trading range. We could even see a further push higher, which already looks to be underway, and is coinciding with the lift from the war in Iraq. But the sentiment picture is clearly getting less and less bullish for the long term.
Obviously there's no guarantee of anything in the markets. But I've had this model in mind over the last months, and there's nothing that has happened to dissuade me about the potential for it to play out exactly this way. In fact, it seems to be developing perfectly.
Just so you know.
In the short-term, we're now solidly above 876, and those who have taken long positions are being rewarded. The fractal pattern that forecasted this leg up holds that the market is really only obliged to make a run up to the previous high at SPX 895, although it could go much higher. I recommend you take the "easy money" and exit long positions on any surge towards this 895 level -- which is likely to come this morning -- and look to re-load at lower levels.
After this morning's push, it's likely the markets will fall back and tag -- you guessed it -- the 876 level. If it breaks all the way back below 868, then that would wipe out the market's current bullish vibe.
Sentiment Dashboard
by Adam Oliensis
SENTIMENT TANK: The tank drained 3% on Wednesday down to "42% full" of negative sentiment. It remains in a down channel, putting in lower highs and lower lows. In the current backdrop it will likely need a steady diet of good international news to continue draining. In that context we could see it move down toward 25%. A move below 25% would likely require a real bull market, complete with good fundamental news. If we get below 25% without huge gulps of unremittingly good fundamental news, then this market will be on in a very dangerous spot.
SHORT-TERM: The hourly gauge remains in an advance phase. That phase may have weakened late in the day. The advance phase is looking a little wobbly and will require a fresh surge of bullishness. Otherwise it will expire.
MID-TERM: The mid-term gauge progressed 1 point to 10% in its decline phase. While the gauge hasn't been yanked back up by the short-term advance phase, it has decelerated. The Confidence Diffusion Index (CDI) has regressed to 0 (neutral) as well. This is why we like to wait for the gauge to gain a little traction when it starts to create a signal. The hourly gauge will now either give us bullish continuation or, if it rolls over, start confirming the sell signal. If we get that short-term sell signal, then we could be set up for our mid-term short entry. If not, then we'll ride out the short-term long positions.
LONG-TERM: The weekly gauge rolled under into neutral on Wednesday. The reading is actually bullish but we can't go bullish on this gauge (except in exceptional circumstances) intra-week. The gauge went from a bearish (red) 56% to a bullish (green) 45%. (It has turned up by 1 point on its raw score.) Our weekly CDI has moved from a bearish position to a slightly bullish one. The real "tell" here will be when we see how we look after Friday's close. This mid-week reading is pretty provisional.
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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