This Rally was Pure Weapons Grade Balognium
June 22, 2009
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This title was a nod to all you Futurama Fans out there, and I know there are a few :) But the jist of the post is going to be (yet-another) rally ending prognostication. But before you tune this out completely, let me just say that there has been a lot of sentiment damage done to this rally as well as technical damage. So lets just take a look and see what old binv is talking about.
First there are several references that talk about most of the ideas in this post:
From GoodVibe: GoodVibe Call – My green shoots and the mighty wave 3 of 3 - Perfect and Timely TA post for this rally,
From TastyLunch: Moving Average Crossover Paper - Observation on the potential "Golden Cross". Read GoodVibe's and Anchak's comments in this post.
From binve: Bob Hoye: Banks: Another "Widows and Orphans" Short - Good article by Bob Hoye. Very worth a read.
From binve: Still Bearish: FA and TA on S&P 500, Observations on the Economy - Fundamentals on the Economy (read: I think that stunk before and they still stink now).
So, my thoughts on the rally:
Yep, I think it is over for now. I think we have had a definitive trend change. Now do you need to hear this from me? No. GoodVibe in the post above called this already and quite frankly his TA is much better than mine. So why are you reading this post? Because my take on things follows a different timeframe that GoodVibe and many others, and lets face it: When you want to hear crazy ideas or wildly speculative projections, binv is your guy (I can just imagine GV cringing now :) ).
Lets take a look at a few indicators
Indicator #1 - The Put / Call Ratio.
The Put/Call Ratio ($CPC) by itself gives you very little knowledge about what option investors are thinking (it is a very erratic number, changing all the time). But what is very useful is looking at the trends of the CPC. Extreme values (usually above 1.25 or below 0.75) are usually found at turning points (when the general investing sentiment is either too bullish or too bearish). From these extremes, the direction of the shorter term Moving Averages can give a clue as to how option writers view the progress of the rally and how they are hedging their bets. Based on the recent trends, it looks like Option Writers (in general) are turning more bearish on this rally
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Indicator #2 - Bank / Financial Recent Performance.
Finanicals lead the rally off the bottom, but they have not been making new highs along with the market. Tech has been leading the rally for the last several weeks and financials have taken a back seat in many of the discussions (at least here on Caps). I always watch and pay attention to them (because I despise them, but that is just me, and I have already said that ad naseum). And have noticed the non-participation / non-confirmation of Financials (via XLF) and Banking (via BKX) vs. the broader market (Dow, SPX, Nasdaq), that is they are not making new highs along with the rest of the market. And because of their over 100% rally off the bottom, this should give anybody pause that is currently holding financials (as a long).
From Bob Hoye's article:
"Great manias in financial and tangible assets have been methodical in their euphoric climax and consequent contractions. With six now recorded since the first one in 1720, it has been fascinating to watch this one track its way through the typical post-bubble path-- now to twenty months after the stock market peak when global credit markets would start another phase of distress.
The signal for the beginning of the contraction has been the reversal in the yield curve. Typically, the boom can run for 12 to 16 months against an inverted curve, as the demand for margin by speculators drives short-rates up faster than long-rates. While rising interest rates seem to worry Wall Street strategists, history records that troubles begin when the curve reverses to steepening and short-dated market rates of interest start a steep decline. It has been prudent to recognize that this along with declining Treasury bill rates is one of the warnings about the end of a speculative frenzy and its inevitable collapse.
This time around, the curve inverted in early 2006, and the 16 months counted out to June, 2007, which we frequently discussed. Included was the seasonal tendency of credit spreads narrowing into to May, and then if the party has been wild enough -- reversing to disaster. By mid June, the curve and spreads had changed enough to conclude that the greatest train wreck in the history of credit had begun, making banks and financials a "Widows and Orphans Short."
The next step in the path was that as credit became more stringent through the summer of 2008, our conclusions were that a typical fall crash was possible and considered the 1929 and 1873 examples would provide reliable guidance. This worked out rather well, setting up the possibility of a dramatic revival in animated spirits to around April-May. On the equivalent move in 1930, Barron's wrote that it would be "difficult to quench the fires of enthusiasm." This spring the equivalent move in commodities, corporate bonds and stocks ran into early June--close enough--when a number of our indicators registered excessive speculation. Also the run against the dollar became overdone.
Where the fall crash and its rebound have been the main events, the next one is determined by the twenty-month count following the 1929 and 1873 bubbles. Credit markets then took a turn for the worse.
June is the fateful month and one key signal would be another reversal in the yield curve- -this time to flattening, which could be soon followed by spread widening.
When steepening started in 2007 standard research applauded it as banks usually make better spreads, but we noted that steepening at the end of mania signals financial distress. Our concern about the reversal to flattening in June is that it indicates the resumption of illiquidity. And the reversal in the curve last week was a "heads up" on a market change that could hit inappropriately positioned traders. It will also change orthodoxy about the "benefits" of steepening.
On timing and credit market change that is global in nature, most bank stocks in most countries are again vulnerable."
Indicator #3 - The *way* the recent top was made
Maybe you believe in EWP, maybe you don't. But technically (EWP aside) when the S&P 500 moves through and closes below the 50 day MA and the 200 day MA, from a very strong down move starting a few days previously, that should not be ignored.
Here are my counts for the recent price action. My counts do not line up with a lot of other peoples counts (many count the move up from 666 as an A-B-C corrective, whereas I count it is an impulse. This is technically a viable count. And some of the other indexes also look impulsive). Either way, most of the EW chartists on GoodVibe's CIL all agree that we either made a Wave 2 Primary Top or an A of 2 Primary Top at 956.
What you are looking for in the chart below is the way the count moved up strongly to 956, and then strong down, through a number of lateral support levels.
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Indicator #4 - US Treasury Bonds and the US Dollar
Both the US Dollar (via the USDX or any number of currency pairs) and the Long Bond Price look like they have made a temporary bottom. Sometimes the dollar / bonds are stronly inversely correlated with the stock market and sometimes they are not. But recently, equities, gold, oil and commodities were trading up with the Dollar was trading down. This is not good and not normal. These quantities should not be this strongly positively correlated. This happens there is either major deleveraging going on or when big money is moving / rebalancing though the global system.
If you see the dollar rally from this level, I would think very carefully about any long positons you are not fundamentally engaged in.
*binve's Crazy - Highly Speculative - Tin-Foil Hat Projections*
The next part is just, well, binv being binv. I like thinking about the big picture. Even if it is not tradeable at all, I am just a big "what if" kind of guy.
The next few charts are exactly that. They are not for trading. I am not even 100% serious about them, I am throwing out ideas and seeing what sticks. But I do see a possible large Head and Shoulders setup that could get this who projection rolling. Just fun to think about :)
By the way, all of the original logic for these next charts comes from: More Thoughts and Analysis: Timeframes – Bearish, to Bullish, ...to Bearish. Please read this blog post first to get my thoughts on these charts.
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Please feel free to comment, disagree, discuss. And even if you don’t agree with my conclusions, please rec if you appreciate the effort or the explanation of my thoughts, even if you use them draw different conclusions than mine.
The binv standard disclaimer: This in no way constitutes investing advice. All of these opinions are my own and I am simply sharing them. I am not trying to convince anybody to do anything with their money. I am simply offering up ideas for the sake of discussion. As always, everybody is expected to do their own due diligence and to ulimately be comfortable with their own investing decisions.
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