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The Muddy Waters of the Market
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Today the S&P500 made a new all-time high for the move off March '09. The way this correction has played out is very similar to the one that occurred in July 2009, and we are seeing some similar upside potential now that could very well take the markets 15 - 20% higher than they are right now.
Link to Chart: http://4.bp.blogspot.com/_t4zzpUL3Cnk/S5ppZavyS_I/AAAAAAAAAak/rxqk3Xdgfyo/s1600-h/SP500+bull+break.png
As such we have closed off our small term shorts with a break-even on the Dow trade, and are going to be looking for some short-term long trades with tight stops.
I'm not going to be taking any immediate long position on the market, as it still looks quite over-bought and should pull-back a few percent over the next while.
A secondary re-enforcer of this potential bull-leg is the most recent Investor's Intelligence Survey.
The latest collapse in the bull:bear ratio on the Investor Intelligence Survey was the largest single move since August of 2007. The rebound has been lethargic compared to the scope of the rally in stocks, indicating that investors are now back to the "worry" phase of the game.
This, along with the technical moves in the broad markets this week, seem to have finally indicated a short-term direction as the battle between bull and bear was extremely even matched with sideways choppiness all week.
This also changes the mid-term outlook for precious metals - if "Reflation" is still in the books and not quite done its work through the system, then the lower price in gold is still some ways off, and we just witnessed a small A-B-C correction in the metal.
As such, it might be a good idea to start making some small and regular purchases of the yellow metal. The maximum upside we see in gold is an even shorter price-length rally in the metal that takes it to $1300 - $1325 at most. However, as the price direction is not currently clear, we are not even a fraction as bullish as we were in fall of 2008 on gold, and even less so on silver at this point. Small regular purchases of physical are your best bet right now, until some clarity can be had.
Link to chart: http://1.bp.blogspot.com/_t4zzpUL3Cnk/S5pvWsrm_rI/AAAAAAAAAa0/Ihk5kDnD58Q/s1600-h/GLD+Daily+Bar.png
The funny thing about the human disposition (most likely excluding our daily-oppressed Dark-Age predecessors, mind you) is that it is so prone to optimism and hope, that despair melts away very quickly. Even in the face of the largest credit bubble in the history of mankind (although, unlike 100 years ago, most people have no clue about aggregate money and how banking works), the most massive debt implosion that has ever been documented, the future implosion of governments they have come to depend on (as a libertarian I find this sad and thank my lucky stars I get to be alive as this happens, for the betterment of mankind), they can be "optimistically worried".
That's the stuff that drives bull markets, unfortunately (for the perma-bears/shorts). Even laborious ones, with decreasing trend slopes. To that, however, it looks like this next break up, if it does happen, could be a significant move in terms of time and breadth. Backbone indicators (actual buying activity versus selling, breadth and strength) have been getting stronger the last few days which tells me that a big move is in the works.
It looks like the odds are favoring the upside right now, however those odds can quickly change - keep your stops tight and look for good, high-probability setups.
J. Derek Blain
March 12, 2010
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Derek Blain has been trading since the day he was old enough to open his first brokerage account.
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