Sunday, August 16, 2009

Markets Starting to feel like a beached Whale (With Obvious Potential to Unbeach itself!): Well, it certainly looks like the “straight shot” thesis, “Scenario #2, suggested in the July edition of the Rambler has come to pass, that continued upward thrust of equity and commodity markets without adequate pause or retrenchment. I had thrown out the objective of S&P 1050-1100 and sure enough, top tick right now is at 1017, not quite to my target. As all difficult markets, they stop just short of a no-brainer bet, meaning every bet takes brains and then some. Technically, the picture looks worrisome to me here. The S&P currently sits at 1003 and find myself flip-flopping on whether the correction started Friday (preventing me from gaining the short exposure I have long-dreamed about with tingles, yes, tingles), or if there is one more, blow-off run to my target in the works. If I am guilty of any sin as a trader it is that I am notoriously early (on too much to list), so that’s obviously the concern preventing my aggressive shorting here. As a younger man maybe, but birthdays and a marriage have added some much needed seasoning to this filet. So what’s the move? I will be taking my long exposure close to zero here, while respecting the market’s momentum, though waning. It is my desire to get short select commodity, financial, technology, etc stocks around the top, but am unwilling to stick my neck out too far just yet, though I want to so badly. I am long-long-term bullish on gold and silver, but have been significantly trimming positions in both on strength as they are over owned and underperforming (gold is, not silver—another sign of exhaustion=silver’s outperformance). Major down moves usually sink all boats like up-markets lift them. I have learned by making excuses for keeping this stock and that commodity the hard way—now I simply sell everything and relax (at least I want to think I do; no, I am close). Yes, yes, I will keep some physical metal position on as “dollar catastrophe insurance” (humbly, I just can’t be sure of anything necessarily…these are, as they say, uncharted waters), but I feel like the dollar, for reasons unbeknownst to me, perhaps simply its relation to the crappy currencies it finds itself competing with (save the Australian dollar, though prices now reflect the difference), seems ripe for a bounce. Many commentators are posting dollar charts and info right now, showing severely oversold indicators like the RSI (Relative Strength Index—just an indication of how overbought or oversold something is) as well as a paltry 3% bullish sentiment reading, as reasons the dollar may soon advance. These data points are embraced by contrarians as the crowd is always assumed to be wrong about what they think en mass (much like Murphy’s law—what can go wrong, will go wrong). The dollar could be forming a revere head and shoulders bottom here, and wise traders should wait for a move above 79 on the US Dollar Index to confirm that technical beauty. A stronger dollar would be another factor favoring a correction in equities, but things can stay oversold for quite a while, so be cognizant of that in the case of the buck.

Yes, it’s too difficult for this overworked brain to determine if this 1017 level on the S&P was the top. Friday’s action was a clear negative, as commodities broke, universally and convincingly, to the downside from consolidation ranges, with much real estate below. I keep mentioning commodities because they, more than anything, serve as the barometer of future economic expectations. Gold is working on a mini head and shoulders top (not good). Sugar is reversing its parabola (don’t short it). There are signs that we could be close.

Remember: Because the market is so heated, and with the knowledge that bubbles, parabolic upswings, can go much further than one can stay solvent, I am refraining from any short positions until S$P 1100, but will be aggressive there. If aggressiveness or worry (for these newsletters come but one a month) has you clamoring for names to short if the S&P hits 1100 before we speak again, just pick something in an economically sensitive sector that has had a big advance and analyze. While this isn’t the most professional advice, it sure does work, as good stories are already priced into the big movers. But be sure to be diligent, and only make bets that you can afford. I can’t imagine what the prices would be like at S&P1100, but I will not be fooled. They will be priced, like houses in 2005-2006—to sell. Don’t listen to the folks who say the path is clear from S&P 1018 to 1200+. I have thought about it, and while possible (anything is really possible), this market is set to top at 1112 at the highest. Getting there necessitates a crowd that is screaming S&P 1200 (that’s how it will hit 1100!), but they will be wrong. Giddiness is rampant, I simply don’t know why, as this economy seems little improved with some spotty patchwork plugging its gaping holes. I keep hearing about this segment of the investing population, this pathetic group, the underinvested bulls--Hedge fund managers are apparently so worried about relative performance that they are routinely cited as the reason that the stock markets cannot go down even two days in a row (for they keep “capitalizing” on weakness, if you can call 150 Dow points weakness, Cramer will, he’ll rave about the sale). All I know is this, the more something moves in only one direction, on the correction, it will be the same, one direction, relentlessly, to the degree that it was on the upside. Newton’s law folks, Matter cannot be created or destroyed. Oh, I can’t wait, I can feel it in my gut, that this group, the underinvested bulls, shall soon become known as the overinvested bulls, or the bulls that bought the bank’s junk at the top. This next down move is really going to separate the cream from the crap (or is it supposed to be crop) as far as investment managers are concerned. Ants in my pants; it almost feels like Christmas Eve as a 7 year old boy. These guys are no better than you or I, save a few (maybe!)

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