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THE UNFORTUNATE TRUTH ABOUT AN OVERBOUGHT STOCK MARKET
Here's JW Jones's perspective on the stock market and the eurozone "non-bailout" or whatever it is, from www.OptionsTradingSignals.com. ~ Ilene
THE UNFORTUNATE TRUTH ABOUT AN OVERBOUGHT STOCK MARKET
Writing about financial markets is probably the most challenging endeavor I have ever immersed myself into. I am a trader first and a writer second, but I have really come to enjoy scribing missives about financial markets because it really forces me to concentrate on my analysis.
Writing for the general public has really enhanced my perception of the market and forced me to dig deeper and learn new forms of analysis. I find myself learning more and more every day and the beauty of trading is that even for the most experienced of traders there is always an opportunity to learn more. As members of my service know, I strive to be different than most of my peers as my focus is on education and being completely transparent and honest.
I want readers to know that I was wrong about my recent expectations regarding the European sovereign debt summit. I was expecting the Dollar to rally based on the recent price action and quite frankly I expected stocks to falter after running up nearly 15% into the announcement. My expectations could not have been more untimely and incorrect.
I share this with you because as I read and listen to market pundits discussing financial markets I find that too many writers and commentators flip-flop their positions to always have the appearance of accuracy. In some cases, there have been television pundits that stated we were possibly going to revisit a depression in 2012 no more than 5 weeks ago. These so-called experts have now changed their positions stating that we have started a new bull market in recent weeks. How can anyone take these people seriously?
Financial markets are dynamic and consistently fool the best minds and most experienced traders out there. Financial markets do not reward hubris. If a trader does not remain humble, Mr. Market will happily handle the humbling process for him. I was humbled this week. I was reminded yet again that financial markets do not take prisoners and they show no mercy. I am sharing this with readers because I want you to know that I refuse to flip-flop my position without first declaring that I was wrong.
When I am wrong, I will own up to it purely out of sense of responsibility. My word and my name actually mean something to me, and while I strive to present accurate analysis I am fallible and I will make mistakes. The key however to the mistakes that I make is my ability to learn from them and the past week was a great learning opportunity.
After regrouping and stepping back after the price action on Thursday, a few key elements really stood out to me regarding recent price action. First of all, in the short-term we are extremely overbought. The chart below illustrates the number of stocks in domestic equity markets trading above their 20 period moving averages over the past 5 years:
Overbought Stock Momentum
What is apparent from the chart above is that prices are almost as overbought right now as they have been anytime in the past 5 years. The number of domestic equities trading above their 50 period moving average over the past 5 years is also nearing the highest levels seen during the same period as the chart below illustrates:
Trading Stock Market Momentum
Equities trading above the 100, 150, and 200 period moving averages are somewhat subdued by comparison meaning in the short run a possible correction appears likely. The longer-term time frames are no longer oversold, but they have considerable upside to work with before we could declare that they are overbought.
Additionally, the details of the European Union’s supposed solution have not yet been released raising questions going forward. Every move that is made will create unintended consequences. As an example, since Greece had 50% of their debt written down why wouldn't Ireland or Portugal refuse to pay their debts in full?
The Irish and Portuguese governments are going to come under pressure from their constituents to renegotiate the terms of their debt based on the agreement that was made with Greece recently. Spain politicians will likely be under pressure as well. The decisions made in these so-called bailouts reverberate across the geopolitical spectrum. Moral hazard still exists, it just evolves over time.
The risk premium of sovereign debt has to be adjusted since credit default swaps did not trigger payment as the write-downs were considered “voluntary.” Thus credit default swaps are not the answer to hedge sovereign debt as it would appear that governments have the ability to write down debt without triggering a default based on the status of the write-down. The long-term unintended consequences could be severe and are unknown at this point in time.
In addition to the unknown factors impacting the European “solution”, next week the Federal Reserve will have their regular FOMC meeting and statement. There has been a lot of chatter regarding the potential for QE III to come out of this meeting. While I could be wrong, initiating QE III right after the Operation Twist announcement would lead many to believe that Operation Twist was a failure.
With interest rates at or near all time lows and the recent rally we have seen in the stock market, it does not make sense that QE III would be initiated during this meeting. It is possible that if QE III is not announced the U.S. Dollar could rally and put pressure on risk assets such as the S&P 500 in the short to intermediate term. If this sequence of events played out, a correction would be likely. The following is a daily chart of the S&P 500 with possible correction targets in place:
SPY Overbought Stock Market
Right now it is a toss up in the financial blogosphere as to the expectations of where price action will head. Are we near a top? Is this the beginning of a new bull market? I scanned through several charts Friday evening and Saturday morning and came to this realization. If the market is going to breakout and this is not a top but the beginning of a major bullish wave higher, then the Nasdaq 100 Index (NDX) has to breakout over the 2011 highs.
The Nasdaq 100 Index is comprised of stocks such as AAPL, GOOG, INTC, and YHOO. In order for a new leg higher to transpire, hyper beta names like AAPL and GOOG have to breakout higher and show continuation with strong supporting volume. If the NDX does not breakout over the 2011 highs, a top could potentially be forming. The daily chart of the Nasdaq 100 Index is shown below:
QQQ Overbought Market
In conclusion, the short term looks like a possible correction could play out. However, it is critical to note that the longer term time frames are more neutral at this time. Furthermore, if price action cannot penetrate the 2011 highs for the Nasdaq 100 Index, I do not believe that a new bull market will have begun. If the Nasdaq 100 Index cannot breakout above the 2011 highs, we could be putting in a potential top going into the holiday season.
In closing, I will leave you with the thoughtful muse of famed writer and minister Hugh Prather, “Almost any difficulty will move in the face of honesty. When I am honest I never feel stupid. And when I am honest I am automatically humble.”
By: JW Jones
This material should not be considered investment advice. J.W. Jones is not a registered investment advisor. Under no circumstances should any content from this article or the OptionsTradingSignals.com website be used or interpreted as a recommendation to buy or sell any type of security or commodity contract. This material is not a solicitation for a trading approach to financial markets. Any investment decisions must in all cases be made by the reader or by his or her registered investment advisor. This information is for educational purposes only.
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See the right hand of the chart for a visual example of Uncle Ben's WEALTH EFFECT.
Follow the bouncing bubble, boys and gurls...
Aren't all these momentum charting techniques "out the window" with HFT?
Come on, with all the HFT goosing the indices/individual equities, how reliable is momentum if momentum is fabricated?
It's not overbought I haven't sold my silver and gold shares to the fish yet.
Everyman:
I think it's time for your meds!
What do you do with the government officials who are complicit? And what about the debt slavery economic model of the FED that is the ipetus of these frauds?
The "Kill em all' solution is one that will likely come knocking at your door.
THE ROOT OF OUR SOCIAL, ECONOMIC, MILITARISTIC WOW'S IS AN EVIL, MONETARY SYSTEM. EVERYTHING ELSE IS A SYMPTOM OR AN ACTION THAT SUPPORTS IT. AT THE HEART OF THIS SYSTEM ARE THE CENTRAL BANKS; THE FED, THOSE WHO CONTROL IT AND THEIR DISHONEST, DEBT BASED MONETARY POLICIES. AS SUCH; POLICIES, LAWS AND THE CAPTURE OF REGULATORS ARE FOR THEIR BENEFIT. AN ACCOUNT OF THE PEOPLE HAS NO PLACE IN IT.
INDEED, IF THE PEOPLE WERE ITS PRIMARY CONCERN, THE WORLD WOULD BE MORE FREE, LESS VIOLENT AND MORE PROSPEROUS.
See: END THE FED: THE FIRST STEP IN RESTORING OUR CONSTITUTIONAL REPUBLIC
***
Free Market Capitalism is not pro business. It is pro competition hence, "FREE MARKET"! In free market capitalism, losses are born by the business and or it's shareholders. It is not socialized leaving the people holding the bag. When government facilitates the transfer of losses from corporations to the public, that is Fascism. Worse yet the losses are actually overtly converted to debt; the elite money power's most important tool.
“The most potent weapon of the oppressor is the mind of the oppressed.” - Steven Biko
See: Peter Schiff Occupies Wall Street: Government Is The Problem But Ignorance Abounds
The unfortunate truth is that this market is going higher, much higher.
Would you happen to be the Beach Pundit?
Have always enjoyed reading your analyses! Though i wonder, even if the US economy chugs along at 1-2% for next few quarters, can its markets truly decouple from turmoil in the rest of the world? Would love to hear your thoughts on this.
four keys to WS performance :
1° Interest rates have to stay down
2° USD has to stay down
3° QE3 has to come in one form or the other.
4° Gross margins fall as corporates lose on RM costs, transport and consumer buy power.
Only if all these conditions are met will the DJ stay >12000.
We all know the currency war, if it pushes Euro to wall ups USD <<<bad!
We all know if hyper inflation comes Interest rates will rise<<<bad!
we all know that to fight debt FED will print, so point 3° is assured.
we all know the corporate margin sqeeze is inevitable as energy and food soar<<<<bad!
So 3 out of 4 indicators look bad for WS.
2012 a bitch.
Stay PM and look for US/EU consumer energy inelastic stocks. Or Bric energy stocks.
If the margins fall big time then run fast.
You at least put a blurb in about markets longterm not overbought.
We are in the zone!
People are tired of being scared. It is time to spend and live it up for a while. There is not enough financial drag from 20 percent un or underemployed anyway. They have long since been discounted by the market. The bottom fifty percent always spend everything they get. Discretionary spending from the top half is beginning to look good.
?
Why are people still drawing arrows on charts and doing "analysis"???? Time and time again this market shows that T/A is TOTALLY and UNEQUIVOCALLY BULLSHIT in these markets. Where there are no fundamentals and the markets go up 13% on "RUMORS", there is no reality in the market, so why the hell does anyone think there is an algorithm or mathematical expression for "unknown"?? Only a bunch of financial criminals would put forward "charts".
Funny that there are no mathematical models of the unknown in any branch of Science or Physics, but here in the "financial world" for some reason math explains uncertainty on no variables???? Really?!?!?!
Just stop the chart nonsense, there are something like 27 gaps in the S&P and the Dow Jones that need to be filled and that old chart adage "all gaps must be filled" has not been true for over 2.5 fucking years!
So spare me the fucking naval gazing at charts. Everyone knows the economy is in the shitter, but the liars keep lying, and people still naval gaze to get insight. So sick this market. Everyone involved needs to be taken out and shot. That just may happen with OWS soon. Drag a bunch of banksters, financial guru's out in the street shoot 'em in the head and leave them in the gutter. Fair exchange for their massive fraud.
Everyman:
I think it's time for your meds!
What do you do with the government officials who are complicit? And what about the debt slavery economic model of the FED that is the ipetus of these frauds?
The "Kill em all' solution is one that will likely come knocking at your door.
THE ROOT OF OUR SOCIAL, ECONOMIC, MILITARISTIC WOW'S IS AN EVIL, MONETARY SYSTEM. EVERYTHING ELSE IS A SYMPTOM OR AN ACTION THAT SUPPORTS IT. AT THE HEART OF THIS SYSTEM ARE THE CENTRAL BANKS; THE FED, THOSE WHO CONTROL IT AND THEIR DISHONEST, DEBT BASED MONETARY POLICIES. AS SUCH; POLICIES, LAWS AND THE CAPTURE OF REGULATORS ARE FOR THEIR BENEFIT. AN ACCOUNT OF THE PEOPLE HAS NO PLACE IN IT.
INDEED, IF THE PEOPLE WERE ITS PRIMARY CONCERN, THE WORLD WOULD BE MORE FREE, LESS VIOLENT AND MORE PROSPEROUS.
See: END THE FED: THE FIRST STEP IN RESTORING OUR CONSTITUTIONAL REPUBLIC
***
Free Market Capitalism is not pro business. It is pro competition hence, "FREE MARKET"! In free market capitalism, losses are born by the business and or it's shareholders. It is not socialized leaving the people holding the bag. When government facilitates the transfer of losses from corporations to the public, that is Fascism. Worse yet the losses are actually overtly converted to debt; the elite money power's most important tool.
“The most potent weapon of the oppressor is the mind of the oppressed.” - Steven Biko
See: Peter Schiff Occupies Wall Street: Government Is The Problem But Ignorance Abounds
You see chaos? I see truth.
The basic fundamental truth is, there is no correlation between money and stuff. There is only an inverse correlation between money and 1. The more there is the less each unit is worth.
Without monetary discipline, nothing can be measured. There is no value, no growth. There's only money sloshing from here to there and back again.
I made a comment here on ZH a week or two ago (and got junked for it) that fundamental analysis didn't work, this is what I meant. It's all about belief, rumours and psychology. You're playing poker, not investing.
Bullish! Rally on!
Funny that there are no mathematical models of the unknown in any branch of Science or Physics, but here in the "financial world" for some reason math explains uncertainty on no variables???? Really?!?!?!
So spare me the fucking naval gazing at charts. Everyone knows the economy is in the shitter, but the liars keep lying, and people still naval gaze to get insight.
*****************
Why would you compare Science and Physics to Mass Psychology ie: Human emotion which is "all" that drives Stock Markets ie: Sentiment-
The Stock Market and the Economy are a piss poor comparison of each other-
Look back to the Market rallies during the Depression-
thank you fo confirming what i said. the economy is very different from the stock market. in fact the one is largely and tangible produces physical objects or shows something (i.e. labour). the stoc market is magical and driven by the spirits, in the end nothing can be shown for stocks, a stock does not equate to a physical item or sweat of your brow. watching the pundits on tv chant their incantations reminds me of the beginiing of the movie the inspector general where a bunch of quacks are trying to sell a cure all.
quatloos, bat guano and incantations can also make the market move. i bought a ouija board to guide my investments today.
Seems to me it's all about the EUR/USD and implied "risk" correlation to equities, there is no fundamental reason for this move up, Q3 earnings were lackluster at best with many of the big name market "darlings" missing badly ie. APPL, IBM, AMZN, and large bank earnings were a joke as has been well documented here...
not one word about this being being a market rising based on total fraud, manipulation, rumours. this post almost had me convinced on a market functioning on fundamentals. you were wrong now, and you'll be wrong again, trust me. this thing is done for!!!
http://www.prudentbear.com/index.php/creditbubblebulletinview?art_id=10589
Doug Nolands piece this week is all about "moneyness". His Austrian bias should make ZH readers sit up and pay attention. I keep wondering though what the hell "moneyness" is? I decided its the difference between sweat dollars and central banker electronic dollars. This is the point of the OWS movement isn't it. There's a bull market in CB electro dollars, and a depression in sweat dollars? Yeah. Basically its got to hit you in the groin if you ever held shovel or tried to balance a check book, these guys just type money on a keyboard and the stock market goes up? and money costs you time and soul, and they suck it away by typing on a keyboard.
we all know that's crap really, that's the destruction of 'moneyness' that Noland is talking about. you can't see it in these silly ass charts (which is why all the major brokerage firms did away with technical analysis years ago) right now the market in negatively correlated to the dollar, what kind of shit is that? this is an election year and the corporate political status quo is trying to paint the tape to fool you, while your 'moneyness' goes down the crapper, whats' their end game? (get elected once more and serve their clients -hint- not you)
I am shocked....maybe I need to change my username.....nah, not yet!
Easy to be wrong in this environment-
Scared European and Asian money could continue to flow into western markets-especially now with China starting to crash-
If hot money really starts to flow out of those countries-western markets could see new highs as a "perceived" flight to safety begins-
in the end theunited states is a power house to reckon with. the dollar is the worlds reserve currency this means in poker terms it is the house and the housealways wins. further more the us has oil, a bbuilt up infra structure, a largely well educated work force, mineral and natural resources and the list goes on. it doesnt surprise me that hot money will eventually flow back into the us.
IMO you need trading rules for govt manipulated markets and rules for 'normal' markets. If there is such a thing.
Btw I have used the IWM chart but your naz chart would have got me long at the lows. Thanks for sharing
A little honesty goes a long ways, especially when it is embodied in leaders. Unfortunately it seems to be mostly absent in those that serve their own interests exclusively, and they are the ones that are in the service of greed and lust for power.
Only cooperation for common good will get us out of the difficulties that we personally and collectively face, and never has the need been greater. Being honest with ourselves and others is a basic pillar in that endeavour.
For those who have been there before (mid & late '09 + early & late '10 + early '11), this is starting to have all the hallmarks of an upward move based on bullshit (Euro resolution) that will not give a flying "*^~ about any overbought levels and will carry on crucifying shorts for some time to come.
I hope i'm wrong but with plenty of fund managers lagging in and lacking a decent yearly % return what is the likelyhood that they will fuel this higher and higher.
Give it a bit more upside and suddenly the coming 'santa's rally' will be on everyone's lips....
Who's money will "fuel" the "Santa rally"??? Only HFTs, algos and trading desks(hedges and banks)!!!
Into the FEDsters meeting yes it could add another few points but after that, with nothing from BancheroBen, we'll see ya' at 1180ish?!?!?
Am short but with puts only, ain't no banchero squeezing me bubba!
Who's money will "fuel" the "Santa rally"???
Long only mutual funds, aka 401k's. Record profits and fat balance sheets in corporate America have lead to the cutting loose of the purse strings. Hence, companies are contributing/matching employees 401k's once again, many of which include profit sharing.
While U-6 unemployment is what it is, those that are employed are enjoying a release of frozen status of 401k contributions. This information is from boots-on-the-ground discussion with friends and colleagues. I have been asking them this question for the past couple years and 401k contributions and profit sharing are back. Even those employees that actively manage (time - jump in and out) their 401k will jump in at some point if they are on the sidelines. For example, would you expect consumer confidence to get much lower - or see it rising?
I would not underestimate the power of long only mutual fund money to fuel this market higher.
"I would not underestimate the power of long only mutual fund money to fuel this market higher."
Yeah, cause they've been losing money the last year intentionally, just waiting to make this move.....
Might wanna check fund outflows lately, not to mention the fact that most funds are now fully invested- they don't have any cash left.
As the question is this 2007-8 or 2009-10 ?(or neither), the ICI LTMF equity stats are still telling the long-only money to stay away or pick bottom-up plays carefully. They didn't have much respect for the Oct Insta-market. They are still pulling $10+B/mth
With a little regression analysis, the front end of the Dumb Money for long-side long are very smart people when it comes to real and imagined market trends, and trend turns in the S&P..
They called 2008, March 2009, and stayed-on the Bernanke Put like a bloodhound. Long Longsiders would have been paring in May & June, and not bought a fucking thing from June-to-date, except many of them were the trailing Dumb Asses that pulled in Aug and Sep.
Not much of value to hardcore-traders, but for MainStreet mid-trader and long builder, it doesn't suck.
My point was that if one is short, it doesn't matter what/who leads the market higher, be it fund managers/trading desks/HFT/algos....it's likely going to hurt and when one's bubba is being squeezed hard, the last thing you gonna worry about is who's doing the squezzing.
I was just saying "careful out there with your shorts" as a lot of these sort of rallies make a mockery of those trying to pick a top and words to that effect ("yes it could add another few points but after that"...) invariably come back to haunt you
;-)