Get Short?.. Or Get Shortie??

It's DECIDED.. the new Bull(sh*t) Market has arrived!!

The shorts took it in the shorts anticipating a Friday afternoon sell-off (myself included).. The longs just continued to paint the tape higher and higher attempting to trigger "buy stops" that that shorts had entered to protect their positions.

But where's the volume??!!! We can't have a TRUE Bull market without a serious volume that indicates major institutional buying and it seems the higher this market rallies, the lower the volume goes.

Here's the most recent PSA video for your entertainment and education. I think he makes a great point about this lack of volume:

July 9th PSA market read: Get Short!

That's REEKS of stealth selling, and reflects that Mutual Fund managers are fully invested, lacking cash, and selling to meet investor redemptions. Again, this has been the case ever since the "Flash Crash" of May 6th removed 10% of the Dow's market value within minutes. This apparently convinced investors that "cash/bonds are king" and led to 9 straight weeks of redemptions, which are only now decreasing in size.

Investors pull $12 Billion out of the stock market in June

And ponder this article that just came out in USAToday, which is WIDELY READ (at least at hotels... ;0)

Trading against the Computers

Pretty frightening to realize that computers can "paint the tape" (which is illegal) in such a way to make it seem that there is actually interest from retail and institutional investors. They just want to suck you in and then slam the market down, leaving the average investor foundering in losses.

But it's not just the retail investor (Joe Six Pack) that is pulling out of the markets. Even the major Hedge Funds are seeing BILLIONS in redemptions from their "smart money" clients.

John Paulson, who made $3 Billion after working with Goldman Sachs to manipulate the Sub-Prime and Credit Default Swap markets just saw $2 Billion in redemptions from his clients.

Big Money pulling out of Hedge Funds.

Now.. if John Paulson and other Hedge Fund managers can't make money in this market, DESPITE being able to go both short and long at the same time (Mutual Funds can only "Go Long", while "Hedgies" can do anything and do it secretly), what makes the average investor think they can?

It's why I day trade, or at most, swing trade.. Everyone is getting whip-sawed as we wait for the market to choose it's ultimate direction, whether higher or lower. So they sit and wait.

So we rallied 500 points on the Dow last week, but positive buying volume on Friday was the worst we've seen since April:

DOW Weekly Chart

See the positive volume spike we saw in March, 2009? THAT'S what we need to be seeing, or at least seeing INCREASING positive volume, not declining volume. It's a sign that the market is lacking conviction and that "Big Money" investors are de-leveraging, and sitting on the equity market sidelines.

Does that mean the market can't go higher? Sure it can, but it will be fed by short-sellers covering and closing out their positions, not REAL DEMAND from bullish investors.

Thus, the signs are clear this is a "Bull(sh*t) Market rally (for now).

And the Rally goes on!!

The Beat Goes On!

Yeah.. I know.. it's cheeky!! But it's what came to mind when I titled this post.. ;0)

Bear Market rallies are SHARP and often powerful enough to make one believe that a new bull market is impending that will take us to new highs. Heck, even I get

But what the CNBC pundits don't discuss is that we've been in a major bear market since 2008. The 83% rally we've had since Mar, 2009 was NOT a bull market, but a bear market rally. But some bozo decided to "reset the clock" and call it a bull market.

Maybe I'm strange, but I don't consider it a bull market until I'm relatively assured that there is more upside than downside, and we're trending toward taking out previous historical market highs.

So we've had over 400 points on the DOW added in the past 3 days. We're back above 10,000, and the S&P 500 is trading over the H&S neckline for the second day. Should we be bullish? Was this really the "Mother Of All Bear Traps" and the shorts are about to get scorched? Or is this just the eye of the storm and we're about to catch it from the other side of the financial hurricane?

I wish I could answer that. I really wish I could. And if I could determine the ultimate direction of the market, I'd be charging you for this advice in a private market newsletter.. ;0)

But again.. Technical Analysis of markets is like a windsock, not a crystal ball. All I can do is provide "risk/reward" scenarios. But the guy from Perfect Stock Alerts remains bearish and demonstrates some clear logic for his case:

PSA July 8th market read

And here's a longer market take from Dan Fitzpatrick who is ALSO a very competent Market Technician:

Dan Fitzpatrick market read

I had someone IM me last night on Yahoo out of the blue, wondering what direction the market was going to take, and mentioning that he he was down 10% on TZA, and Ultra-Bear ETF inverse to the Russell 2000 smallcap index. I truly felt sorry for him, as well as not being able to indicate how much more "pain" he was likely to feel holding that ETF. They are incredibly volatile and generally not for anything but a daytrade, or in certain circumstances, a short-term swing-trade. I have also learned the painful lesson of trying a "buy and hold" tactic on these inverse ETFs and one position took several weeks to become profitable again.

So let me attempt to address the current situation on some of these ETFs. I may have some screenshots from my trading platform available to annotate to this post tomorrow, so be sure and visit this post again for update data and charts. But for now I'll rely upon Bigcharts, which isn't perfect, but adequate to get the message across.

First... TZA:

TZA on my trading platform showed some INCREDIBLE DISTRIBUTION today. A very long brown volume spike, indicating selling. But when I looked at TNA, it did not show the same kind of positive volume spike. It could possibly be due to the fact that some folks lacking trading platforms with realtime charting were unable to deal with the 1 for 5 reverse that occurred in TZA, DRV, and TYP (and other Direxion 3x Ultra-Bear ETFs). Bigcharts is having this problem and it will be at least 10 days before I can get a good chart on the hourly timeframe.

Here is a screenshot from my trading platform for July 8th, Daily Chart. This one has traditional 30, 50, and 200 Day MA lines (color identified at upper left):

Notice the Parabolic SAR trending upward (blue dotted line) and the price at appox $36.00?  TZA is quite likely to hit that "tick" and cause the SAR to "flip" downward starting from 45.66. Also, if you backtest the results of when a daily SAR is "flipped", you'll note that more often than not, the price will continue to decline to the next level of support which could be around $32-33/share, where the lower Bollinger Band arm is currently located.    Now I don't expect TZA to actually get down to that level.  It's likely that we'll see it flip, have  a quick minor sell off and then begin the grind back up to the descending SAR line.   SAR lines are like "magnets" for price movements.   Prices will tend to trend back to the SAR line.

Now.. the OTHER possibility is that TZA sells off to the 50 Day MA at around $36 and then soars to new highs, thereby creating an even HIGHER Parabolic SAR "reset" (which would clearly demonstrate the uptrend is resuming (and the Russell 2000 furthering it's decline).

Now.. back to that volume spike..    Do you see it?    But TNA, the Ultra-Bull ETF does not reflect a major accumulation spike.    So I wonder how this reverse split is creating a volume divergence and whether that will result in higher prices for the Ultra-Bull ETFs.

Now.. in the hourly chart, we're seeing the 200 HOUR MA sitting at around $37.70.. This is a MUST HOLD to avoid trending downward, and it should be good for a short term trading opportunity for $1-2 price swing up to the lower Bollinger Band at around $39. But the last candlestick on the hourly chart was NOT a "hammer", which suggests we have further selling to go in the morning (which means TNA and the RUT will likely be up).

And look at the descending Chalkin's money flow.   It's declining, and it generally goes negative red when it hits the "neutral zone".   That indicates we have more pain for TZA.

Bottom line.. the selloff in TZA did a hell of a lot of technical damage to the chart. And that reverse split didn't do it any good either. And when I look at the daily chart of TNA, I don't see much resistance until $40/share for that Ultra Bull ETF. Since TZA is the inverse, it will likely suffer from this advance in TNA.

BTW, did I mention that the 60 minute TZA chart indicates a "Bear Flag" formation? That's usually not bullish.

Right now I'm playing FAS and some in DRV and DRN. Banking coin, but a bit frightened to leave a position overnight (I did leave my DRN in place tonight, but I'll be restless.. ;0)

This is a trader's market. And I like being able to bank 2-3% on my positions each day and sleep peacefully.

But these ETFs are not for the weak of stomach. The odds are that if you find yourself underwater in one of them, eventually you'll get bailed out. But if the Bears lose the game and this turns into a serious short squeeze, there is nothing but pain for the Ultra-Bears lying ahead.

Scrutinizer

Money continues to flow out of Stock Mutual Funds

Redemptions by retail investors from Stock (Equity) Mutual Funds continue for the ninth consecutive weekly period. However, most of that money seems to be moving into bonds and data does indicate that the outflow is decreasing in total amounts. But does that suggest that the pace of redemptions might pick up again in the future? Possibly.

Ninth Sequential Month of Mutual Fund Redemptions

ICI data link

So what is sustaining this market? Some theorize, with some merit, I would suggest, that the computers and their "black box" High Frequency Trading parameters are "kiting" the market and creating volume when the underlying lack of TRUE investor buying is far lower. This is just one more aspect that a market technician will need to assess when viewing volume related data. Fully eighty percent of all volume is related to HFT activity and we all know what happened on May 6th, 2010 when those computers were shut off.

So where are they folks getting their money to feed the computers? You're guess is as good as mine. But I suspect some major banks are lending them money, or engaging in proprietary trading with their own Black Boxes. With nearly zero interest rate loans available from the Fed, these banks can invest it in Treasuries, Corporate bonds, or in Equities. So as bond yields decrease due to retail investors outflows from equities to bonds, the black boxes start looking at equities as being reasonably valued.

So, if the theory is correct, how much longer can they borrow money to have computers trade against one another? And what happens if one, or more, of those proprietary black box systems decides to take a holiday AGAIN?

What I believe is that the average retail investor is realizing that the markets are no longer about human decision making related to proper "price discovery" in achieving the proper valuation of stocks. These decisions are being left to computer models and computers programmed to make thousands of trades a second based upon those models.

The amazing part of this is that computer based models are supposed to analyze and predict human behavior. But if human behavior is telling them that these markets are increasing rigged against them, then how do they model what seems to be a decreasing amount of retail investor interest? If investors vote with their feet and flee the equities markets, then can we not question whether those computer valuations are based upon sound analysis/programming?

Let's not forget that computer models were used to value Mortgage Backed Securities and they turned out to be utterly flawed.

Well.. let's see what tomorrow's market has in store for us. Looking good in Asia, thus far.

But we have the jobs data tomorrow morning, and the consensus is for 465,000 new jobless claims.
Anything higher than that and we'll likely see a sell-off. But if we meet or exceed consensus, the markets will likely rally further up to the 30 Day MA line at 1080 SPX, at which point the market will likely hesitate.

Scrutinizer

Jobs, Jobs, Jobs!!! It ALL comes down to Jobs!!

Note: Comment on today's market rally addressed at end of this posting.

Came across this article last night, but was too tired to post it then. But IMO, it truly reflects how much this administration SCREWS the small businessman in favor of the Big Corporations who provide them all those campaign contributions and campaign money. Monopolists trying to undermine the capitalist heart of our economy.

Why unemployment is so high.

Of course, let's also recall that for the Democrats in charge of this administration and congress, the quickest way to create jobs is to put people on welfare, not back to work.

Pelosi: Welfare creates Jobs.

So we have the Initial Jobs Claims report tomorrow and that should be indicative as to whether this rally can hold or not.

Current Market Situation

Whew!! That was quite a rally we had today!! Very strong price moves, but did the volume truly reflect the price move? Not particularly. If we look at the SPY (a proxy for the S&P 500 which provides me with volume related data), we can see that volume over the past two days, while positive (black columns), was PATHETIC in relation to previous selling peaks (brown columns):

SPY Daily chart

And this evening I watched the nightly market analysis at Perfect Stock Alerts to hear Christian's. He strikes me as a savvy market technician who backs up his views with easy to understand explanations. It never hurts to confirm/challenge your own beliefs with the views of others.

Perfect Stock Alerts analysis: Read The Market Chart, Don't Chase It

NOW.. CNBS is spamming their website and network with "noted short seller" Doug Kass's declaration that the market low is in. I have to admit that I must not watch enough CNBS because I don't recall this guy's name, or the assertion that he called the previous low in March, 2009. But whatever.. He's one voice in the wilderness and the TECHNICALS DON'T LIE!! They may "fib", but they don't lie.. ;0) And neither does volume (or Relative Strength Indicators, RSI)

Of course, maybe all this volume is taking place "off-market" in the "dark pools" of capital (Hellow FINREG?!), but to capture the attention of the retail and independent market traders, you have to "show your hand" eventually and reveal that the market is under heavy accumulation.

Doug Kass goes bullish

Doug Kass, most views

Kass, interview with Jon Najarian

Could Mr. Kass be right again? It's still hard to say.. Give us a few more rally days like today and eventually we're going to get that Buy Volume spike as shorts throw in the towel and are forced to cover, adding fuel to the buying fire. But we'll need to get above 200 Day MA before I see that happening. And it's my belief that to nullify the H&S formation, we need to see 1250 on the SPX seen within a few months.

But just because Mr. Kass is calling for a bottom in the market, he's also only suggesting a 10-12% increase by YEAR END. 10% on the SPX from the 1010 bottom is only 1110 and we're half-way there based upon today's trading ALONE.

Furthermore, 10% return on the SPX still leaves it BELOW the 200 Week MA

Doesn't strike me as much of a bottom.. Nor much of a bull market rally. After all, we saw nearly 83% upside after Mr. Kass's LAST market bottom call. Now he's only settling for 10-12%... Hmmmm...

HOWEVER, let's look at something interesting.. The SPY Monthly chart IS DIFFERENT than the underlying SPX for which it's supposed to be a proxy. It's something that I hadn't looked at closely, relying upon the raw index data. But I'm finding some interesting divergences when looking at SPY data:

SPY Monthly Chart

Notice the hammer that was put in on the SPY? It's not yet evident on the SPX monthly chart (it's "all data" so you might want to decrease it to 5 years):

SPX Monthly

THAT IS INTERESTING. Because a Market Technician, looking for reversal points, looks for "Hammers", (Google "Candlesticks Hammer" for a description). And a Hammer on a Monthly chart is not to be ignored as something temporary. Of course, it requires confirmation from the following month's Candlestick indicator.

What's so interesting is why there is a hammer on the SPY, but not on the SPX? Which one should be trusted as the best reflection of the market technicals?

ALSO, something that other technicians are not paying attention to is that the Monthly Stochastics are fast approaching previous oversold conditions. Now that doesn't mean that oversold monthly stochastic can't exceed the previous iterations, but it's unlikely.

In sum.. this is going to be a trader's market.. swings in one direction or another and no major gains to be had by holding it. And that's what Mr. Kass is offering as his best case scenario that leads him to assert "This business is going to be fun again and it's going to happen sooner than most people think".

If 10% returns is "fun", I'd sure hate to know what he asserts is "boring".. ;0)

In sum.. be nimble.. watch the volume.. and look for inverted hammers on the charts for reversal points back to the downside.

And remember there's always the potential scenario where we see the mother of all short squeezes that takes us up to 1250 on the SPX.

Scrutinizer

Paralysis by Analysis

Well.. the US markets finally broke a 7 day losing streak after a 171 point rally which then fizzled into negative territory before closing in the positive (barely) by about 1/2 percent. Asian and European markets seemed to be the impetus for this major pop, but it was clear that people were selling the rally, at the same time it was squeezing the shorts. I had spare cash ready so I did pretty well. However, at the end of the day I closed out my Ultra-Short positions after banking some serious percentage gains over the past several weeks in anticipation that this might be a long overdue relief rally (not a bull market, just a relief rally... ;0)

And Ultra-Short ETFs can lose a LOT OF VALUE during any significant rally, so it was better to end with cash.. Tomorrow is another day. Might even go long some of the 3x Ultra-Bull ETFs, but it won't be anything I hold overnight.

So how far will this rally, assuming it repeats tomorrow, take us? It had a hard time clearing the 1040 SPX level, which is the neckline of the Head & Shoulders formation. It briefly breach that 1040 number, but then fell back with only a 5.5 point gain for the SPX. I personally will be surprised if it exceeds 1100:

SPX chart with 100 week MA

More likely it will try for 1050 to 1065. But look at the "Death Cross" where the 30 and 50 Day MAs are crossing under the 200 Day MA. Those are resistance points that any rally will pound it's head against:

SPX Daily Chart

And if you go back to the previous weekly chart, you'll note that the SPX underwent a WEEKLY "Death Cross" back in 2008 that took the SPX down from 1300 to 666 (NUMBER OF THE BEAST Baby!! Now TELL ME THAT was just a coincidence.. ;0) That's a 50% haircut from the time that ALL THREE WEEKLY MOVING AVERAGES turned downward. That's important to remember, because all three of them have turned downward YET AGAIN!!

Furthermore, this is the FIRST TIME that I can track where the 100 Week MA, once having descended below the 200 Week MA FAILED TO SUBSEQUENTLY PENETRATE IT AGAIN. The rally from 2009 to now has FAILED to see that 100 Week MA rise back above the 200 Week MA.

First time in history that I can discern. Read that as UNPRECEDENTED... HISTORY MAKING.. and SCARY AS HELL...

Don't believe me.. look at the Weekly chart above I posted.. But remove all sharp objects from your immediate presence beforehand.. ;0)

Now.. for you Russell 2000 (RUT) fans, you'll note that CNBS is reporting that the RUT is the first index to hit a 20% decrease (bear market) since the April highs.

RUT enters Bear Market

This should not surprise anyone as small caps ALWAYS get sacrificed and used as a "source of funds" to support the SPX and DOW. That's why I was trading TZA, which is the 3x Ultra-Bear ETF that is the inverse of the RUT.

And from looking at the Monthly chart for the RUT, it's pretty clear where it's eventually going to find support, 510:

RUT Monthly

But the REALITY is that ALL INDICES have been in a CONTINUING BEAR MARKET since 2008. Why CNBS has CHOSEN to ignore the previous year and only counts the rally from the Mar, 2009 lows is beyond me.

The ONE THING favoring the RUT at this moment is that it has YET to see all 3 major Weekly MAs turn downward. However, that seems to be a certainty in coming weeks as the Daily MAs have turned down:

RUT Daily Chart

RUT Weekly Chart

Finally.. I've been reflecting on my market analysis and looking for any missing "clues" or hints that I might have been missing..

First off, the very nature of the 12 year, as well as this more recent Head & Shoulders, has me wondering why the SPX hasn't sold off below 1000 yet. Every market technician willing to recognize that H&S expects the SPX to hit 850 very soon. H&S formations normally resolve themselves to the downside very rapidly as they are widely recognized by Technicians as major sell signals.

But WE DO HAVE some Bullish fundamentals in the form of corporate earnings, as well as how much cash they are amassing on their balance sheets and those facts should not be ignored. The SPX currently has a P/E of about 15, while the DOW has one of about 14. That's, BY NO MEANS, out of line. But the market is a forward predictor of value and it obviously believes that with no new stimulus, it will be difficult to maintain that earnings momentum in future months.

Even some noted bears are calling this a bottom for the year:

Bear going into hibernation?

So what if this is a "Bear Trap"? A carefully laid trap that lulls the bears into thinking this is a "no-brainer" short trade all the way down to 2009 lows. A sinister trap that lets the SPX slip to just above that critical psychological support of 1000, and then comes in with a crushing amount of buying that creates the "mother of all short squeezes" and propels the indices to new highs (thereby negating that 12 year Head & Shoulders formation)??

If they are going to do it, and possess the financial wherewithal to ACTUALLY do it, and if corporate earnings in coming weeks genuinely provide GREAT NEWS to justify it, then they would need to spring their Bear Trap NOW. Do it when all the bears are piling in and no one wants to be long stocks. Such a squeeze, given the requisite rationale, could be truly devastating to the bearish case and provide a ton of buying power from short covering.

I'll only feel TRULY solid about my bearish analysis when the SPX breaks 1000. That will be the final nail in the coffin, IMO.

Scrutinizer

Happy B-Day USA!!

I hope you're all having a great 4th of July!! I managed to get up to the mountains and spend some quality time amongst Mother Nature.

It's on days like this that we have to remember that this country has been strong enough to endure a multitude of financial storms, but yet emerged stronger after they have passed. That's the nature of the USA, the American people, and our culture that recognizes humanity's unalienable rights to "Life, Liberty, and the Pursuit of Happiness"..

It's time to return to a government (and economic system) that is " of the people, by the people, for the people". To recognize that both of these institutions are tools to SERVE THE PEOPLE, not control them. They are tools "to promote the general welfare, and secure the Blessings of Liberty to ourselves and our Posterity".

That said, the people must recognize the truth, understand it, and be willing to resolved the problems. And we must understand that "Big Money" in this country is not the kind of COMPETITIVE CAPITALISM we to achieve a better future. What we are seeing now is MONOPOLISTIC CAPITALISM, asserting it's control over the marketplace and stifling innovation and entrepreneurial forces within our culture and economy. It's turning out markets and financial system into casinos where "skin in the game" investing takes a backseat to derivatives, hedges, and Credit Default Swaps that provide profit when capital and assets are deflated and/or destroyed.

So remember that the challenges we face in coming months and years are temporary and they too will pass. But it will not be easy, and communities will need to come together in support of one another.

Now.. on to some reading that I found interesting.

David Tice has been a long-time bear and runs the "Prudent Bear" mutual fund. He's been bearish since I first became aware of him back in the '90s. That said, sometimes he makes some sense and brings up some good points. And maybe, like a stopped watch, maybe the course of the financial markets and his sense of bearish timing are finally coming into alignment:

Will S&P retest 666?

First of all, I found it actually ominous last year when the S&P hit the "number of the beast". Just TOO freakin' coincidental, if you ask me. Suddenly in all the panic selling the "Big Money" put in orders to buy the S&P at 666? Come on now.. ;0)

Back to Tice. He brings up critical points related to state and local budgets forcing the laying off of hundreds of thousands of employees. And this cycle of layoffs is just beginning because they were staved off by the Federal stimulus last year. It's very unlikely that the market has much appetite for another such stimulus, but as US bond rates descend back towards previous lows, that may change. Money demands a place to be "parked", and Obama's stimulus provided just that. However, as I've mentioned before, that money was utterly wasted and created few, if any, sustainable jobs.

So read those points and ponder the future. And pray it doesn't come to pass.

And if you would like to read where this country should be heading, a good start is with "The Capitalist Manifesto":

"The Capitalist Manifesto"

The Great Disconnect

Additionally, I've previously read Peruvian Economist, Hernando De Soto's work, "The Mystery of Capital":

The Mystery of Capital

In both of these works, the authors disdain monopolistic Capitalism. True Capitalism releases the individual talents of the people to innovate and prosper. But current capitalism has evidenced itself as denying common people the ability to access capital, either by excessive bureaucratic interdiction (regulations, permitting, licenses, taxes, fees) and/or through monopolist capitalists/aristocrats using legal and governmental means to protect their capitalist fiefdoms from competition.

Capitalism is flawed and it needs to be fixed so that it benefits the most people. But it's merely an economic tool to guide the process of ensuring the prosperity and economic security of our people (and people around the world).

Scrutinizer