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How do you know....

....when the market is starting its collapse?

Silly question since there is no collapse? Or perhaps silly because there will not be one?

Again, I ask how do you know? Who knew on that day in October 2007 that we just saw a high in stocks that would last at least two years?

I get the feeling that gold is starting such a move - only to the upside. It has been too strong and too resilient in the face of some fierce arguments that it is a bubble or that the GLD ETF is self propagating or that it cannot possibly grow any more. Or that it costs too much to hold. Or that it has not use other than to hold. Or that there is deflation.

Yet day after day it moves higher.

And bonds are not budging. And the two-year yield is still near record lows. And the yen has nearly come all the way back from the abyss of silly government intervention.

So I ask again, how do you know?

I don't. I just have a feeling that something somewhere is going to spook the herd and the Dow will drop 1000 points.

The good news is that it will scare the pants off everyone and set the stage for the real bottom.

Sentiment quote of the day

Ma and Pa are not the first stage or even boosters of a bull move--more like the thrusters when this thing is already in orbit.

- ewave@cox.net (why doesn't everyone attach their names to their email addresses?)

Hussman's view

John Hussman's view:

Presently, our valuations measures suggest clear overvaluation (our estimated 10-year total return for the S&P 500, based on a variety of models including the operating earnings model presented a few weeks ago, is only about 5%-5.4% annually), market action is strenuously overbought, market internals are relatively positive, but economic pressures are still negative, and sentiment is once again bullish enough to define an "overvalued, overbought, overbullish" condition.

Real or photoshop?

Who cares? Technical analysis geeks need a laugh, too.  This one made its viral way to me from parts unknown.

This is messed up

If you think the stock market is rigged here are a few charts to stoke your fires:

Arena Pharma - This sector is always jumping on news or lack thereof. This one had FDA stuff pending and then it was not granted. Ouch!

Satyam Computer - This one was an Internet darling from India way back when. Supposedly, management liked the auditing reports but a few days later they say they would delist US-based shares. Doh!

Adobe Systems - Jumps on news Apple will let them in on the iPhone gravy train and then they release their numbers. How is the small investor supposed to cope? Not stop orders. Options? How about cash at zero percent. At least you won't lose.

Strike that. (Fiat) Cash is trash.

Jackie Gleason, CMT

...And away we go!

Jackie Gleason's tag line applies to the mood on Wall Street today. After a breakout and test, the S&P 500 is back in rally mode, at least as of 11am NYT Friday. Why? Not durables goods orders although it was better than expected.

It was Germany, where they breathed a sigh of relief that Europe's backstop was not facing a near-term  growth slowdown. One report on business sentiment unexpectedly rose in September.

This just reinforces the idea that multinational companies here - the ones driving the rally - are doing OK while the rest of the US economy flounders. It is the difference between the stock market and the economy. Domestic unemployment does not matter - for now.

The tanking dollar does not alter that theory. After all, it helps our multinationals export their wares.

So, I should be bullish? The tape is up, that is for sure. But there is something about gold being at record highs with no inflation. And even though bonds may have taken a little hit today, the 2-year yield broke down to record lows this week.

Stocks may seem healthy but other, smarter markets say otherwise.

Test Time

For the minions cheering the upside breakout of the S&P 500's trading range, today was either the best thing that could have happened or the worry that will keep them up all night tonight.

With today's roller coaster ending on a down note the index is now testing Monday's breakout. What is spookier is that the afternoon low was just about the same as the morning gap down low. In other words, all that good news that got juices flowing dried up.

I still think that the correct patter for the summer was a rising wedge not a trading range (see Wednesday's Barron's Online column). Or, just put up a NYSE composite chart to see.

So, do you buy 'em on this pullback or do you panic if and when prices go below the breakout point seen Monday? In the words of Bill O'Reilly, "you make the call."

Sentiment

Today's column talks about the breakout in the S&P 500, the breakout 10 days ago in the NDX and the lack of breakout in many other indices. It also covers a bit on sentiment with no hard conclusions other than the fear we say in August is completely gone.

Just wanted to give the nod to two of my sources that did not make it into the column.

Jason Goepfert of Sentimentrader.com said that the AAII data is not that reliable and short interest is not good too. He did say mutual fund cash levels were very low but that many funds are constrained to keep it that way. Therefore, he does not see an exuberant market.

Todd Salamone at Schaeffer's Investment Research said that hedge funds have been underweighted stocks for a while and are just now accumulating. Again, no frothiness.

Subjectively, I don't read a whole lot from fundamental types that do not say the recovery is at least plodding along and companies are making plenty of money.

Then again, that does not include Peter Schiff, to whom I had the pleasure of speaking a few occasions. Too bad I could not vote in the Connecticut primary for US Senator.

Clarification

My Monday Barron's Online column is at the top of both the most read and most emailed lists for the day at the Barrons.com site and I wonder it if was the title that drew in so many people. As it reads now - with sub-head -  it is:

Signs of a Recovery May be Found in Charts
Big gains in many commodity prices suggest that happy days could be here for U.S. economy.

What I submitted for editing was:

Rumblings of Recovery
A breakout in an old favorite commodities index suggests cyclical stock strength is real.

Now, my editors have a much better sense of titles and headlines than I do. But Mikey the Bear still likes gold.

Fed Fake Out

The market thumbed its nose at the housing data this morning but the real fun happened after the Fed said it was ready to do more to get the economy moving.  How buying bonds creates jobs is above my little technical analysis keppie but bulls, or was it fools, rushed in. I looked at a chart of the Dow intraday and it looked spooky - as in ready to haunt the greedy.

Was it an ingenious bit of financial engineering by Goldman and pals (yeah, I said it) to suck in retail so they could get out? After all, everyone say the resistance breakout in the market yesterday and even I had to relinquish the growling.

But the more this continues, and there is little outside of common sense that says it won't, the hard the fall will be, I am convinced.

Check this chart:
 

Adobe got slammed after hours for a weak forecast even though earnings were good. And only a few weeks ago it was sent to the moon with good news. The falling part was vicious and not very bull market like.

Mikey still likes gold and now silver. Awesome upside reversals in both (intraday) after the Fed basically admitted they have to do dumb things rather than do nothing.

Triple Digits? Must be Monday

Once again, the Dow scooted up triple digits on Monday and just as it was showing its lactic acid NBER declared that the recession ended in June.  Nothing like driving while looking in the rear view mirror.

Timed with this report was President Obama's town hall meeting on CNBC. Honestly, I do not know why he did it as the bulk of questions were about his perceived anti-business stance and how people can no longer pay mortgages, student loans and live the dream. Was it to say, "You know, you are right and we'll keep the tax cuts for all."  Or was it to say, "You know, you are right, we should enforce trade laws."

You get the drift. And I don't want to get political as that is not what this blog is about.

So the stock market rallied - a lot. Cyclicals/heavy industrials are strong. Housing got some good news and did well. Retail marches higher.  Commodities broke out last this month but today were weak - except gold and oil, of course.

Check out copper. A bear reversal? What is going on here? If stocks were down, everything would make sense given higher gold and bonds and lower commodities. But stocks are up and that means some other factor is at work.

It's not retail. Stock volume still stinks.

It's not mutual funds. They are already operating on record low cash.

That means traders trading with traders. Enough to suck in Joe 401-K no doubt.

Still asking for "Likes"

If you have not done so, I'd appreciate you hitting that "like" button over in the Facebook section on the right of this page -->

Technology of the Future

Just a few thoughts from Google CEO Eric Schmidt:

• "The best applications are being built for mobile."
• "The smart phone is the defining, iconic device of our time."
• "Smart phone sales will eclipse PC sales in two years."
• "The web is the biggest platform of them all."

For we in the stock market, it means WinTel (Windows and Intel)  is old tech. New tech, whatever that turns out to be, should lead the next bull market, whenever that is.

Poverty

Survivor fans may think Parvati but this is a bit more serious. The government released data saying that 14% of Americans live below the poverty line. That's $22K per year for a family of four. Who spends that at Starbucks?

It is an believable stat but what did Wall Street do? Why rally, of course.

I may be a technical guy but if 14% of the country has fallen below the line then there might not be enough consumers to go around to keep things humming.

The technician in me says to trade what is happening in the market and not what is happening outside the market. Very well. But I can't help think that the inevitable decline - when investors wake up - is going to be a killer.

Modern Day Depression

This was the headline in an article in Advisor Perspectives by David Rosenberg, Chief Economist of Investment Advisor Gluskin Sheff

He wrote:

The bottom line is that when we get to single-digit P/E multiples and a 5-6% dividend yield, we will be at levels that will touch off a new secular bull market and we are more than prepared for that eventuality. At that point, sentiment will be completely washed out, as it was in 1982, all the cheerleaders who failed to see the 2007-08 collapse and the new paradigm of frugality will be out of a job, and political change will have occurred.

Does not look like we are there quite yet.

Analogs part 2

In today's column i compared 2010 to 2004. Although I say so in the piece, it would not hurt to emphasize that the economic and fundamental backdrops of the two years are radically different. And back then I was not still looking for a debacle in stock prices, either.

Just to be clear, I am still a bear. The article talks more about timing - and that timing for a tradeable buying opportunity is not here yet.

Sy Harding of the Street Smart Report sees similarities between 2010 and 1992. Here is an excerpt from his Sept 10 free email distribution:

The current similarities to the fall of 1992 are not confined to the similar surrounding economic conditions and fear in the stock market, but also to historical seasonal patterns, and even the political situation.

In November, 1992, a Democratic president was elected for the first time since 1977, succeeding a previously popular Republican president, George Bush Sr. President Bush had become unpopular by re-election time, as a result of the difficulty his administration was having pulling the economy out of the 1991 recession. In another eerie similarity, that recession had been the result of the bursting of a real estate bubble; a serious collapse of the banking system (almost 1,000 banks had failed and had to be taken over by the FDIC); and federal budget deficits that were at near record highs. The budget deficits in turn were the result of economic stimulus efforts, and the costs of the Desert Storm war to drive Saddam Hussein’s Iraqi forces out of Kuwait.

Similar to the situation of our current president, the new president in 1993, Bill Clinton, became increasingly less popular as his efforts to revive the economy seemed to be taking too long, while he seemed to put too much effort into side issues like attempting to reform healthcare.

However by 1996, contrary to the fears of 1993 and 1994, the economy was recovering dramatically, and the stock market continued in what would become the longest and strongest bull market in history. Some of the economic highlights included the record budget deficits that were sure to bankrupt the country being reversed to significant budget surpluses.

Is it possible the present similarities to the early 1990’s could continue?

No one thinks so right now. The current opinion is similar to that of Time magazine in 1992, that the “once in a lifetime dislocations will take years to work out.”

I sure don’t have a crystal ball that’s tuned to look out five or ten years.

But I have been saying for more than a year that the market should see an important low in the October/November time-frame this year, followed by a dramatic rally of 50% to its high next year. That expectation of a further decline from here, followed by an important buy signal, is based on indications that the degree of economic slowdown has not been fully factored into stock prices, my belief that it’s still too early for the market to anticipate an improving economy six to nine months out, the market’s annual seasonality, and the history of the Four-Year Presidential Cycle.

End quote

I am not one to talk about the funnymentals but Sy and I do agree that we may see a nice buying opportunity later in the year.

Analogs

I cannot reveal too much here and now because today's column is not yet up on Barron's Online but the topic was a comparison of the chart of the stock market today a time period in the past - called an analog. These sorts of comparisons often look great on paper when they are made but tracking the market's two time periods does not always give you a good path to follow.

There are so many factors in play that any one of them can rise from being a non-influence to being the major tipping point. For example, ask a trader a few years ago what high frequency trading (HFT) was. You would ave gotten a blank stare.

Ditto zero percent interest rates or even a war on terror with its requisite changes in how business gets down (air travel, new security industries, protection of the power grid, etc...)

Anyway, more on the column after it is up on the site.

Is this good?

With all the talk of zero inflation, I find it interesting that corn (above), wheat, sugar, coffee, cotton and, of course, precious metals are all in strong rising trends. Cotton (below) should be especially troublesome for the deflationists.

Bond Bubble Bogasity

Bogasity (bogacity)
Something that is making me unhappy. Something that has an element of ridiculousness. Something that is totally false and untrue.

I've written that bonds were indeed in nosebleed territory but that this was no bubble. First of all, if we think it is a bubble it is not.

Bubbles are not just chart patterns. They are states of mind. Measuring tech stocks on advertising dollars per share or RnD per share as they did in 1999-2000 is a bubble because everyone thought it was the only way to go.

Ditto setting Joe the Plumber up with a 500K jumbo loan with no money down for 110% financing.

I think we may have seen the peak in prices (see today's column) but that we are going to stay in the area for a while. Bonds are still a lousy investment but they are better then stocks IMHO.

Check out how actively bonds of every maturity bounced off supports (again, see the column). And to the right you will see a Facebook post saying how shorter-term interest rates tanked. Down nearly 5% (vs. Friday's yield) on the 5-year and down 7% on the 2-year.

If you think that means the market thinks the economy is roaring back you've got another thing coming (which really means you've got another think coming - as in try again, ladies and gents).

I knew it!

I have been writing in Quick Takes Pro that all of the econonomic indicators we anziously await each day have turned into noise.  Here is an excerpt from a free Birinyi Associate report:

"Over the last eight years the number of indicators deemed to be "important" has doubled from roughly forty-eight per month to now over one hundred."

But wait! There's more! (Oh Billy Mays!)

"Additionally, these examples are only the ones that pertain to the US economy; today's market moves because of reports ranging from Chinese GDP to expected German exports to Greek debt."

Just this week the markets rocked and rolled over a Portuguese bond sale.  It is a good thing I look at charts instead of following Ben Bernanke around to report on the size of his briefcase and color of his tie.

Grandma again

I wrote this before and almost submitted it to my editor for today's column.

If Grandma had wheels she'd be a bicycle.

Excerpt:

But breakouts from patterns as the current large one require a marked mood swing, from apathetically neutral to energetically bullish. That is what breakouts are all about — getting the crowd moving one way or the other.
That shift seems nowhere in evidence. But if the market can suddenly fire up all burners and get the public back in the game, then I will have to eat my hat. (end quote)

IF the market can fire up on all burners it would be a bull market
IF Grandma......

She doesn't and neither does the market

Campbells - for your perusal

Mentioned Tuesday in my column

Health care

File this under irony - My kid needs a medical test. Insurance company has not approved it yet. I cannot show up at the doctor's office with cash in hand to get the test because my insurance company has not yet approved it. Feeling confident about more government regulations?

Hedgies Go Boom

I hope the long weekend went well for everyone. Here are a few snippets on hedge funds. You can piece together the story.

From businessinsider.com:
Recent and major departures from the hedge fund kingdom - Stanley Druckenmiller, Paolo Pelligrini, Richard Grubman and Lou Simpson - signal a trend of investors retiring at a time when hedge funds show the worst results in recent memory. The wave started with Druckenmiller, who was down for the first time in years and it just wasn't fun anymore. Then there was Pelligrini, also down, who said he fundamentally disagrees with the government's economic policies. (hat tip Alex Spiroglou)

From dailyfinance.com:
It's a Hedge Fund Life: Investing Billions Takes a Toll on Star Managers (hat tip Dave Steckler)

From NYTimes.com:
It’s funny, but when quants do well, they all call themselves brilliant, but when things don’t go well, they whine and call it an anomalous market,” said Theodore Aronson, a quant fund manager in Philadelphia whose firm’s assets have dropped to $19 billion  from $31 billion in the spring of 2007. (Steckler again)

From WSJ.com:
Computer-driven mutual funds, chastened by a string of poor results and a wave of redemptions, are striving to bring more of a human touch to their investment decisions. These so-called quantitative funds, which rely largely on computer models to select investments, have been on the fritz for several years. A group of 65 such funds tracked by investment-research firm Morningstar Inc. lagged behind 72% of their category rivals, on average, in the three years ended Aug. 27. (Spiroglou again)

Then there is always this fun site tracking hedge funds that blow up - http://hf-implode.com/

Funny how Spoos rallied before the news

Either data services are FUBAR in terms of how they report data and time or a lot of people knew what the jobs report would say just before it came out. You make the call.

Any way the wind blows II

The latest AAII sentiment survey is out and my have AAII members changed their tune! To quote the mailing:

"Bullish sentiment of individual investors rose 10.1 percentage points to 30.8% in the latest AAII Sentiment Survey. While the increase in bullish sentiment was dramatic, bullish sentiment remains below its long-term average of 39%.

The improvement in bullish sentiment comes on the heels of a strong stock market advance during the first trading day of September. Investor sentiment is often influenced by recent stock market action."

Influenced by recent action? Ya think?

It looks like for this to be of any value anymore it needs to be smoothed but at least a 3-period average.

Who drives a Fiat?

You never give me your money
You only give me your funny paper
and in the middle of negotiations
you break down
- The Beatles (hat tip Josh Schneck)

This is a picture of the dollar index. Looks like a bear flag to me. Is it any wonder gold barely fell on a day when stocks soared?  Fiat currencies - funny paper.

This is the euro index. Think the euro index should be the exact opposite of the dollar index? Think again, Poindexter. This one looks like a bear flag, too, albeit smaller.


Out of college, money spent
See no future, pay no rent
All the money's gone, nowhere to go
- same Beatles tune

Frank Sinatra CMT

That's life, that's what all the people say.
You're riding high in April,
Shot down in May
- Frank Sinatra (That's Life)

How did he know?  Market peaks in May, Flash crash in May.

(hat tip CNBC)