Saturday Rock Blog: Like a Rolling Stone

Disclosure: I own UNG calls.

Our Hero

Commodity index GSG cup n handle failed breakout

Is it time to buy UNG yet? (I think so)

Disclosure: I own UNG calls

The Bear Market is Over

Yep, I'm ready to go ahead and call this one. In my view the US stock markets are no longer in a long term downtrend and began a new uptrend in mid July as the major US stock indexes made a significant higher high. This ends the bear market which in my opinion began in the first week of January 2008. Its a sad day for the remaining bears who go down hard in defeat as the fraudulent system (think Paulson (Bush), Dimon (JPM), Mozillo (CFC), Geithner (White House), Lewis (BAC), Bernanke (Feds), Liddy (AIG), Greenspan (Feds) prevails in victory. The cronnies who created this mess, for the most part, all got of a get out of jail free card plus a bonus.

Now I'm not gonna argue with those of you who remind me of rising unemployment, collapsing commercial real estate prices, the lower level of aggregate consumer demand or tell me that Obama's socialism will kill the economy. No I won't argue with any of that, but I won't give it much weight either. The markets are the pulse of the economy and they have the power to make or break global psychology. Was this rally based on bull shit? Yeah, most likely. Does it matter? No, not really, because if people get optimistic that things have turned around, if companies can start raising capital for expansion, if investors start making profits, then the fiction can become reality. And thats where I think we are today. Enough people drank the koolaid, who cares if we are all drunk as long as we have fun for a while right?

So thats it, I think this is likely to be a short bull market by historical standards. Perhaps lasting a few years. I could see the S&P 500 reaching close to the former highs in this bull, maybe higher. If I had to guess, I'd say this will be an inflation fueled frenzy of a stock bubble. Expect commodity prices to outperform stocks, and expect the leading stocks to be commodity producers. My guess is that at the end of this bubble you will see solar stocks at insanely astronomical valuations bringing back memories of the dot com bubble ("too the moon alice"). We are no where near the end of this bull, but expect the top to ultimately come from credit tightening by the feds after things get out of control.

Readers know, this opinion is entriely based on charts so here they are. In the daily chart below you can see that the S&P 500 made a very clear and significant higher high in mid July. The market followed through for about a week before goign sideways, it was at that time that my skeptical bearish tendencies kicked in and I really thought that the reality of the economy (all the bearish news the past few weeks) would roll us over and as that breakout failed volume would pick up. This did not happen. After a consolidation, mostly in time rather than price, the market made a new year high Friday on increasing volume. For me thats the confirmation I was looking for to define the previous long term downtrend as over.

So yeah, its pretty clear there to me. Now, I still have a knot in my stomach telling me this is all a big bull trap, and the economy will pull the market back down, etc, etc. I won't say that it is impossible for the bear market to resume, but it would be pretty damn hard. My line in the sand is 950 on the S&P, below there we are back in the 2008-2009 bear market. If we broke below 1000 again I'd start to get nervous being long, and either hedge myself or stop out. If the recent breakout does fail I'd imagine the market would go 1987 style and crash 10-20% in a few days. That being said, the odds are with the bulls from here forward.

In the weekly charts, I see massive inverted head and shoulders bottoms everywhere. On the S&P 500 (see top) that pattern targets about 1250 or 20% higher, a ~100% gain from the bottom this year. Below I have the market leading small caps (IWM) where the head and shoulders there nicely targets $75 which was the 2008 high.

This doesn't mean I am going to whole heartedly embrace stocks Monday, although I did heavily shift into UNG Friday. In the short term the market feels over extended and I would guess that we'll see a post options expiration correction early next week. Essentially, all the wealthy August call holders and put sellers will be taking profits on their newly aquired stock. Stocks will probably dip, but I think its time to buy that dip. If they don't dip next week, well, that would kinda suck. Again, I would stress that if the S&P 500 looses 950, this was a failed breakout and the vicious 2008-2009 bear market rises like a pheonix.

Disclosure: I own XLF puts and UNG calls.

Saturday Rock Blogging: Funky Nassau

ENDANGERED SPECIES: The Bear (eg TYH)

Come on folks, sell a stock, save a bear!

A tiny hint of a notion that there might be some weakness...

Disclosure: I own Jan QQQQ puts but was stopped out of TYH short.

The recent rotation out of smalls caps and in to financials in a broader context (the other way)

The narrow range of the past two weeks have been frustrating for just about everyone. The prior vertical run up had bulls wanting a pullback to add to positions and build support while the bears just wanted this parabolic bear market rally to end. I find myself in the latter camp but only barely so. It won't take much more upside for me to be convinced that this rally is for real and that we might be beginning a new bull market (that could last for years). Of course that's speaking from a strictly technical (chart based) perspective. Based on any fundamental metric, the notion of a bull market is criminal to me. But hey, I'm just here to read charts.


First we have the Russel 2000 ETF, IWM, over the past three months. Looks pretty bullish. I've pointed out golden crosses on other charts recently and the IWM has one too. After breaking past the key $53 mark IWM has been pretty much been range bound ($55-$58) . This flag-like pattern has served to work off overbought conditions but I'm not convinced. This whole move smells like a fake out (bull trap), where is the surge in volume that should have accompanied such a big breakout? Volume was declining until Friday's selloff which tested the bottom end of the recent range. I'd bet IWM retraces back to $53 where everybody will get there chance to vote with their wallets. Bulls will buy the pullback, Bears will try and run stops to force a failed move. The winner will draw in volume one way or the other...


The real meat of tonight's post is in the next chart. Lately I have noticed that the financials have really, really outperformed the rest of the market, especially the technology and small cap sectors. Don't ask me why this might be the case, the market behaves in seemingly naive and silly ways at times. But while big money has rotated from small caps into financials recently, the long term trend is a rotation the other way. Below I've got the financial sector ETF, XLF, divided by IWM. This is effectively a measure of financial sector valuation relative to the small cap sector:

So yeah, in the context of this three year trend (note the weekly time frame) the recent relative out performance of the financial sector is just a blip. For years now small caps have outperformed the financial sector by a wide margin and I don't see anything here to make me think that this trend is changing.

For a little more contrast on this issue I've got the ratio of Bank of America (BAC) to Apple (AAPL). Obviously, this ratio has gotten crushed by about 90% in the past three years despite having recently doubled. What I find most interesting about this chart is that you can see a roughly 5 month cycle in the sector rotation. That is, for about five months money moves from into banks like BAC, then for five months money moves into tech stocks like AAPL, then back to banks and so forth. In the end much more money has "rotated" into AAPL and so this ratio declined significantly.

To be honest I don't really know how much weight you can really put in these ratio charts but I have fun looking at them. If the five month cycle is true and if I'm right about the small caps pulling back here, then XLF should get hit pretty hard in the coming weeks.

Disclosure: I have puts on pretty much all this stuff including XLF, AAPL, QQQQ and IWM.

On an unrelated note, this weekend I was listening to an "oldies" radio station up in Chicago and they kept playing music from Woodstock mixed in with true oldies like Marvin Gaye and Roy Orbison. They were celebrating the 40th anniversary of Woodstock this weekend, which is great but come on, lets not start calling Classic Rock "oldies." No, I don't care how old I get, I will never call Santana, Joe Crocker, Jimi Hendrix or any of the other Woodstock acts "oldies." Hell no. What I will do, however, is join in with the "Oldies 94.5" in honoring this weekend's 40th anniversary of Woodstock with some Sunday night rock n roll. Enjoy:

Saturday Rock Blog: A Little Help From My Friends

Rally Monkey Gets Fired

Bankers: "The recession is over"

Saturday Rock Blog: Sweet Jane (it's a bull trap!)

I took some heat Friday but this action is feeling more and more like a capitulation top despite some obviously bullish technical signals. I maintained all my positions with stops set at Friday's highs. I'm hoping the recent breakouts will fail and that this is just a big bull trap to end a bear market correction rally. If the recent breakouts hold and there is follow through with volume then I'd be ready to declare the bear market over. On the other hand, if the market reverses then I'd expect a ton of late comer weak hands to panic. XLF should retest $11 if $13 breaks.

Disclosure: I own XLF puts.

A Chart a Day #19: DTG Parabola

Disclosure: I entered DTG puts this morning and re-bought index puts on market weakness. The S&P 500 can't seem to hold 1,000.

A Chart a Day #18: Auto Zone Clunked

AZO is a stock that I've been bearish on this year, and more or less rightly so. Today AZO made a new six month low on continued selling which I assume most would attribute to the cash for clunkers program, also known as the "don't fix your pos (piece of shit) car, buy a new pos car" program. Today's break brings into play a long term pivot for AZO at about $140 which is where I'd expect the bulls to put up a real fight. If you are bullish on AZO that's where I'd try a low risk entry, if you are bearish then I'd wait for that level to break on volume. If $140 breaks then this "consolidation" in AZO could rapidly turn into "oh no the momentum died in my over bloated retail stock" crash. This chart is beginning to look a lot like this oldie, but goody:

WTF: Bankruptcy Filings Soar With Stocks

I got the chart above from over at CalculatedRisk, its kind of a big wtf to me. Aparrently, personal bankruptcy filings were up a staggering 34.3% in July compared to last year while the S&P 500 rallied 7.4% last month. Obviously its not main street that is bidding up stocks, main street is loosing their job and filing for bankruptcy. It could be the shorts on wall street that were filing for bankruptcy but something tells me they are pretty far from bankrupt in this bear market. Its also interesting how the last time bankruptcy filings peaked was in late 2005, when the last stock market bubble was exploding to the upside. Now I'm not trying to go all fundamental or anything, I'm not short and if I was it wouldn't be because of this or any other economic statistic. It just makes me think to myself... what the fuck, what. the. fuck?

Keeping It Simple, Honoring My Stops

Hey folks, well its been a rough past two days for me and many who don't buy into this big breakout through 1000. We are all getting sick of the unending media headlines about how the recession is over when its plain as day that its not. With increasing job losses, accelerating earnings deterioration, a collapsing US dollar and a deterioirating still-overvalued housing market we know that the bounce in leading indicators is just a zag. Afterall, thats how volitile leading indicators usually work, they zig and they zag, rarely do markets and economies move in a monotonic fashion. So yeah, yeah, keep pumping it feds, its your only hope. Really, Obama, Geithner, Bernanke, its your only hope if you want to keep your jobs.

Anyways, yeah, I'm frustrated because I got stopped out on all but one of my recently entered bearish positions over the past two days even though I know I had gotten good long term prices. As frustrating as that is, I have to be practical when I look at the bubble before me. "The makret can remain irrational far longer than I can remain solvent." In stupid, ridiculous times like these it pays to keep things simple: S&P broke out, moving averages are rising, volume is rising, measured rule targets about 4% higher. If it rolls over and dies I'll be back on this market like a fly on .... But for now, I'll just sit back and expect the ovbious: That we plow higher but could crash at any second.

08/03/09 DX, NG, GC

Continuous US Dollar Index Weekly:

Continuous Natural Gas Weekly:

Continuous Gold Weekly:

PAST PERFORMANCE IS NOT INDICATIVE OF FUTURE RESULTS. THE RISK OF LOSS IN TRADING FUTURES AND OPTIONS IS SUBSTANTIAL AND SUCH INVESTING IS NOT SUITABLE FOR ALL INVESTORS. AN INVESTOR COULD LOSE MORE THAN THE INITIAL INVESTMENT.

Saturday Rock Blogging: You Can't Touch This

I see a plethora of inverted hammers and gravestone dojis on the Thursday and Friday candles of many charts, like on IWM above. I really don't see how anyone can touch this market on the long side.

Disclosure: I own IWM puts.