Apr. 10th weekend report
Stocks:
I think Friday’s ISEE data says it all. There were periods during the day when traders were buying almost 3 times as many calls as puts. By the end of the day they had purchased 2.6 times as many calls as puts. That’s one of the highest ratios of calls to puts in 4 years. The market has been conditioned to see only blue skies ahead. That’s simply amazing considering it only took 2 months to reach this state.
Normally something like this would unfold over a 4-6 month period and lead to an intermediate term correction lasting 3-6 weeks. However it’s just too early for that yet. We are only on the 9th week of this intermediate cycle and the intermediate cycle usually lasts 20-25 weeks (trough to trough). More importantly we still haven’t seen anything that even vaguely looks like a daily cycle low even though this daily cycle is now 43 days old. If we had moved through the daily cycle low and where 2 or 3 weeks into the next daily cycle there would be the possibility for a left translated daily cycle leading to a multi-week correction. But since we still don’t have a daily cycle low yet I think that scenario is probably off the table.
This kind of bullish sentiment isn’t destined to lead to a sustained push higher. That doesn’t mean it can’t go higher still, it certainly can. However I fully expect any further gains are going to be given back. What I’m concerned with is the manner in which they are erased. I continue to think we are going to get a violent correction soon that should wipeout several weeks of gains in a matter of days. That would quickly reset sentiment and set the market up for a final parabolic push higher (similar to the mini-crash in Feb. 07). So until that correction materializes it’s just too dangerous to push the long side further.
Now keep in mind I do think this will just be a correction and that the market will quickly recover and go higher, maybe a lot higher. So as long as one doesn’t mind holding through a drawdown for a few weeks you could just sit with any long positions through the correction and be fairly confident the drawdown will only be temporary.
We’ve now reached interesting psychological levels on quite a few indexes that may act as resistance next week. Notice on virtually every chart we are seeing momentum divergences and low volume during the last several weeks. We also haven’t seen much improvement in breadth. New highs are barely half what they were several weeks ago despite new highs for the indexes. They’ve even dropped from last week’s 450 level. The push to new highs only barely managed to push the McClellan oscillator back above 0. Next week begins earnings season and historically the market hasn’t performed well if it enters earnings season at 52 week highs. You can see from the next series of charts that during the last bull the SPX more times than not corrected as soon as earnings season began. Occasionally it would start to drop prior to the beginning of earnings. In those cases it tended to bottom during the first or second week. The periods where the market sold off prior to earnings have tended to rally during earnings. Of course that’s far from the case now. The cyclical trend is up, so we have to expect that the rally will continue, but earnings season tends to be governed by how the market enters into it and more often than not a market on a roll tends to roll over once the grade cards start coming out. The exception was during the rally from August 06 to February `07. During that period the market was solely controlled by the technical & emotional aspects of the runaway move. As I’ve stated several times in the past couple of weeks I think we are in the same technical and emotional state right now as we were in early `07. However I don’t expect this move to last as long as the one in `07. This entire bull market has unfolded much more aggressively than the last one, which I suppose is a direct result of the magnitude of liquidity the Fed has pumped into the system. Even during the runaway move of 06/07 we still had minor declines corresponding to daily and half cycle lows. This recent move out of the February bottom has again been much more aggressive than the 06 move. It’s now been 38 days without a single close below the 10 day moving average. That is an incredibly persistent trend and one that is beginning to verge on parabolic. We all know how parabolic moves end. Now that doesn’t mean I think the market is going to collapse like oil did. I do think we are probably going to see some kind of mini-crash (-4%to -6%) before we get thru earnings season though. And with most indexes now sitting at psychologically significant levels I’m not terribly confident we will even get through next week before the correction begins. We got another mild selling on strength day Friday to top it off. Gold: I think this comment from the blog says it all: “Sweet Jesus. Will gold ever pullback so I can buy?” Gold bugs have run the full gambit from utter despair to absolute fear that gold is going to run away and never look back. If this is a C-wave continuation then we will certainly see a monster parabolic move but it’s unlikely to come from this level. The parabolic move should occur during the final daily cycle of an intermediate cycle. This intermediate cycle is only 9 weeks old. If we are going to get a parabolic move I would expect it around week 15ish. It will also occur with gold at new highs. That’s obviously not the case yet. Right now we are still in the stage where the conspiracy theorist are scratching their heads and trying to figure out how the powers that be could possibly stand idly by while gold rallies 10 out of 11 days in a row. (Don’t worry if this is a C-wave and gold does finish off with a huge parabolic spike higher you will get another opportunity to cry foul as gold comes crashing back down during the next D-wave correction.) So let’s start out with the daily cycle and see if we can get some idea of where we sit. The daily cycle usually doesn’t run much longer than 20 days and it’s not unusual to see one run as quickly as 16-18 days. At this point with a stock market correction still in front of us and gold now about as short term overbought as it ever gets, it’s probably too late to panic in at this stage. Generally 95 times out of 100 buying with the 3 day RSI at 97 is going to lead to a drawdown. At this point it’s probably too late to jump in and we would be better off just waiting till gold moves down into the next daily cycle low before buying. Next let’s take a look at the intermediate cycle because the move above $1161 this week did clear up the intermediate phasing. A re-phasing of the intermediate cycle was mandatory if this was to have any chance of being a C-wave continuation although it still is no guarantee as I’ll explain in a minute. We needed the re-phasing because we were running out of time in the intermediate cycle if the Dec. low was the last intermediate cycle bottom. If that had remained the case then we would now be on week 15 and the intermediate cycle usually doesn’t run much longer than 18-20 weeks. Now that we know Feb. marked the last intermediate cycle low we have gained back 6 weeks and gold is only on week 9. That gives us potentially another 5-6 weeks (probably two daily cycles) before we would need to start looking for an intermediate top. If this does turn out to be a C-wave continuation then that is about what I would expect. Namely at least two more daily cycles with the next cycle testing and possibly making new highs and the last daily cycle bringing the final parabolic move before the D-wave crash. Now here is the potential fly in the ointment. The last intermediate cycle ran exceptionally long at 30 weeks. It’s not unusual to get a short cycle after a very long cycle. If that turns out to be the case it would fit the A-wave scenario. In that case gold would probably top with the next daily cycle failing to break to new highs. Gold would then move down during the remainder of the intermediate cycle which would give us the B-wave correction. And bottom sometime in the next 6-8 weeks. The problem is there really is no way to tell A-wave from C-wave until gold breaks convincingly above the November high. By the time it does that we will probably be in the middle of the last daily cycle. All in all this has been the trickiest C-wave of the entire bull market. And if the dollar remains in a cyclical bull that will also add pressure to any C-wave continuation. It may not halt it but there is a good chance that a strong dollar could cap the final rally much sooner than would happen in a dollar collapsing environment, which is how all other C-wave’s have unfolded. Like I said strange times. Next I’m going to put up that chart of GDX again. Nothing much has really changed. We are still looking at a very low volume rally. Pretty atypical of a move destined for a further big push higher. Not to mention we also have an indecision candle Friday as price closed at the same level it opened at. If smart money was accumulating here for a big sustained move I would expect much better volume during this rally. I believe the miners are being dragged higher by surging gold but big money is content to wait on the sidelines until the stock market corrects. Oil: Finally I thought I would make note of oils divergence from the market for the last three days. I do expect oil will recover and continue higher but the recent divergence despite the weak dollar Friday suggests that oil traders might also be reluctant to push the long side in front of an impending stock market correction. Short term indicators are still overbought. Portfolio: This section will remain blank until we get through the impending stock market correction. At which time I will probably go ahead buy back mining positions on the chance of a C-wave continuation. If this does turn out to be an A-wave then I will just resign myself to riding out the ups and downs through the rest of the spring and summer. I do still have a little over 25% position in miners that I didn’t take profits on. I will continue to hold these positions. But new subscribers should just stay in cash at this point as we await the correction in the stock market. 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
