Apr. 6th
Stocks:
I’m going to be brief today as we are still waiting for the illusive correction into the now overdue daily cycle low.
One notable occurrence happened yesterday in the options markets. The put/call ratio reached one of the most lopsided levels we’ve seen during the last four years. It’s not so much that traders are loading up on calls as they don’t feel the need to buy protective puts. The ratio yesterday reached almost 3:1. There have been several times we’ve seen this kind of skewed behavior and needless to say the results going forward weren’t rosy.
Over the next two weeks the maximum loss was almost 7% vs. a maximum gain of less than 1%.
This is what happens when one of these extreme momentum moves gets going. Eventually everyone loses all fear of a correction so when one does start (the market always corrects sooner or later) traders are stuck with no protection to the downside. So when the music stops everyone tends to head for the door all at the same time.
This is why I think it’s so important to just remain patient right now. The correction will come and there’s a very good chance it’s going to be sharp.
This is also why I’m not willing to chase gold or miners here. Look at what happened to gold and miners during the `07 mini crash that followed a similar momentum run. You can see gold wasn’t immune to the panic selling and the miners were especially susceptible to the selling pressure. Now I don’t know if we are going to see a 6.5% drop like we did in 07, but once one of these things gets started they start to feed on themselves. In that environment the S&P could quickly slice right through the 1150 support and perhaps even fill the gap at 1120. That would constitute a 6% decline. Something like that would almost certainly affect miners and gold. I noted on the blog today that we have a coil on the Russell that has now broken higher. Remember about 70-75% of the time the initial move out of the coil tends to be a “false” move followed soon after by a more powerful and durable reversal in the other direction. Since we have nothing that even vaguely looks like a daily cycle low yet I’m guessing this is going to be one of those ¾’s of the times that we see a reversal. Dollar: Again I’m going to say that I doubt the market will correct without the dollar rallying. That doesn’t mean it will stay down just that a weaker dollar will act to support the market and prevent any correction. With that thought in mind the dollar fund (UUP) looks like it has broken higher out of the bull flag it’s been in. Oil: I haven’t mentioned oil lately. For one it’s not going to be my preferred asset class during this stage of the commodity bull. Energy led the first stage from `02 to `08. It would be very unusual to see it lead the next bull. And as a matter of fact it’s been lagging badly while gold has gone on to make new all time highs. The same for miners vs. energy stocks. The HUI and XAU have already challenged all time highs while XLE and OIH are still 33% and 40% below all time highs. The fact is energy demand is still very depressed and we have plenty of oil. Oil is rising for two reasons. One valid and one imaginary. The fact is every country in the world is debasing their currency. In that environment it is to be expected that oil will rise. The other reason is purely speculative. Traders are gaming a strong economic recovery and the expected increase in energy demand that that expansion should bring. I don’t think the world is going back to that level of economic activity for quite some time so I fully expect we will eventually see oil collapse again as the looked for demand surge fails to materialize. In the meantime though we can expect rising oil to again flatten economic activity just as it did in `08. I’ve mentioned many times before that every time we’ve seen oil spike 100% or more within a year it has soon been followed by a recession. We have already seen the 100%+ spike up so the damage is already being done and it’s being done in an already depressed economic environment. For what it’s worth oil is now moving into the timing band for a cycle low also. Usually we will see oil move down into a daily cycle bottom between 40 and 55 days. Today was the 40th day of this cycle so not only are stocks due to top but so is oil. Short term indicators are still overbought. Gary Investing in the financial markets can involve considerable risk. Past performance is not necessarily an indication of future performance. The information included in The Smart Money Tracker and The SMT subscribers daily updates is prepared for educational purposes and is not a solicitation, or an offer to buy or sell any security or use any particular system. Information is based on historical research using data believed to be reliable, but there is no guarantee as to its accuracy. G.D.S L.L.C., nor Gary Savage, do not represent themselves as acting in the position of an investment adviser or investment manager for funds that are not under their direct control and fiduciary responsibility. GDS L.L.C., Gary Savage, will not provide you with personally tailored advice concerning the nature, potential, value or suitability of any particular security, portfolio or securities, transaction, investment strategy or other matter. From time to time, GDS L.L.C., Gary Savage, may hold positions in securities mentioned, but are under no obligation to hold such position
