This correction has legs and it is likely to give us some great short profits.
That out of the way, let's consider the longer term prospects of this market. Is the bull dead? If you pay attention to the news you might think so. Sub prime this, bubble that. The problem is bulls don't die on sour notes. Has it been so long since 2000 that we all forgot the euphoria that the last bull died on?
No, bull markets play out in three phases (click link for source):
• Bull markets commence with reviving confidence as business conditions improve.
• Prices rise as the market responds to improved earnings
• Rampant speculation dominates the market and price advances are based on hopes and expectations rather than actual results.
So far the market has experienced the first two, but has not yet seen the third part play out. In fact, as we have noted here repeatedly, bearish bets have been extreme for months now. What's to happen if this correction doesn't in fact turn into something worse, but instead quickly bottoms and starts to run at the highs?
We'll tell you what will happen. All those hedge funds holding heavy short positions will be in danger of underperforming on the year and they will not only be forced to cover, but buy as well if they expect to keep their jobs when the dust has settled January 01. This is how fall rallies get underway.
Hear this and heed the message: If there is one thing you can be sure about besides death and taxes, it's that the institutions that need buyers at the top and sellers at the bottom will not ring a bell and shout that the sky is falling when the market is topping. Just read the headlines in any financial rag right now and ask yourself what mood the media is attempting to engender in the retail market. It's certainly not one of high expectations now is it?
2 comments:
http://icecoldstocks.com/pattern_trader/index.html
He makes an interesting argument, and his use of the financials as leading indicators of the market correction was spot on. We don't disagree with his analysis this week either. Something is different this time and that's why we are short even with the QQQQ and SPY trading at their 50-day and 200-day averages respectively. This correction is surely going to be deeper than anything we have seen for a while.
That said, here's an interesting comment from Bernie Shaeffer:
"My guess is that with the recent plunge in the RUT, most long/short equity funds are now seriously in the hole vs. S&P for the year. And if the market now rallies from here, they've just gotten themselves into more trouble by adding to their hedges via IWM puts or IWM shorts. And what would the hedge funds do on a rally? If they decide to lift their incremental short hedges, this would add a lot of buying power to the mix and could super charge the rally. But if they stand pat, or add to their short exposure, they'd then be in the position of seriously under performing on a market recovery. The bottom line is that while the "bad market breadth" on this correction is disquieting to many and is a signal of a potentially bullish oversold condition to others (viz., the two "9-1 Desmond down days" last week), it may indicate nothing more than a "hedge fund puke" that could be reversed in a heartbeat should the market begin to stabilize."
The bottom line: this is a market that you should be short and you should stay short until there is a good reason not to be; ala capitulation, bullish money flow divergences, and recovery of leading groups like the financials. But also keep in mind that the sky is not falling here. As we note in today's report, this bull market is not yet played out. It can handle a large correction that doesn't have to damage the long term trend.
When we start to see euphoria and only good news, we will then be concerned that a major top is in place. Right now a median top of some sort has certainly carved itself out and it is to be respected.
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