Blog Motto Update
The first Blog Motto (shown at the top of each page under the title) that I put on this blog was “The S&P 500 Bear-Market Rally is Almost Over.” I put that on in early May.
Then, I updated the motto to “The S&P 500 Bear-Market Rally is Over. Look Out Below!” I announced that change in a post titled: I Called the Top on May 21st. Yep, I knew it was the top only two days after the fact. How did I do that? Frankly, I didn’t really do anything more than basic chart-reading with techniques that are at least a hundred years old.
Now that the March-to-May bear-market rally is clearly over, it is time for another motto update. This one I don’t expect to last very long:
“The S&P 500 Will Take Out the March Low Soon”
By “low”, I mean the lowest intra-day print on March 17th of 1257. By “take out”, I mean that the S&P 500 will close below that point. After it trades underneath 1257 for three days and confirms the break-down, I will update the motto again.
I’m posting this late Monday night because I think the low can be taken out at any day now, including Tuesday, July 1st.
July 1st, 2008 at 12:50 am
Fundamental update. Here in Asia money is tightening. Inflationary policies in Vietnam has to be reined in. India is tightening and China will have to start soon (Yes bring forward that “after Olympics debate”).
We have inflation and deflation at the same time. Oil and food prices are scaring Central Banks. They are tightening through reserve requeirements at banks and maybe through interest hikes.
The Credit Bubble was global. Money was cheap everywhere. The only scarce input was commodities. I think we will see massive deflation across the globe. The consumer is not buying capital goods and those factories in China will soon be empty.
Be aware of bear-market rallies every week on Wall Street when oil price start to tumble. As long as oil continues its speculative parabolic rise the Bear’s are sitting pretty. They are sitting pretty after oil pops too, but trading will become much more difficult.
July 1st, 2008 at 7:44 am
Hi Larry,
With oil as the world’s new reserve currency, it may be able to levitate a lot longer than we might think.
Also, I’m looking forward to the next bear-market rally. I think that they are one of the easiest ways to make money if you can correctly identify them. It might begin when the Vix spikes since that is the indicator everybody is looking to for a buy signal right now.
Matt
July 1st, 2008 at 9:43 am
Speaking of bear market rallies — we’re all waiting for the bounce. I agree this is fun trading, far more predictable than trying to guess ups and downs during the toppy 2007. I didn’t think it would come yesterday, off of closings above even the end-of-day March lows, even though the S&P has been falling relentlessly, and it didn’t. This morning we touched 1,267 after a nasty gap down — not exactly a bounce setup. On Thursday we have employment numbers, not likely to be pretty. That leaves a tiny space this week for a minibounce, barely distinguishable from sideways, or we simply keep up the relentless fall since mid-May. My question: why do you expect us to stay below the March intra-day lows for three days? By confirming the breakdown, you simply mean confirming the bear market, confirming we’re headed still lower, by having a succession of lower lows? Why do we need three days to do that?
I was also waiting for the lows of March to be taken out, but I imagined it a brief and precipitous fall, leading immediately to a tradeable bounce. Though since I don’t expect the bounce until next week, I predicted we would go sideways or slightly up through Wednesday, fall on Thursday, fall hard on Monday, and then bounce.
It’s all about catching the low.
July 1st, 2008 at 10:59 am
Hi Kailash,
The “Three Day Rule” is just a technique that technical traders use to rule out a false break-down or a false break-out. You can see a classic example of it in action recently as the XLF took out its March low: it fought back for three days, briefly regained the low, and then flopped over.
Matt
July 1st, 2008 at 11:52 am
Matt,
I agree regarding the VIX. We need a rise to about 30 before the money managers start moving in. There are so many bullish undertones this week. The market not being able to rise is a sign of how ugly things are.
Larry,
Thanks for the Asia update. Keep us posted. I agree with your global deflation call.
July 1st, 2008 at 1:02 pm
It seems to me that VIX is the hook that will keep the crowd shorting rallies well past the low. The 2003 low looks a lot like this one — VIX did not spike to a new high on that final low, constituting a case of bullish divergence. If everyone is watching VIX, it indicates the crowd will be wrong.
July 1st, 2008 at 1:18 pm
Hi Bob,
In early 2003, the economy had just begun to expand again, and sentiment was beaten down by the impending invasion of Iraq. That was a dramatically different scenario. The economy is definitely not expanding now, and if traders took the saber-rattling with Iran seriously, the market would be much lower.
A complacent Vix today just means that there are a lot of bulls still clinging to the idea of a second-half recovery, of which there is no hard evidence.
Matt
July 1st, 2008 at 3:27 pm
Bob,
I don’t think “everyone is watching the VIX”. Definitely not something to make major investing decisions on.
I was slowly buying in Feb 2003, a month before the bottom. The Dow was at 8000 and the consumer, credit and banks were in solid shape. Oil was in the $20 range. The difference between now and then is night and day in so many ways. This is a bear market. Don’t fight it.
July 1st, 2008 at 5:34 pm
Hello Matt and all - What do you guys make of today’s reversal? SPX put in a hammer and on heavy volume. VIX seems like a logical focus point for traders but may catch the bears off guard this time by not spiking to the 30 area to create a short term bottom. Weekly charts don’t allow for much upside here but we are going into earnings soon and seems like this could be a good place for the markets to bounce for a couple of weeks. SPX 1320 looks like a resistance area. Then down to sideways again thru earnings. I dunno… Have been short but going long here with tight stops… We’ll see…
Good luck…
visuall
July 1st, 2008 at 6:43 pm
Hi visuall,
The first descent to a support level usually produces a bounce. The SPX’s bounce off of the March intra-day low today was a classic textbook example. The XLF did the same thing three weeks ago before it fell through its March low.
If the market gaps down after the jobs report Thursday morning, your stops might not save you. The ECB might also trash the dollar Thursday morning. Way, way too risky for me to be long here, even for a quick trade.
Matt
July 1st, 2008 at 9:22 pm
Matt -
Makes sense, but what would make you become even “short term” bullish? Bad news and a depressed dollar have to be priced into the markets at some point soon…
visuall
July 1st, 2008 at 9:56 pm
visuall,
In bear markets, I think it is pretty rare for another bear-market rally to begin hard on the heals of the previous one. Now that this bear-market rally is over, it should be a matter of weeks, at least, before we get another one.
For a long time, people were saying that the recession was priced into stocks. That turned out to be a rather dramatically bad idea to believe in. Once earnings are out, people will see just how badly oil has ravaged profits. FedEx and UPS were no accident.
I don’t see why the market shouldn’t continue to resemble 2001-2002, and I think we are still in the 2001 parallel.
Matt
July 7th, 2008 at 4:54 pm
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