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Run Away, Turn Away

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(Fast forward to 1:40) "Run away, turn away, run away".... we all know the true meaning of that song, but we can totally apply it to the current market conditions in an 80's kind of way. As the crowd seems to have been fooled into playing the contarian, buying when the market is down method, but they fail to recognize that it's only contrarian when everybody else is selling. For the most part, contrarian investing was probably invented by the enormous mutual fund industry to keep money flowing to the coffers in bull or bear market.

I don't think the recent action bodes well for bulls as the little short squeeze bounce should be hailed as a gift to get out before it's too late. I'm not fading a 50/200 cross to the downside on a LT or IT scale even though there is probably some money to be made on the ST as some have shown this past week. A few weeks ago I mentioned how I was ST bullish, but that was about it. We never got the strong intermediate follow through after the kindling burned out.

Another flashing signal that the tide has turned to bear is the number of huge 2% up days on shallow volume. Even though IBD has registered 3 Follow Thru Days in the past 2 months, it should be noted that 2 have failed. Failed FTD's are not a good sign. What IBD fails to take into account (and this would kill their sales pitch if readers actually read between the lines) is that IBD's system cuts losses at 7-8% in growth stocks. So lets see, 2 failed FTD's equals roughly a 15% loss just in the past two months. Like I've said on an review of an IBD book before, "The method (momentum investing) only works in a bull market".

A second case in point is all this nonsense about buying when there is blood in the streets. Where were these people in March of 2009? I have no idea. Obviously most believe that they are contrarians buying at these prices since the TSP sentiment survey went to a sell for next week. (In other words, too many bulls.... even though we are allegedly at major bear extremes.) Not a good sign; however, it will probably switch back to bull some time next week if the market gets a good 'surprise' hammering. Bear markets have big up days and quick switches to overbought territory, which is enough to keep a margined short seller on schizophrenic edge.

A third LT signal, Dow Theory, is on a buy or sell, depending on who you listen to. My guess is that once we break 3750 on the Transportation Index.... watch out. Looks like the DJIA already hit a sell signal breaking the Feb lows. To get back to bull territory, it would need to break the late April high- which right now is a long ways off. Don't forget about the Baltic Dry Index, a strong leading indicator that has not yet been infiltrated by speculative HFT's and futures markets. The BD is now at levels not seen since March 2009, aka a negative divergence.

Major indexes, looks like the Nasdaq is getting overbought quickly... below the 200 DMA.

The safety trade we all know is in full force with Treasury prices flying high which most market gurus got wrong when they insisted that everybody buy TBT for a sure thing trade a few months ago. Today, as the pundits insist that the retail investors move into growth stocks at a cheap price, the Dow Utility index continues to march higher above the 200 DMA.

Smart money (and I've often wondered if a better term would be crooks) have been moving out the door slowly since March and into cash, treasuries and utility stocks as they know that capital preservation is paramount.

The only hope for bulls is the European bank stress tests which, unless some new rule is invented as was during the US bank stress tests in March 2009 when banks were allowed to mark assets to whatever value they wanted, could prove fruitless. A positive report could strengthen the Euro which would sell the dollar and Yen, both carry trade currencies. Does anybody really believe that this test will not be rigged? It's a matter of whether the rigging has already been factored into the market or not is what will make the difference.

ST traders (0-3 weeks) could have plenty of opportunity ahead, but for those looking to enjoy the summer months, I think you will be able to do so without having to worry about missing any superb opportunities for a while.

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  1. crws's Avatar
    June had the same type of run-up prior to options expiry.
    However, that week was much lighter on the news and reports than next week will be.
    I'm still very skeptical of this big gain with so little resistance, even though there were some decent volume exchanges.
    I guess what bugs me the most is the last 1/2 hour climbs or dumps, like it's an algo fakeout game without a justifiable catalyst.
    Thanks for posting- wondered where you've been.
  2. Birchtree's Avatar
    I think I'll stay strong and long until I see what the four year cycle nesting will do. The damage could already have been done.

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