Tuesday, June 13, 2006
Last Thursday looked like things had gotten about has bad as they were going to get. We had expected a retest of the bottom this week but what we got yesterday was anything but a mere test. The bottom formed by a high volume reversal – the highest volume reversal mind you – did not even serve as a point of hesitation in the last hour of trading yesterday. The put/call ratio is nearing all time bearish highs and the VIX is breaking out in force. Both of these events predict a turning point in the next day or two. The problem is that momentum in this market has turned into a convoy of sellers as institutions sell down their inventories in front of the CPI and PPI numbers to be released over the next two days. We are concerned that under the right circumstances the market could find an air pocket to the downside that could bring us down to the expected four year cycle low in nearly one fell swoop. Frankly we had been expecting more lows to form, but we had believed that the market would have significantly retraced some of the damage that was done in May. We clearly called a near term bottom too early. At this point, if the CPI and PPI don't cause a waterfall sell off, we are expecting a relief bounce, but this bounce may be an opportunity to exit open positions and put on shorts. A better buying opportunity is near and this sell off actually sets us up for what could be a phenomenal summer rally. For now though our bottom calling is done and we will step back and wait for a better set up.