Monday, February 8, 2010

Market Update 05.10

I'm a little late this week, but with the benefit of Monday's session, I think we have some added evidence for the beginning of a multi-month decline. The character of this latest selloff has a different feel than either the July or October selloffs. I would venture to guess that if I asked people a month ago that we'd have an unemployment rate of 9.7% and GDP growth of 5.7% (annualized), the stock market would be squeezing shorts into oblivion and trudging yet higher toward the heavens.

Not so. Apparently, good news only mattes when, well, when it matters. If the stock market goes down, then the good news doesn't matter and something else does. Got it? Right. Perhaps it is best to pay greater attention to the bigger fundamental picture and what the market does, rather than the monthly or weekly data. People decide what stocks are worth based on their emotions. And their emotions appear to be directed by something other than the monthly data. The best explanation I have found for this phenomenon is that people merely take their emotive cues from each other - oscillating between optimism and pessimism.

Right now, everyone feels panicky about the situation in Greece, Portugal and Spain. But these problems are not new. They've been problems for a good 5 years now. The difference is that people are now paying attention to them. But I am sensing a great deal of complacency about the nature of this decline. Most sound completely certain that it is only a minor correction. And this gives me greater reason to believe that a far larger decline is upon us. See the chart below where a survey of 140 newsletter writers shows quite a decline in bullish sentiment, yet a far smaller increase in bearish sentiment. Notice how the two typically inversely correlate perfectly. But this time, we see a very strong resistance to the idea of becoming outright bearish.

(Data as of last Tues)

Elliott Wave patterns have been extremely compelling on the way down. This is in contrast with the October selloff, where one had to stretch to count 5 waves down and when it rallied, it rallied very compellingly. The bounces on this selloff have been weak and overlapping. The implication is that a 3rd of a 3rd wave down is just beginning. Support resides in the 940-980 range. This count from Daneric's Elliott Wave Blog looks like the most probable from my perspective.

The Euro/Yen cross has been a reliable indicator for risk aversion over the past few years. While I feel that trend will break at some point, it still bears watching.

Gold needs to hold the 200 day EMA to avoid significant technical damage. I think a test of the April lows at $865 is a best case scenario.

The weekly chart of oil is not looking pretty. I've pointed out the bunched up moving averages before, and they usually portend a major move in one direction or another. I still think we see new lows for oil as speculators unwind their positions. A sustained break of $70 would be very bearish.

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Namke von Federlein said...

Hi Matt;

About the madness of crowds ("taking cues from each other"). This is one of the most powerful forces in the universe. It is called rhythmic entrainment. Google on it and you will see what I mean.

Personal example. I was in Switzerland at a Cuckoo Clock shop. In the shop they have various models of completely mechanical and hand-made Cuckoo Clocks on the wall in groups. For instance, 3 of one small model, 4 very big ones, etc. The walls were completely covered like this.

The amazing thing : each group of clocks had their pendulums swinging in perfect synchronisation. In other words, there were probably 15 or 20 groups of clocks and each group had their pendulum swinging at a different speed - but in perfect synchronisation within each group.

Amazing. I asked if they had some "super master expert job" for setting the clock pendulums swinging. The guy said "No, we just give them a push and within 24 hours the clock pendulums are in perfect synch." Keep in mind - these are *mechanical* and *hand-made* (relatively imprecise) Cuckoo clocks.

The stock market, politics, sales, rock concerts, music, sporting events, radio crystals, couples and families - the list of situations where an understanding of the use of rhythmic entrainment is useful is endless.

This is also partly the reason why the current policies of the Fed and Treasury IMHO are so incredibly stupid and dangerous. The current policies are like trying to fix a group of broken Cuckoo clocks with a machine gun?

Thanks for your blogging!

Namke von Federlein

Willy2 said...

Another interesting indicator: compare the copper/gold ratio with the S&P 500.


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