To Buy Or Not To Buy; Shorting May Be The Answer

March 20th, 2012
in Gary's blogging, midday post

For the midday report there is little I can add to the otherwise lackluster trading day although there has been a little action of a rising market, still within very tight range. The volume is a tad better than it has been for months, but has fallen off as the day progresses. There is lots of talk as of late about possibilities of market tops, strengthening positions of cash and general 'better watch out' as the markets have shown a nice run up after penetrating the so-called resistance of the year.

SSO is at 58.22, the DOW is at 13183, the 500 is at 1404, SPY at 140.37, GLD at 159.93 and oil at 105.48.

Then there were calls that the Russell 2000 HAD to rise or the large caps would falter and die. The $RUT did dramatically rise to new heights but the DOW did nothing and today it looks like and investment that went bad. Is this the sign heralding a correction is coming, the signal we have been waiting for is this just a technical breathing spell. The old adage of sell in May is quickly approaching and beware of the Ides of March. O.K. the 15th was last week, but you get the point. Erik points out my feelings as well.

Stock Market Risk Rises To Historical Extreme by Erik McCurdy

These highly reliable computer models indicate that the current risk/return profile of the stock market is in the worst 1 percent of all historical observations. In other words, from both an investing and a trading perspective, our models indicate that now is one of the riskiest times to be long stocks during the last 80 years. It is highly likely that the cyclical bull market from early 2009 is in the final stage of its development and it is also highly likely that the rally from October of last year will be followed by a violent overbought correction that will retrace a majority, if not all, of the gains logged during the first quarter of 2012.

It is highly likely that anyone entering the market from the long side at these levels will suffer substantial losses sometime during the next few months, so we urge you to remain defensive.

I have sensed the market had reached its peak some weeks ago as pointed out in my articles. The Greek drama pushed it to almost unbearable heights and then the news went away. As the European news subsided and feed on "Hopium" the markets continued to rise blowing away the supposed difficult to impossible zones of resistance, surprising even me.

The question of 'what is really happening' is an everyday occurrence as anyone who watches and follows the daily micro trend of the markets could clearly see that this emperor really didn't have any clothes, so why all the excitement? I guess I wanted to see a bolt of lighting shoot from the sky and a heavenly voice declare the 'End is Near'. That didn't happen or at least I was unaware Zeus was even in town. The signs are there and I feel they are valid except for the one signal of high volume I would love to see.  Further data to a reversing market to consider.

@expertstocktiming: "If there was a negative to point out on today's chart, it would be that a negative divergence is appearing.   Basically, as the rally matures and moves higher, the level of Accumulation has decreased as you can see, therefore it is negatively divergent.

But, that is what Institutions do ... they load up before the move, and lessen their exposure (taking selective profits) as the rally matures.   The concern about negative divergences, is they tell you that a market condition may be getting closer to a directional change. (Read More)

All along I have questioned the employment data and yes I too questioned the medias incessant, if not over exuberance, in reporting misleading first financial reports. They would pen glowing reports of employment problems are a thing of the past and everyone would soon get a job as the economy is improving by leaps and bounds. My skepticism falls in the category of how can the markets continue to rise in face of a looming recession in Europe, a declining GDP and lowering corporate profits to name just a few. That is another question I also ask myself everyday. David discusses this very topic of disconnect.

The Disconnect Between The Economic Data And Sentiment by David I. Templeton

"Recent unemployment data released by the Labor Department continues to indicate the economy is adding 200,000 jobs per month. This has been the case for the last three months. Something about the U.S. economy isn't adding up.

At 8.3%, the unemployment rate has fallen 0.7 percentage point from a year earlier and is down 1.7 percentage points from a peak of 10% in October 2009. And the number of people filing claims for government unemployment benefits has fallen.

Yet the economy is barely growing.

How can an economy that is growing so slowly produce such big declines in unemployment?

TrimTabs thinks the problem lies in the heavily massaged BLS employment data and the highly suspect BEA personal income data.

There is a basic disconnect between the media and the American public," he said, adding that coverage of the jobs picture has been too positive."

Words to the wise as we contemplate our quandary on continuing riding the bull market up or easing off. Do we jump ship completely, go to partial cash or try to catch a falling knife. The last option is not one of my favorites as I have seen friends loose great financial positions in a matter of minutes in the process of beating greed. Remember what Pierpont Morgan said, "I made a fortune of getting out too soon".

My proprietary buy and sell signals are running at 95% sell which was indicated several sessions ago and always precede a market decline of some sort. Could it be a correction or could it be the end of a bull run? We won't know until Mr. Market tells us, but these signals have been 95% correct over the past several years in predicting a reversal. I'll admit some, 65%, have taken several weeks for fruition so we may still see a up day or two in the forecast.

@dailymarkets: "A Market Top Is A Process And Not An Event, In Most Cases"

In most cases, and I mean 98% of the time a market that results in a trend change of 10% of more is a process and not an event.  My suggestion is to not guess as to where the market tops out, but rather, wait and watch the road signs. The market will give you lots of indicators that it is starting to stumble, than lose its balance, ultimately pratfalling. Even 1987 has a 14% drop in advance of the Black Monday 23% crash. In 2007-09, we received plenty of warnings before the market reached its 666 lows — down 57%.

Hence, if you are an investor, you should not be thinking about when to jump out, and move to all cash/bonds position. Instead, you should be looking for a variety of signs that suggest it is time to lower your equity exposure as a function of rising risk relative to potential gains."

For myself, as a trader, this past month or so has not been a good time to test ones trading skills and lately it is down right scary to go long or short. My long view extends out to the 4 pm closing bell and that's because anything beyond that is a gamble. Now I can't see investing at all much less than sneaking in a daily trade once in a while. I'll wait until I can clearly see the environment we are in. And if this mamby pandy stock market continues like it has for the past couple of months, it won't be good for anyone. Even David is not willing to dip his toe into the waters.

Daily State Of The Markets: Are You A Market Environmentalist? by David Moenning

. . . . . if I can understand why things are happening in the short-term, I shouldn't be taken by surprise by how the market acts over longer periods of time. And understanding why the market does what it does makes it a heck of a lot easier to stay in tune with the current environment.  . . . emphasize again how important it is to be able to adapt to a changing environment.  . . . knowing the answers to these questions will help you identify the best strategy to employ for a given environment.

The moral of the story is pretty simple ... Investors need to employ strategies that can (a) handle both up and down markets, and then (b) be able to adapt to changing markets quickly. Employing such an approach doesn't mean you won't ever lose money. But it does mean that you shouldn't incur losses so large that you can't recover. As Warren Buffett so famously said, "Rule number one in investing is never lose big money. And then rule number two is to never ever forget rule number one!"

. . . we currently have a cyclical bull market on our hands. And the good news is that the average cyclical bull market that occurs within the context of a secular bear market . . . However, with last year's cyclical bear still fresh in our minds, we're not putting our foot to the floor in terms of leverage right now.

Written by Gary

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