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Putting my last post into perspective: Bears and Idiots

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March 17, 2010 – Comments (11)

Here is my last post Idiot of the Day: bears. So the title is obviously a play off of zloj’s “Idiot of the day" series. But I want to discuss a few different aspects/intentions of my very simple post.

First, I am bearish. I am still very bearish on the fundamentals of the economy.

But I am an idiot? … The answer is yes

The post was obviously self-deprecating and tongue-in-cheek. But it is also an honest assessment.  

Why?

Because it is still rally time. The bulls are still in charge. And it was an obvious call to make, and I almost made it at the time, even though I was being stubborn.

The January Top, Why it was smart to be bearish there, Why the “crash" failed, and Where it was smart to be bullish

I made the case for a coming sentiment peak in December here: The Long View. Why is this important? Because markets climb a wall of worry and they fall down a slope of hope. Bullish sentiment readings from a number of different surveys were near all time high readings.  From the post above:

But the point of this is to show that stocks climb a Wall of Worry. But we are past that. Everybody is bullish. Investors Intelligence just had the most bullish investor sentiment readings in almost 3 years. Wall Street is slapping each other on the back. Economists are getting accolades. Mutual fund cash levels are near record lows. Everybody is bullish!

So if stocks climb a Wall of Worry, then they fall down a Slope of Hope. Be greedy when others are fearful and fearful when others are greedy.

That doesn't mean that "we reached the magic sentiment level and the drop immediately commences". I am not forecasting a crash tomorrow. But what I am saying is that the environment is ripe for a change. This is not the only necessary ingredient, but it is a key ingredient.


So my point was that sentiment was peaking and we were waiting for the wave structure to complete. You need to have both sentiment and technicals line up together to form a top. That is why my next study in January (just a couple of days before the January peak) set out to do: O Mandelbrot, O Mandelbrot. This post was a study of all of the Wave 1’s down and Wave 2 retracements within Primary 1. It was done to give idea for the shape of the structure for Primary 2, as well as the size and duration. From that post:

Before we go to the last chart and put this into perspective in the larger count, first notice that the structure of each Wave 1 down has a much clearer movement about it. It is an impulse wave and its movement slices through resistance, sometimes almost vertically. This is a motive wave, and its purpose is to carry the overall price movement in the direction of the wave that is one degree higher. And after each impulse wave down, there needs to be a correction. In this case it is a Wave 2. These waves tend to meander. However even when they trend strongly, the internal price action is very overlapping. This is one good way to tell a trending corrective wave from an impulse wave (there are other tells, but this is a key one).

And so what is interesting is that whether the price action took a couple of weeks to a couple of months to play out, the overall structure is very similar.

Next some stats

Wave 2 price retracements: 0.618, 0.500, and 0.500
Wave 2 time ratios: 0.236, 0.500, 0.618

And this limited sample set verifies what we see about Wave 1 - Wave 2 relationships in many other scenarios (on 1 minute charts, 5 minute, etc.). Wave 2's typically (but not always) are deep retracement waves, meaning they retrace the previous Wave 1 by 50% to 62%. The duration of any corrective wave is much more variable. The time component is almost always a Fibonacci relationship too. In these cases we see between 24% and 62%. Sometimes Wave 2's can be as long in duration as Wave 1's, and much more infrequently, even longer (such as 162%).

But *usually* it one of these Fibonacci relationships: 50%, 62%, 79%, or 100%

So now stepping back at looking one degree higher, what do we see about the rally since March?
Currently Wave 2 is 0.500 * Wave 1 in points
Currently Wave 2 is 0.618 * Wave 1 in duration

We can see that Primary 2 has hit many of the targets that we expect to see in relation to Wave 1. Additionally there is a lot about the internal wave structure in P2 that also has some nice Fibonacci relationships: Just a Step Back
So, What does this mean?

 It means that conditions are ripe, from an Elliott Wave and Fibonacci Relationship perspective for Primary 2 to be done.

But just because conditions are ripe, does that mean we will begin P3 on Monday? **NO**. Absolutely not. It is a possible scenario, nothing more, nothing less.


So what you see is that I was describing the stage, the technical and sentiment setup that made it a high probability setup (from a risk/reward standpoint) for a top. Before before I recap what happened next, I want to point out something else that I wrote in the post above that we will come back to later:

P2 might not be done. It might rally up to the 62% level (1240) and take us out to July (100% of time as P1). That is another scenario where P2 would still be a viable proportion to P1.

Remember this, this is important.

So what happened next? A nice fat very bearish selloff:  Looks Like Hibernation Time Is Over / The Real Deal? (Divided Opinions). But was it a crash? Nope. And could we have known at the time that it wasn’t

…. Yep. And I did, but I was being stubborn in my call. …. In short, I was being an idiot.

First indicator: Sentiment. It shifted from extreme bullishness to extreme bearishness *much* too fast. When the next crash begins in earnest (assuming of course we have one, which is *not* a given) it will be in denial. The bulls will be denying the new downtrend just as vehemently as the bears have been denying the uptrend (just as I have done many times). The fact that everything got bearish should have been a huge red flag.

Why? Like I said above: Markets climb a wall of worry and fall down a slope of hope. Changes don’t happen when they are expected, and they certainly don’t happen when the crowd is “on to it". When cab drivers start offering stock advice again (or hell, even engineers for that matter :) ) then we will have a top. Not before.

Second Indicator: The move was not an impulse. I saw this. I tried to rationalize it. I tried to justify it. But it was not one. I was so *sure* that the trend had changed that I ignored clear and valuable technical evidence to the contrary. Until we see 5 clear waves down in a impulse structure, with acceleration down on the 3rd wave, that is absolutely an unambiguously discernable on a 60 minute chart, there will not be a crash. That is the opening salvo. And even if we do see this, it DOES NOT guarantee a crash. But there is *no way* a crash will commence without this pattern.  P3 is an impulse, and the move from January to February was not an impulse. …. And I knew it. Shame on me.

Third Indicator:  This is the one I am really kicking myself over. Subconsciously, I knew the correction was over (which I should have know consciously). I knew it the day before the new uptrend started in earnest. I even got out of shorts. But I did not have the balls to go long. See this post from Feb 12: And the Hits Just Keep on Coming. I then tried to justify some BS expanded flat as a wave 2 and went short much too early.  

That brings us to Now…. So Where are We Now?

We are in the middle of an Intermediate Wave up. I don’t believe this wave marks the end of P2. I do believe we will get a pullback next (maybe to 1100-1120 on the SPX), but it mostly likely will not be an impulse. Which means that it cannot be the start of P3 down if it is not an impulse.
Wave structures have meaningful Fibonacci relationships in both price and time. And the end of this wave has only trivial relationships with respect to P1. Remember what I said above from my post above: O Mandelbrot, O Mandelbrot

P2 might not be done. It might rally up to the 62% level (1240) and take us out to July (100% of time as P1). That is another scenario where P2 would still be a viable proportion to P1.

This (IMO) is the most likely terminus of the next big move. The 62% retrace level.

Right now the rally is tired. Both volume and breadth are decreasing on the way up. Tired rallies are a good sign that we are entering into the capitulation phase of P2. Bulls are in charge only because the bears are not putting up a fight. This is just a pathetic winding up of the tape. That said, I think we have a few more months of it after a pullback. I think P2 wants to head to the 62% retrace (~1230) in April/May/June/July. And I think it will be an even more tired winding rally than this one.

It won't even be a bear killer, the bears are already dead. This one will be a bull killer. Euphoria will peak. It is like the "Vomit Comet" at the height of its parabolic trajectory. At the top, the euphoria of weightlessness is exhilarating ... until your lunch starts sliding around in you. The bulls will have a similar "euphoric-yet-something's-not-quite-right" feeling around then.

Once the wall of worry is climbed and the bears offer no more resistance, only then will we have *the possibility* of crashing. And not before.

Is a Crash Guaranteed?

…. NO!!.

Like I was pointing out here: Examination of the Large Technical Landscape / Possible Paths, the next phase in the secular bear market could be a crash (P2 to P3 transition). Or it might be an extended sideways trading range before a larger rally (Primary B and Primary C of Cycle X) that eventually makes lower lows (Cycle Y) very much like the Japanese NIKKEI has over the last 20 years.

11 Comments – Post Your Own

#1) On March 17, 2010 at 5:57 PM, starbucks4ever (97.81) wrote:

Hi binve,

My profile statement explains why I will never, ever, have a net short position no matter how frothy it looks: "It's much better to be 6 months early and bullish than to be 6 month late and bearish."

Bears may be very smart and they may have a very good case. It's just that we cautious bulls can afford to be wrong in situations where you bears can't. 

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#2) On March 17, 2010 at 6:51 PM, TMFBabo (100.00) wrote:

Because markets are irrational, I've taken the following viewpoint (and sincerely believe it):

Each day, I believe there's a 50% chance the market will go up and a 50% chance the market will go down.

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#3) On March 17, 2010 at 8:43 PM, Tastylunch (29.41) wrote:

-But I am an idiot? … The answer is yes

The post was obviously self-deprecating and tongue-in-cheek. But it is also an honest assessment.  

Why?

Because it is still rally time. The bulls are still in charge. And it was an obvious call to make, and I almost made it at the time, even though I was being stubborn.

I disagree with that Binve, you might be wrong sometimes ( I am too) but you are certianly not an idiot. As you know I saw a correction in january too and went a little short, but when the market turned I closed them. Portefeuille was right once again  as the market stayed within his channel  it bounced off the bottom of it as if on cue.

I just happen to think what you are trying to do with EWP Binve is really really really tough to do. Riding trends long I've always felt is easier to do well then time turns. IBD (well the old version of 1% not that 1.7% they use now) got me in and out with minimal damage this time.  As for timing turns I still find IBD's definition of rally vs correction (and the ye olde golden/death crosses) much easier to use.  

but that could be just because I'm a ninny. :)

anyway it always pays to remember the default direction of the market is up, it's designed to favor bulls, and it take special circumstances to actually meaningfully disrupt that. I know I forget that myself from time to time. :)

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#4) On March 17, 2010 at 9:09 PM, binve (< 20) wrote:

zloj,

Sorry for ripping off your "Idiot of the day" series, but it was the perfect foil for this message :)

My profile statement explains why I will never, ever, have a net short position no matter how frothy it looks: "It's much better to be 6 months early and bullish than to be 6 month late and bearish."

I agree. I went very short with long term money in January. And have scaled out of those positions already. The call was wrong. Mostly what I am referring to here are my swing trades, it was a very good setup for first the bearish case and then the bullish one, and I ignored the second one :(

Bears may be very smart and they may have a very good case. It's just that we cautious bulls can afford to be wrong in situations where you bears can't.

Very true! Thanks man :)

bullishbabo ,

LOL! I think that is a perfect and accurate description of the odd recently :) Thanks :)

Tastylunch ,

Hey man! No, in this case I am an idiot. I do want to be honest and accountable to myself. I make mistakes all the time, and that is fine. Those do not make me an idiot, just wrong.

But this was a mistake not based on the technicals, but because I was being stubborn. It was hard for me to even realize it at first. But that is definitely the case, and I wanted to lay it out there for everyone (not always a nice prospect, but an honest one) :)

I just happen to think what you are trying to do with EWP Binve is really really really tough to do. Riding trends long I've always felt is easier to do well then time turns. IBD (well the old version of 1% not that 1.7% they use now) got me in and out with minimal damage this time.  As for timing turns I still find IBD's definition of rally vs correction (and the ye olde golden/death crosses) much easier to use. 

Yep, definitely for the longer term stuff that is much safer to do!! But what I was describing above was my swing trade setups which is more on the bleeding edge. And that is the thing about bleeding edges, once and awhile the blood on there is from you :(

but that could be just because I'm a ninny. :)

You see my idiot and raise me a ninny? :)

anyway it always pays to remember the default direction of the market is up, it's designed to favor bulls, and it take special circumstances to actually meaningfully disrupt that. I know I forget that myself from time to time. :)

Good call my friend :) Thanks man!!..

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#5) On March 17, 2010 at 9:47 PM, starbucks4ever (97.81) wrote:

In the beginning it did feel very much like the beginning of a crash. If anything, it felt like September 2007. But then after we held 105 on S&P it became clear that the crash was getting sidetracked. It felt like the PPT came in with a hundred billion $$$ and bought the market that was going to crash according to the technicals, and then the bears saw all this liquidity from the PPT and ran for the cover. Such market manipulation is a natural phenomenon and it deserves as much respect from the active trader as EWT charts and other tea leaves and animal entrails.

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#6) On March 17, 2010 at 10:12 PM, checklist34 (99.71) wrote:

I already have a "this is euphoric, yet i feel uneasy" feeling about it all...  I'm selling basically everything as it moves past a one-year-holding time period and moving into myhighest cash position since last June on a percentage basis and highest in absolute dollars since early Feb 2009.  More cash is coming.

I am trading alot of cash in for shares in high-yielding blue chips like T, VZ, LLY, PFE and stuff.  

I don't think another severe crash is on the table for several years for a variety of reasons, but I think the runs in alot of the stocks that I was in are approaching their end...

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#7) On March 17, 2010 at 11:12 PM, starbucks4ever (97.81) wrote:

#6,

Agree. Stocks don't rise 14 days in a row. It's last year's February played in reverse. 

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#8) On March 18, 2010 at 12:47 AM, awallejr (81.59) wrote:

Sorry but I just don't see the "euphoria." This has been one of the least respected rallies in history imo.  You still have a ton of money on the sidelines just too afraid to commit.  Look at the chart of the S&P for the last year and it really is a near perfect chart, steady rise with needed corrections along the way.  The only thing the bears seem to have left is the dreaded "double dip" threat.

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#9) On March 18, 2010 at 11:14 AM, Londamania (63.81) wrote:

Hi Binve :)  Been a while since I commented here...still very active in the Market just not spending much time in CAPS.  Something to consider - I think there is an implicit floor in the market which is why you see a general overall climb higher and higher over the past 6 months.  Companies figured out quickly (much more quickly than many here thought) how to make money in the bad economy.  They shed the overhead (including people) necessary to make money.  So we need to keep in mind that we are buying stocks in companies not an Econoomy ETF so to speak.  What I mean by this is that as we get bad economic news, the market goes down, but when you look at INDIVIDUAL stocks and in particular large caps they are still pumping out good earnings because they have gotten very very lean.  And while the bad economy hurts them, they are winning market share as the weaker competitors die off. So sure the bad numbers will drop their revenue a bit but will only hurt profits so much.  And so the P/E ratio is going to get very attractive for many stocks (makret leaders) as the market goes down on bad news...and soon gets bought up on an individual stock level and we only drop so far.  I think this is exactly what happend in Jan-Feb and will continue.

So....buy the dips!  For market leading companies :)  The earnings will continue to be fine even with a flat economy.  We were talking about getting in last Fall when S&P was down at 900 I hope you did :)   Some of my holdings are already starting to up the divvie paypout which is a trend over time I fully expect.

And - get some C now.  Will be at 12 or higher in three years and will be paying a dividend again at some point in a few years.  Remember how you were telling me you hated GE all last year - I bought at 7 and it's over 18 lately and starting to rumble about a higher dividend payout at some point :)  Get some C!  it ain't going under.  The government divestment will very likely occur through institutioinal investors or a secondary specifically created to pay it off.  It won't trash the stock and it will likely shoot up as soon as it is announced (as it will clear up the black cloud overhanging it).  People at our level won't know when this happens so get in now BEFORE earnings in mid-April. 

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#10) On March 18, 2010 at 11:41 AM, binve (< 20) wrote:

zloj,

and then the bears saw all this liquidity from the PPT and ran for the cover. Such market manipulation is a natural phenomenon

Absolutely. You are right on.

and it deserves as much respect from the active trader as EWT charts and other tea leaves and animal entrails.

Glad to be lumped into the same group. Thanks :) Actually I am paga, I think all EWT practitioners are :)

Londamania,

Nice to see you man! How have you been!

Companies figured out quickly (much more quickly than many here thought) how to make money in the bad economy.  They shed the overhead (including people) necessary to make money.  So we need to keep in mind that we are buying stocks in companies not an Econoomy ETF so to speak.  What I mean by this is that as we get bad economic news, the market goes down, but when you look at INDIVIDUAL stocks and in particular large caps they are still pumping out good earnings because they have gotten very very lean.  And while the bad economy hurts them, they are winning market share as the weaker competitors die off.

Good call man. Yes you have said this before. And I agree with your assessment, this will be a stock pickers market. And I have no doubt that you can find indivdual issues that will not only vastly outperform the market, but will make good returns in their own right.

But like we have talked about, that is not my cup of tea. I am not really a stock picker (and we can argue why that does or does not make sense later). I am a macro guy and I look at the overall economy and try to see how the broad market is reacting to it.

So....buy the dips!  For market leading companies :)  The earnings will continue to be fine even with a flat economy.

Yep, I agree. That can be a very winning strategy, and I am glad you are profiting!

I did go long many times from Aug to November, but only for a couple of weeks at a time. I was, and continue to, swing trade the Minor Degree Waves (the ones that last a few weeks).

I am not, nor can I convince myself to be fundamentally engaged in this economy and stock market as a LTBH investor. I think this rally is still a cyclical bull (and yes, like I point out in the main post has further to run) with in a secular bear.

Get some C!  it ain't going under.  The government divestment will very likely occur through institutioinal investors or a secondary specifically created to pay it off.  It won't trash the stock and it will likely shoot up as soon as it is announced (as it will clear up the black cloud overhanging it)

Hmmm. You are probably right, but I cannot do it. I cannot invest in an institution that should have failed and would have failed were it not for bailouts. And the CEO is a pompous egomanical prick. The hubris that gets spewed is nothing short of ridiculous. But they will still rally. I wrote a post a few weeks ago putting a target of 58 for the BKX, when it was at 50. (http://marketthoughtsandanalysis.blogspot.com/2010/03/some-more-evidence-for-continuation-of.html) I am happy to hold these things for a swing trade, but I am not even remotely fundamentally engaged.

The only thing that I remain fundamentally bullish on is Gold and Gold/Silver Miners. They have done and continue to do well over the last year. If I go long as an investor, then I need to be fundamentally engaged. I cannot invest while holding my nose because the stench is so bad. Maybe that is a failing on my part, but it is just the way I am :)

Thanks for your comment man! I hope you are very well!! (I don't know if you know, but we had a little girl just over 6 months ago. She is awesome and perfect and beautiful). Take care man!..

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#11) On March 19, 2010 at 6:38 AM, Londamania (63.81) wrote:

Gratz on your baby girl Bin!  Awesome!  I can't argue your comments about C - after it gets to 12 I'll sell it forever hehehe  But until then I figure it was some of my tax money that bailed the damn thing out and by god I will profit from it!  :)

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