Tuesday Jan 3, 2011
By the way before I get started, is it bothering anyone else that the Bowl Games have sold their names for the sake of the almighty buck? I mean is nothing sacred? It used to be that Bowl Games, at least those in the south, all had agriculture names. Orange, Cotton, Rose, and what could be more southern than say
Gator?
But, now really, The Meineke Car Care Bowl? What have things come to? Oh well...
An alert Market Perspective Reader asks, do we have a target for this rally? Years ago before there was a CNBC there was the FNN Financial News Network. One of the commentators was a chap named John Bollinger, a camerman turned analyst. (He later immodestly named the Bollinger Band indicator after himself). But anyway, John made the observation that when you name a target, no matter, one cannot but help but get engaged if not married to the number. Yes picking a target seems to give the target some sort of credibility. And that can be dangerous. Recall that we admitted that if the bullish percent chart did not improve as recently as a week ago we would be wrong. We were not wrong but had we been in love with a target it would have been that much more difficult to take a stance.
AS the reader observed, many are picking the current downtrend line at 3120 on the SPX, here it is.
SPX
Even the WSJ in its chart uses the 65 and the 200 day MA. Stockcharts can default to 50 and 200 MAs.
And remember that most discount brokers also furnish similar software which has 50 and 200 bar MAs.
The not too surprising result is that everyone begins to focus on those MAs, ie, by default of their presence in so many places they become a sort of target.
And so the next thing that happens, these same MAs become part of the quantitative software that large funds use for generating buy and sell signals. Don't doubt me on this, let's look.
When the market dropped below the 50 and then the 200 weekly MA, that generated a lot of sell signals.
I put the Chakin Money Flow indicator at bottom to make the point. And understand that these sell indicators actually double power the market so to speak. On the move below the 50 day MA, some stocks were sold and short positions were established. So there was one sell for the stocks to exit and another to establish a new short. As the 200 MA red line was taken out, the same thing happened, one sell to exit, another to establish a new short position. But then guess what? Since all the funds were using the same software, they ran out of things to sell. The sand had run out of one end of our financial hourglass.
and so the fist week of Oct was a huge reversal, and the ideal entry on the long side. (Go back and look at what we said Oct 3-4). The herd is all following the same signals. AS the market moved back above the 200 bar MA, the same thing happened in reverse. The short positions were closed and some stocks were bought. Now since November the markets have been fighting the same battle at the 50 bar (blue) MA. Today I suspect we will finally take out the resistance that has kept stocks below this level, about 1225-1260.
Indeed the confirmation is at the bottom, see how money is beginning to flow back into the market. We have detailed that money has been hiding in bonds even though the VIX has been falling for weeks now. As investors, and fund managers see 'the train leaving the station' without them on it, and the market crests the 50 bar MA, yep, get it now, the shorts will exit and new long positions will be established. Indeed that explains the big move today.
As you can see the money flow was much higher earlier this year. Before the markets can go back down, everyone, and I mean everyone, has to be convinced the long side is the right side. So all the money has to come back into stocks. As I write during the trading day Tuesday, bonds and the Dollar are weakening, as we and the VIX predicted. The SPX is up 20, I saw the NASD up 50. Why the imbalance? Everyone has been buying the big cap dividend paying stocks. Now that the dollar is down, again we told you, commodity producers and energy are moving up.
The better idea for a target is to target the indicators. Rather than pick a number for the SPX like 1320 or 1375, let's watch
the VIX below 20
TLT as it falls back to its 50% retracement level at 100-104
the Dollar as it too retraces half its recent rise. Money flowing out of bonds will fuel the stock rally. Once that happens and all the money that will and can move has, then the market will top out. I pointed out that just last Friday the WSJ carried full page stories on the Disaster that is Europe (movie buffs like me are reminded of disaster movies that reflected the mood of the 1970s, the Towering Inferno, the Poseidon Adventure, etc). Friday even featured color photos of each European leader and their predicament but today we get in Section C
Germany's Fast Start! Gee what a difference a weekend makes.
This is why following news is pointless other than as a reverse indicator. As I have mentioned the two guys that write for stockcharts have fallen into the same state of herd following. Today John Murphy marvels at the recovery, last week Art Hill pointed out all the reasons to be defensive. Neither suggested an offensive position. I am not being critical but observant. John Murphy wrote one of the definitive books on tech analysis but now that everyone is using the same program, they all react to the same signals. That won't work!
For serious math reading on this topic try Brainy Quants and how they wrecked Wall Street. Succintly Tom Wolfe made this same observation in the Right Stuff about pilots that look only at the instruments and fly their plane into the ground, hey, look outside the canopy, see the ground coming up?
Okay I hoped this helped your understanding of the markets.
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