Monday, May 6, 2013

Pop and Drop? Didn’t Happen…

POP AND DROP (Minyanville)
“We spent some time the week before last discussing The Critical Juncture of the Technical Landscape, including how a jump through S&P 1600 (to clear out the shorts) may have been a necessary precursor to the path of maximum frustration (Pop & Drop). As I gingerly sit here on May 6, 2013, however, the price action continues to impress with the S&P hovering around 1615.” - Todd Harrison, founder and CEO of Minyanville Media, Inc.
Full comment at Stock/5/6/2013/id/49531#ixzz2SWviKUST

Pop and drop? I had the same idea last week. With the continued move to the upside, I must admit, as did Mr. Harrison, this market apparently wants to go higher still.  Topping is a process, not a place, i.e. it’s probably a fools game to try and call an exact top since finding a top usually involves several months of slowing momentum and choppy trading.  I look back to the correction in 2010 and it took more than three months (19 Jan – 23 April) before the markets really broke to the downside and made a final bottom in July.  The time to make a top was even longer in 2011.  Just glancing at the S&P 500 chart, it is hard to see any signs of topping action and many have tried to explain why since this has been a very long bull run. 

The FED is often given credit for the continued upward movement of the markets, but the Fed has been pumping the markets with QE since 2008 and there have been several corrections since the 2009 bottom, so the FED can’t by itself do away with corrections.

As we have suggested before, the lack of a meaningful correction over the past year is likely due to foreign money, including foreign sovereign banks, buying into US markets.  Since the markets are now making new rules (for fools like me who try to predict its movement and direction) it is impossible to know when the market will break down.  We can only say that we have reached and passed a number of triggers that have signaled the start of corrections in the past.  

“The advance estimate for first quarter GDP came in decidedly below expectations at a 2.5% annual rate, but even that rate belies the fact that real final sales slowed to just 1.5% growth, from 1.8% last quarter. The remaining 1% of the first-quarter growth figure – 40% of the total – represented the accumulation of unsold inventory. [My emphasis] My view remains that the U.S. is unlikely to avoid joining the rest of the developed world in a global recession that is already underway, and may well be already underway in the U.S. once data revisions are reflected. The year-over-year growth rates of real GDP and real final sales have declined to just 1.80% and 1.87% respectively, which is the first time in this economic cycle that both have simultaneously declined from above 2.0% to below 1.9% - an occurrence that has been a hallmark of every post-war recession, with remarkably few false signals for such a simple measure. The Fed’s ability to kick-the-can in increments of a few months at a time may allow this time to be different, but investors should recognize that they are relying on that proposition.”  John Hussman, PhD, Hussman Funds, 29 April 2013 weekly Market Comment at…

MOHAMED EL-ERIAN (Street Talk Live)
“When it comes to investing the majority of recommendations to investors is not based on fundamentals but rather stocks are cheaper than something else. This is potentially very dangerous….What Should Investors Be Doing? Ride the central bank wave…However, it is also important to understand that all waves eventually break. The question is whether you crash or “walk off” the surf board. This wave will crash. When it does it will depend on how you are positioned that will determine whether you suffer or not.  Investors that are overly invested in stocks will eventually pay a very high price for taking on excessive risk. We are approaching the end of the journey for this experiment and it will either result in a return to organic growth or economic disaster. The problem is that we really don't know which it will be. What we do know is that eventually, regardless of the outcome of these monetary experiments, the disconnect between the fundamentals and the markets will revert which will prove painful for unhedged investors.”  Mohamed El-Erian, PIMCO CEO.  Full story at…

My Cmt: I think the comments above by John Hussman and Mohamed El-Erian reflect long-term views on the market. While I expect a correction in the 10-20% range, I am not at all sure this will be the “big-one” anticipated by Hussman and El-Erian.
Monday, the S&P 500 was up 0.2% to 1,618 (rounded), a new high for the S&P 500.

VIX fell 1.5% to 12.66.                

Monday, the NTSM analysis was again HOLD at the close. 

SENTIMENT is Sell due to its extreme bullish level of 66%-bulls as of Friday’s close.  (That means that twice as much money is now bet long vs. short in the Guggenheim/Rydex funds I track.)  The VOLUME indicator (a variant of on-balance-volume) is positive.  PRICE and VIX are neutral.       

I remain about 20% invested in stocks as of 5 March (S&P 500 -1540).  My reasoning may be found at…
The NTSM system sold at 1575 on 16 April.  (This is just another reminder that I should follow the NTSM analysis and not act emotionally – I am under-performing my own system by about 2%!)

I have no problems leaving 20% or 30% invested.  If the market is cut in half (worst case) I’d only lose 10%-15% of my investments.  It also hedges the bet if I am wrong since I will have some invested if the market goes up.  No system is perfect.