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Sliding Down A Slope of Hope

Recs

30

May 21, 2010 – Comments (19)

In mid-March, I wrote this post: Putting my last post into perspective: Bears and Idiots - http://caps.fool.com/Blogs/ViewPost.aspx?bpid=355132. What I did in this post was to review why the January pullback was just a correction, what the signs were (and there were lots of signs). And to show some very obvious (and troubling) differences between now and then.

From the last post:

So what happened next? A nice fat very bearish selloff:  Looks Like Hibernation Time Is Over / The Real Deal? (Div....... 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 discernible 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.  


Lets talk about indicator #1: Sentiment

As I was saying above, everybody turned bearish in January. The comments that were made, blogs posted, and especially sentiment surveys showed a very sharp change in mentality. Everybody was onto the change, and major peaks don't happen in conditions like those.

Now compare the action of the last few weeks. You see all over the place in the blogosphere, and especially on Caps, statements like: "This is the correction were were looking for, just another dip to buy, look at all the beaten down blue chips, Time to load up!, selling pressure is easing, look at the VIX spike it is so abnormal, etc."

My point is: worry right now is NOTHING like it was in January. Even professional sentiment surveys agree. Bullish sentiment dropped only a few percent last week compared to the peak at the beginning of May. You are still seeing bullish (bordering on arrogant) pitches and comments.

On top of that, the macroeconomic picture now compared to January is far more imminently bearish and the technical damage done the last few weeks is far more destructive than January.

So looking at the technicals for a minute:

As I pointed out last week (No Whammies!) we had break through down and then a failed retest of the 20 day MA, 50 day MA and the support trendline going all the way back to March 2009. On top of that, we closed down yesterday below the 200 day MA in almost a year. Institutional investors watch that last one like a hawk. That is not something the market lightly shrugs off and catapults to new highs.

I think you should prepare yourself for a very serious pullback, not something that just gets mopped up in a couple of days. There is more downside before this trend is complete. My $0.02. (which I know most of you think is overvalued)



ENLARGE

19 Comments – Post Your Own

#1) On May 21, 2010 at 2:39 PM, Griffin416 (99.98) wrote:

As you know, we are in opposite camps, and over the last few days I have dumped my some regular stocks to backed up the truck on super bullish picks as I see this as just a correction and we should catapult upward very soon.

That being said: I disagree with your sentiment analysis greatly. I am not sure what indictor you are using, but I saw on CNBC that the anaylsts were super bullish a month ago and are now more bearish than in a year. Besides that, simply watching the articles come out, the bearish sentiment seems greater to me than it was back in late Jan. The shift in sentiment was also faster.

My second disagreement is the MA's. I admit I do not understand waves, but MAs are my thing. The 200-day is probably the best bull/ bearish indicator. Generally, If we fall below it, I would become bearish. BUT if we trade below it for a day or so on mega, super oversold conditions I am not worried because I expect a relief rally to push us back above the important trend lines. my .02

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#2) On May 21, 2010 at 2:49 PM, Momentum22 (29.50) wrote:

Yes, as someone who is in the bull camp as well I agree with #1.

It is human nature for bulls to read all the bullish analysts and vice-versa. It is real hard to be objective, especially during times like this when we are looking to reinforce our beliefs. Everyone comes out to make wild claims so they can be the one to "have called it."

Headlines in April were primarily bullish...right now there don't seem to be many...believe me I try to find them every night to make myself feel better! Even Cramer is telling me to wait until 9000 to buy...

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#3) On May 21, 2010 at 2:58 PM, davejh23 (< 20) wrote:

"The 200-day is probably the best bull/ bearish indicator. Generally, If we fall below it, I would become bearish. BUT if we trade below it for a day or so on mega, super oversold conditions I am not worried because I expect a relief rally to push us back above the important trend lines."

When would you turn bearish?...how many days closing below the 200-day?...how far a move below the 200-day? 

Concerning the sentiment, I agree with Binve.  The MSM turns from bullish to bearish in a day if we have a significant move down.  Don't look to the MSM reports to judge sentiment.  Looking at blogs posted, there is a huge difference in sentiment between January and now.  For example, see #1 and #2. 

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#4) On May 21, 2010 at 3:00 PM, Griffin416 (99.98) wrote:

Cramer is a great indicator, at the march 6th bottom show, he said I don't know why I am doing this show and recommending stocks you should just put your money CD's.

About a week ago, he said to get out of the way, which was really good advice. We have come down a lot from there, but 9000...no way...at least not is the immediate term.

If we are nearing a short term bottom or whatever you call it, you should not be defensive. Sell your KO and MO and buy BGU or SLX, JOYG or some high beta cyclical.

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#5) On May 21, 2010 at 3:02 PM, binve (< 20) wrote:

Griffin416 ,

>>As you know, we are in opposite camps, and over the last few days I have dumped my some regular stocks to backed up the truck on super bullish picks as I see this as just a correction and we should catapult upward very soon.

Fair enough, I am expecting very little agreement with this post

>>That being said: I disagree with your sentiment analysis greatly. I am not sure what indictor you are using, but I saw on CNBC that the anaylsts were super bullish a month ago and are now more bearish than in a year. Besides that, simply watching the articles come out, the bearish sentiment seems greater to me than it was back in late Jan. The shift in sentiment was also faster.

I disagree. Looking at the Investors Intelligence poll (which is more rigorous than listening to CNBC anchors), showed a drop of bullish sentiment by about 30% in January and from the lastest poll "The latest Investors Intelligence poll is out and shows the bull camp receding a tad, to 43.8% from 47.2%; the bear share stayed at 24.7%. Only 31.5% are in the “correction camp” ". (from David Rosenberg).

>>My second disagreement is the MA's. I admit I do not understand waves, but MAs are my thing. The 200-day is probably the best bull/ bearish indicator. Generally, If we fall below it, I would become bearish. BUT if we trade below it for a day or so on mega, super oversold conditions

Again, I disagree with the characterization of super mega oversold. We are on the hourly indicators by the Daily stochasitics and RSI are far from oversold. They could drop further on a strong wave without blinking.

We can agree to disagree.

Momentum22 ,

>>It is human nature for bulls to read all the bullish analysts and vice-versa. It is real hard to be objective, especially during times like this when we are looking to reinforce our beliefs. Everyone comes out to make wild claims so they can be the one to "have called it."

Fair enough. But see point response above to Griffin regarding sentiment..

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#6) On May 21, 2010 at 3:03 PM, Griffin416 (99.98) wrote:

#3 I hate this answer, but it is more art. my personal indicators got me out of the market in early Jan 2009. Below 50 and 200 day, 200 day trend downward and 50 day crossed below 200 day. We only have 1 out of those 3 with very oversold conditions. If we did not rally from here and went sideways from a week. I would be a bear because the other 2 items would have occured

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#7) On May 21, 2010 at 3:08 PM, Option1307 (30.12) wrote:

Goods thoughts as usual Binve, thanks for sharing!

I guess I'd have to say that I'm torn between the two camps right now, as far as where we go from this juncture. Buying the dip has worked literally everytime the last 15 mnoths, but as you know, all trends eventually do end.

I have to agree, taking out the 200MA yesterday was significant IMO and the the next week or so should be very telling. The longer we stay below it, the greater the chance of more pain to come. Griffin does bring up a good point that yesterday was a huge vol day and could just be a fluke in regards to closing below the 200, we shall see shortly.

Best of luck, enjoy your weekend!

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#8) On May 21, 2010 at 3:11 PM, dragonLZ (99.33) wrote:

Not everybody was bearish in January as you say.

On Jan. 26 (6 days after you said the correction was a Real Deal) I said (in my post Just a simple market prediction) that market will continue going down for only a few more days, but will start coming out of that correction two weeks after that (I was 2 days early on that call). 

Then, on Feb. 17, while the market was still lower than where it was on Jan. 20 when you posted your Real Deal, I said in the same post (in comment# 20) that S&P will reach 1151 by 3/1/10.

Market reached 1151 on 3/22 (meaning I was early with my prediction by 22 days), which was a clear exit out of a January/February correction (S&P was at 1138 on Jan. 20). 

Just my $.02...

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#9) On May 21, 2010 at 3:19 PM, outoffocus (23.49) wrote:

Now compare the action of the last few weeks. You see all over the place in the blogosphere, and especially on Caps, statements like: "This is the correction were were looking for, just another dip to buy, look at all the beaten down blue chips, Time to load up!, selling pressure is easing, look at the VIX spike it is so abnormal, etc."

I made a similar comment on Sentinelbrit's blog this morning.

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#10) On May 21, 2010 at 3:24 PM, binve (< 20) wrote:

Option1307,

Thanks man!

>>I guess I'd have to say that I'm torn between the two camps right now, as far as where we go from this juncture. Buying the dip has worked literally everytime the last 15 mnoths, but as you know, all trends eventually do end.

Exactly, every strategy works until it eventually doesn't.

>>I have to agree, taking out the 200MA yesterday was significant IMO and the the next week or so should be very telling. The longer we stay below it, the greater the chance of more pain to come. Griffin does bring up a good point that yesterday was a huge vol day and could just be a fluke in regards to closing below the 200, we shall see shortly.

The issue with that is that it wasn't just a volatile day. It was down sharply on *stong* volume and closed at the low of the day. That is extremely bearish.

>>Best of luck, enjoy your weekend!

You too man!!

outoffocus ,

>>I made a similar comment on Sentinelbrit's blog this morning..

Right on outoffocus!.

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#11) On May 21, 2010 at 5:04 PM, amassafortune (29.62) wrote:

The trend is now down with broken 50 and 200 day moving averages. We are wrapping up the first wave down which may have ended today, or will go down a little more to test the 1044 Feb low. We will probably not break 1044 and begin a pretty strong wave 2 retrace back up to at least 1150. Bulls will say this confirms the correction. They will be wrong.

Unlike the rebound of 2009, Europe is now toast and a new round of stimulus is (I would hope) out of the question. Unemployment, that nagging, lagging indicator, just turned upward and makes nearly 20% of the U.S. population a group of impaired consumers. The U.S. customer base for businesses is shrinking, even though the population continues to grow. The result = double-dip. 

When I say Europe is toast, I understand headlines will continue to read "solution" as band-aid loan extensions are negotiated, but workers and taxpayers will continue to reject austerity measures to pay for their leaders' past leveraging decisions. 

In the U.S., the Fed is holding assets that are worth 35-50 cents on the dollar. That's at least $1.5 trillion of evaporated taxpayer equity. If they succeed in starting an inflation fire, the economy will get charred. If they buy (or already bought) into the Goldman Sachs salesman's shpeel, the U.S. will be (or is already) on the same Greeced slope of hope as the PIIGS. My guess is that with Goldman cronies in place for the past year, and no audit agreement, we are already on that slope. 

Trading actions are the same for bulls and bears for the next few weeks. Take profits in any shorts soon and start to add longs between here and 1044. Be ready for a retrace back near 1150. Above 1150, bulls will just wait for the losses to begin. Bears will sell longs and add shorts in preparation for a strong slide back below 1044 in the late-June-to-July timeframe.

Earnings will continue to be pretty good. Well-managed companies will continue to adjust workforce and expenses to match the level of business volume. The difference for investors and traders will be fear and valuations. The fear of job loss, investment loss, and loss of confidence that the economy will drive the P/E trend down below 13, even as earnings hold up. 

I hope I'm wrong. I hope binve is wrong. It would be a thrill to learn that the Fed's toxic assest are mostly backed by a stash of gold, and moderating the dollar's value is the reason for resisting an audit. Given the Fed/Goldman connections, I doubt such a conservative approach to the stewardship of this country's collective life force, assets, and well-being has been taken.  

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#12) On May 21, 2010 at 5:23 PM, portefeuille (99.66) wrote:

Europe is now toast

utter nonsense, as Keating would say ...

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#13) On May 21, 2010 at 7:53 PM, amassafortune (29.62) wrote:

I'll see your Keynesian and raise you three CEOs and an economist:

Dimon "There are huge potential negatives out there."

Philip Harris, who has been selling carpets for 52 years, said on Wednesday there was "no question" Carpetright's own sales had "double dipped". The head of Britain's biggest floor coverings retailer, Carpetright, said a "double dip" in the UK economy was likely..."

Sohn Sung-won, "a professor of economics and finance at California State University- A noted global economist said that countries should seek exit strategies later rather than sooner, as there are still chances that the global economy will slip into a double-dip downturn due to sluggish spending."

"Sohn, who served as president and CEO of Los Angeles-based Hanmi Bank, and executive vice president and chief economic officer of Wells Fargo Banks, was a senior economist on the President's Council of Economic Advisors at the White House."

"He was named the most accurate economist in the United States by major media including The Wall Street Journal and Bloomberg News."

David Farr, CEO of Emerson did not think a double-dip was likely as of February 2010, but updated data by the time Q1 (Q2 EMR) results were posted indicated the risk had grown. He said on May 4, 2010 “While the pace and strength of the global recovery continue to gain momentum, we remain concerned about the sustainability of the U.S. and European economies compared to historical recovery cycles."



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#14) On May 21, 2010 at 8:10 PM, portefeuille (99.66) wrote:

the most accurate economist

I like that title.

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#15) On May 21, 2010 at 8:40 PM, WallstreetKnight (42.99) wrote:

@ Binve

I think there's a bit of sampling bias present...  That said, I too noticed a change - in Janurary I was hearing "this is just a correction," whereas now I'm hearing "buckle up, it's about to get ugly."  All paraphrased of course.

I'm curious as to where you're drawing the overall sentiment from?  I'm still in school so my professors pretty much underlie the information I'm exposed to. 

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#16) On May 21, 2010 at 9:09 PM, binve (< 20) wrote:

amassafortune ,

Hey amass, thanks for the comment! I really mean that. That is a perfect take on the situation. I totally agree with it and have nothing to add. Thanks man!!

WallstreetKnight ,

>>I think there's a bit of sampling bias present...

perhaps

>>I'm curious as to where you're drawing the overall sentiment from?

A few places

1. See comment #5 above: Investors Intelligence. I also have seen data for SentimentTrader.com that tells a similar story

2. Caps blogs. Despite what we are all saying here, there are more bullish posts now than there were in January.

3. General posts in the greater blogosphere. A lot of bloggers are not as bearish as they were in January

4. Comments on my other blog: http://marketthoughtsandanalysis.blogspot.com/. I am bearish and so are a lot of my commenters. But I do get bulls that drop by (mostly with very good coversations, a lot more polite than here). And there are definitely more bullish comments and commenters the last few weeks than there were in January..

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#17) On May 22, 2010 at 10:51 PM, bothisellhigher (< 20) wrote:

Sentiment aside, I see the market in a bearish current trend-May 12, 1171 S&P, May 20 1071 S&P...Up on friday (21) to 1087...Should the S&P drop under 1071, the bear continues to growl...I think he will, but it doesn't matter what anyone thinks...if it does, he does...the bull does not become a force again until after a rise above 1171...roll the dice now...no...not until below 1071 or above 1171. 

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#18) On May 23, 2010 at 10:46 PM, bothisellhigher (< 20) wrote:

Binve...do you know anything about Good Vibe taking his site down?  Gonna miss his inputs.

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#19) On May 24, 2010 at 11:02 AM, binve (< 20) wrote:

bothisellhigher ,

>>.the bull does not become a force again until after a rise above 1171.

Exactly. We are trading below several major trend and support lines right now, including the 50 and 200 day MAs. Bulls need to put in a substantial rally and hold 1140 and then 1170 convincingly to turn the tide back in their favor.

>>do you know anything about Good Vibe taking his site down?

not a thing.

Thanks man!..

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