Friday was an interesting day for both Bulls and Bears. We opened way lower only to see a huge outside reversal bar closing at the highs. So what changed? The bulls felt good because they think we have successfully retested the August lows and we will rip into the end of the year so many of you bought on Friday like drunken sailors. The bears on the other hand freaked out and covered because 90% of the bears have zero conviction and are “whimps” for lack of a better word. But what really changed on a fundamental basis? Did we see a massive improvement in credit spreads? Did we see the kind of capitulation selling on massive volume one usually sees at bottoms? Has the global economy started to improve? No…none of these things have happened. In fact credit is worse now than it was at the August lows but equities are a mere 8% from the top. Below are three snapshots of credit and financial conditions as of Friday. Take a good hard look at these charts. I have told you time and time again that credit drives equity valuations. When credit heads South equity heads South with a lag. Well we are diverging again and if you look at the Goldman Sachs Financial Conditions Index we are well above the stress levels we saw in 2011.
So logic would only dictate that unless credit improves dramatically equites will definitely go below the August lows and head toward 1700 on the S&P for a likely near term target. Additionally I hear a lot about the 1998 and 2011 analogues. Important distinction is that in both those instances we were in a primary up trend as no Dow Theory Trend change had occurred. The case today is we do have a bearish primary trend change and that is how I know we are in a bear market. Also in 2011 we went down 20% from top to bottom so by that measure we should go to 1700 on the S&P at a minimum if you believe this analogue.
The market is an energy system and it needs energy to move. Bulls and bears provide that energy for tops as well as bottoms. I want to thank all of you who bought on Friday and all the bears who covered their shorts. The bulls have provided panic fuel as we roll over and they puke out what they just bought and the bears have removed potential buyers from the market and leave a vacuum below. Also don’t forget the energy provided by Margin calls that continue to happen and will accelerate as we go lower. Bear markets are designed to kill both bears and bulls. So you see this is the set up I wanted before the final plunge to a tradable low. Since we are in a bear market I can see 1500 also being a potential low but I won’t know that until I see the structure once we roll. So when do we roll? It could happen as early as Monday or by Friday at the latest. The ideal situation would be for the market to rip up to 1977 by Monday afternoon and then begin to reverse. I remain focused and try not to let fear get the best of me when we get these rip your face off rallies. I always shave some off as we go lower and have fuel for the rise. I do this with confidence because I know we are in a bear market and we have not seen a capitulation bottom to this first stage of the bear market. Remember 95% of the world does not know we are in a bear market yet but they soon will as the price action that is about to happen wakes up the sleeping masses.
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Nice overview. Well defined and the 200/100/50 dma below the recent price action illustrates your point pretty well.
Imo we really need a bear market – and a really nasty one too. Too many criminals got away with horrendous crimes since 2005 – things like the euro project, fannie and freddie and dr bernanke. There are many more which make the world we live in a living hell. I’m not going to pretend that we can stop power corrupting but it certainly was never this brazen before (except for a time in the late 80’s/early 90’s in my lifetime)
prosecutions never happen in bull markets. We need to restore some faith in the system so we can have a real bull market again. Not this cacophony of global fraud we’ve had since central banks started printing money.
Thanks for your thoughts Bluestar
I agree with you completely. I’m not sure we roll over next week as you think but the top is in. I believe that when it goes it will be a massive overnight move that traps the bulls but also doesn’t allow the bears to get in therefore only rewarding the few that have been able to hold…basically very few people will make money but many will lose large.
Didn’t the same Dow signal occur in 1998?
OA,
No.
Chiefton15,
Agree need to be positioned. August caught many by surprise.
So many stocks are washed out here that some are worth investing in. I have a list of 15 blue chips trading at 11x earnings or less, down at least 30% in the past few months, several of which never had declining revenues and/or earnings in the worst bear market of the past 80 years (2008/9), with dividend yields of 3%+
jon v,
Go for it. If you want to stock pick thats fine. I have found in a bear market its very difficult to make absolute return when the trend is down.
Hey Blue.
With this post you convinced me.
It’s very hard to pick spots to get short, and the bull is putting up a fight.
Thanks for your thoughts.
Explain why you think the Dow theory didn’t occur, instead of just saying “no”. Although OA’s question in its simplistic form requires no more than a yes or no response. With all your whit and intelligence, you should at least respond with a more constructive response. Otherwise your post is mere noise that should be ignored.
Jdubs,
What are you…the blog police? Don’t ever tell me what to do! Scram Son! I don’t care what you think. This is not my job. I do this to warn folks as a karmic release for all the money I will make off of the uninitiated. OA and I are having an offline discussion and the point was to look at credit. So please never post here again or I will have you banned. Thanks for playing.
Much like most of the followers of ibankcoin I was inquisitive to hear your opinion in regards to your response, so crucify me for looking for a more intelligent response. It’s my fault for expecting more from an intern. I’ll show my way out of this desolate blog. Check, mate.
Jdubs,
It was your rude commanding manner like I am your servant that garnered my response. Second, your reading comprehension skills are quite poor. I said if you posted here again I would have you banned. I knew you couldn’t help yourself so I expected this exact response from someone of both low IQ and EQ. You are now banned from IBC son! Check Mate.
Bluestar, I just play the bear ETF’s. I thought sticking with EEV would be my primary play with SDS my secondary. Thinking I should reverse that and add to SDS or another bear ETF. I’m not a sophisticated investor, just one that wants to play this environment as well or correctly as I possibly can. Thoughts? Thanks.
Blue, what’s your thoughts on TVIX ? If we wake up to a massive limit down scenario some day tvix will be through the stratosphere.
@uglyflint With TVIX decay you’ll probably be able to get your position back to it’s initial amount at most.
The main problem is timing the drop and I still believe we still have some upside for a better TVIX entry point.
Ugly flint and slott333,
I don’t like levered ETFs due to time decay and I hate VIX etfs. I would rather use Options for leverage.
you’re gonna have your face eaten off, Miami Zombie style, very soon.
Fly,
Have you noticed since May whenever you taunt me and are feeling your oats that the market tops out very quickly. I will be adding shorts tomorrow on my best signal of all time: Fly mocking Bluestar. Take that to the fucking bank sir.
The “Fly mocking Bluestar” signal. Now that is interesting. If I weren’t so lazy, I’d go back through BOTH blogs and chart every instance of this signal. But, what the hell, the secular bear is back on and that’s the primary signal data one needs to know.
pb, what’s the secular bear signal you are referencing?
OA, I can’t point to a single data point and say “This is it!” It is more a conglomeration of macro or what might simply be called “general conditions”. Nonetheless, I do have one chart that I believe firmly indicates the cyclical bull is over. I will email it to you.
Thanks. The secular argument is an interesting one and depending on which camp you are in is the only way to determine the outcome of current conditions. I wasn’t convinced of secular bull until 2012. Looking forward to your read.
I like your thinking of trying to time a short for this week. IMHO the faster we climb the more bearish. I would like to see a steady climb tomorrow that accelerates Tuesday and tops out Wednesday. “Turnaround Tuesday” has become a thing now on social media so hopefully we don’t get a turnaround till Wednesday or later. More fuel for the fire so to speak into the latter half of the week.
I’m preparing to react this week tho at some point. Best of luck all.
IMO, the secular bull ended in 2000. The two bull markets since have been cyclical. It doesn’t look that way (at first glance), because of the new highs. But, this is the first time ever that the govt pulled out all stops, market fuel wise. That has distorted the picture.
I totally agree that the bear started in 2000, but I believe we’ve started the long ago. I was hoping you had more on why you are convinced bear.
PB,
Welcome to the Tinfoil Bear camp. The stock market has never been supported to the degree it has been in the last 6 six. 0% rates for how long? Fed Balance sheet expansion from what like $800B to over $4T in just 6 years? At a certain point the easy money ends. QE ended a year ago and the market is red since. It’s quite evident to me that the market needs further easing, or further interest rate decreases, to push more money into stocks.
Now IMO, timing when the capital flows into assets have peaked is very hard, but given that we’re a year removed from peak QE3, it seems that the we may be running out of fuel.
Will capital flows from struggling EM countries and China be enough to push this market into overdrive, or has that fuel already been tapped?
Has all the selling of long-dated USTs by China already been fully positioned into stocks, or have they move most of that money to short-term maturities, and is that capital being primed to flow into U.S. stocks?
These are the macro issues I’m constantly thinking about.
What do you think bro?
Gentleman,
I tire of this debate. Place your bets as talk is cheap and this game is about making money not about being right. But remember this:
“There is nothing wrong with your television. Do not attempt to adjust the picture. We are now controlling the transmission. We control the horizontal and the vertical. We can deluge you with a thousand channels or expand one single image to crystal clarity and beyond. We can shape your vision to anything our imagination can conceive. For the next few weeks we will control all that you see and hear. You are about to experience the awe and mystery which reaches from the deepest inner mind to the outer limits.”
This is a blog designed and authored by morons.
Goodnight
Fly,
If you post here again I am going to ban you.
QCI: Tinfoil? Not at all, nor do I consider the issue debatable. The next QE might, at best, create a bear market rally. How can they lower rates further? A negative yield and the banks would promptly be emptied of all deposits and they are capital constrained as it is. That’s part of the fed’s little problem.
China can sell all the US debt it wants; yields plainly indicate that there is no shortage of buyers.
No hard data, but as far as I can tell, the only significant capital flowing into US stocks is from Europe. They are kind of slow to catch on. Plus, a developing shortage of EUR makes US stocks look cheap.
Disclaimer: Long EUR futures. May be early. We shall see.
Blue, every storm must have an epicenter. The epicenter was clearly defined in 1991, 1998, 2000 and 2008. My concern is that without the emergence of the clear epicenter, the storm gets postponed. Or it may get replaced by a series of declines targeting one (or two) sectors at a time. It feels that at this point only a substantial geopolitical event may trigger massive market moves of the proportions you described.
PB,
Embrace the tinfoil status. 🙂 I think the next round of QE and/or rate decreases is coming. It will temporarily stop the slide and cause an insane panic buy. It depends how massive the package is of course as to how far we climb from it. But make no mistake, if we do get QE the market will rally until the program is over. That is 2009-2014 stock market 101. Depending on the the economic news at the time the rally may not be immediate, but it will come within weeks or months of the initiation of the program at most.
PB,
Then once QE dries up we have a catastrophic decline lasting a very long time. This is my base case for 2016. We’ll need a terrible decline in stocks before this happens. Just my two cents.
BlueStar,
thanks for the insights.
I’m on board. Hoping for a spike up tomorrow. I could use some more dry powder for the tradeable bottom.
Any guesses as to the duration?
Good luck gentleman.
Here’s what you’re up against, the 95%: https://www.youtube.com/watch?v=u1hnwvWhbJw
Rouge wave,
Duration for what. Forgive my obtuseness.
Gary,
First you don’t need anything other than price to go down for a bear market. But seriously the crisis is the end of the dollar as the reserve currency of the world. We have reached maximum debt. The fact that we only got This high by money printing is all one needs to know. The soverign debt crisis has begun. It is manifesting in a massive deflation.
Blue star – wouldn’t the end of the dollar as the worlds reserve currency bring on massive inflation since the argument for deflation seems to always circle back around to the rising dollar as a primary cause?
John V,
Eventually you will be correct. Deflation occurs first and crushes everything because of the strong dollar. The loss of reserve currency status will happen as countries suffer under a bone crunching deflation and they band together to find a new monetary system. This is were the crisis will take us. I wrote quickly and was perhaps out of order on events.
JonV,
Gold and silver at some point will be must owns if they don’t get banned by the powers that be. In 1932 Roosevelt confiscated gold.
Blue,
Everything you say rings true to me, even if I wonder to what extent you are this site’s bearish bait so readers of all persuasions feel included. In any case, your cautions are valid, but I’m on high alert not to let you become for me another Hussman: smarter than hell, logical and prudent, convincing and calm—and entirely wrong. IF you are wrong, however, I think it’s because the powers that run markets can overcome
math with manipulation. But that is our reality. I’ve personally lost a fair bit of real $ (and loads of opportunity) because of my thoughts about debt, risk, valuation, etc. The market is not a
true measurement tool, I now suspect, as much as it is a contraption built to rise 90% of the time. That said, I do hope and wish I’m wrong and you prove to be right—not because I enjoy the idea of a bear market, but rather I fear what happens in a world that manages to continually distort (if not outright banish) the rules of math.
Here comes your 1977.
Bluestar – what would make you become bullish? If S&P climbed 150 points would you keep shorting?
My bad.
.
Any guesses as to the duration of the tradeable bottom?
2008-style? everything dow then some bounce back?
Puts on tinfoil hat. Do you anticipate a domestic dollar & an international dollar down the road? (Venezuela-style)
corrections/clarifications
Do you expect a 2008 scenario where everything was liquidated initially? Then precious metals & other things of lasting value to rise?
Do you expect those in the US to have to turn in their ‘old’ dollars for new “domestic” dollars at some point?
Bluestar,
I don’t know you personally (or the fly, oa, rc or any or the ibc crew) but have enjoyed hearing your bearish calls throughout this extended period of stock cluster-fuckery. Ultimately, your thesis will be proved correct. Timing is (as you yourself have said) is the key issue. There are unlikely to be any bears left to profit from the decline, when it ultimately happens. I’m with you on this and don’t long for a bear markets to smash the smithereens out of everyone. That’s the job of (thankfully) few sadists out there in blogland and the world at large. Hopefully it will stay that way.
I know many (myself included) would rather be banking coin at a conservative and skillful rate. That being the case, let’s see your thesis play out over the coming weeks. We’re in need of a foil for the BTD-ers who have dominated this market post-2011.
Blue, the end of the dollar may be coming, but I think we are pretty far away. There is no viable alternative, for now. Max Debt? – sovereign US debt has the bid for the same reason. And Japan has been muddling through the deflation for decades. They should crash ahead of US, but apparently not yet. Money coming out of EU, China is going into US. On the other hand, if you took the money out of US stocks, fixed income, in size, where would you put it? Until there is a clear, safe alternative, I do not see mass exodus. Also, all recent prior crisis were triggered by massive leverage and no liquidity, we have elements of both now, but not in the same spots.
Blue – you’ve continually cited the state of the credit market as one of the structural reasons for a bear market, yet yesterday credit ripped titties; does that change anything or are the credit buyers also spineless momentum followers getting sucked up in stock euphoria? and if so, does that put the day of reckoning off for another month or year and make it that much worse?
Sy,
I am not stubborn. I got bearish in early 14. I will flip when the time comes. Now is not the time.
freebie,
if credit strongly out performed stocks.
rouge wave,
yes I expect some nice liquidations then a monstor rally that lasts months but needs to be sold.
juice,
credit popped. I am not a day trader. look at spreads the are wider than august lows. yet equities are higher.
Hi Blue,
Nice to read your comments
My first market experience was the Japan crash 1990 so I now how it feels to get burnt.
But if I m watching the markets right now we are close for the next tumble my best guess is a top today or tommorow.
Good luck