As I sit here the futures have recovered basically all of their dump from Friday after the close. So I guess I shouldn't bitch that I bailed at 3 minutes to 4, eh? Only if I had the fortitude to stick a tight stop on that over the weekend would it have worked out ok.
Anyway, I want to present the following chart which is a 10 year
weekly of the S&P 500, and discuss it a bit, because I'm seeing a lot of "bull
shit" flying around on various blogs about how "there's nothing wrong here" and other similar nonsense.
(Click the chart for a pop-up window in its original size)
Ok, let's go over a few things. I have drawn a trendline (which is somewhat difficult to see, but its there - in red) from the 2003 lows. Note that we have
not breached this trendline. It is roughly at the 100 DMA, or 1349ish.
Also note that over the course of a month it
rises by about 10 points. But - in a purely sideways market we have
about 10 months before we violate the long-term uptrend.
Also, based on that chart, we have some Fibonacci retracement levels outlined from the 2003 lows when the current Bull Market began. The critical ones are at 38.2% which is right near the 200 WMA, the 50% right near the 1175 level, and the 61.8% level at roughly 1075. All three of these are downside targets and are important resistance levels. Both the 50% and 61.8% levels are also coincident with natural chart support which enhances their support structure.
You can also see that if you break the 61.8% level
there really isn't anything left in the chart to keep us off the 100% retracement all the way down to 768! That first move up was near-parabolic and thus offers zero resistance on the way back down. Better hope 1075 holds!
Now the Bull Case rests on this chart, which is what everyone is reading and prognosticating from.
But I want you to look at something else, because it is verrrrry interesting.
Let us presume for a minute that the selloff
last summer was an attempt to actually
break the back of the Bull. That is, it did not establish part of a long-term trendline
but in fact broke below it; that is, the chartists are DRAWING THE LONG TERM TRENDLINE INCORRECTLY!
So we will look for a long-term trendline that
ignores the summer '06 selloff. Is there one?
Hmmmm....
Indeed. If we
ignore the '06 selloff as an attempt to puncture the Bull Market which was arrested - that is, it was not an ordinary correction back to the means, but rather was an abortive attempt to shut the Bull down, then we see that there
is indeed another, factually stronger long-term support line and we are sitting right on top of it right now!
That support line was established by the late '05 pullback
and the February lows!
That's
THREE points as opposed to the
TWO that everyone else is using!
And far more ominously,
we are sitting right on top of that trendline right now.
This doesn't change the Fib retracement picture and where support is on the downside from here at all. But it
does change - dramatically - the odds.
A significant further downstroke in the S&P 500 below the current levels, certainly anything below 1400, leaves us with the sinking possibility that we've been modelling this "bull run" off the wrong numbers!
And if so, we are just one more significant weekly decline - another 3-4% - from breaking the Bull's back with conviction.
Now add to this my "Where we've Ben" post from yesterday, and you can see where the risks and rewards lie in the market right now.
- We could bounce here. But we pretty much have to do it here. If the downside continues for any material length of time from the current levels, we likely have actually broken the Bull thesis, despite protests to the contrary. Below S&P 1400 there is little doubt we're headed back to at least the 1225ish level - the '06 lows - and I'd take an even money bet we're headed to at least a 50% retrace around 1175.
- We could DIVE here but not strongly enough to break the ACTUAL trendline. This could be a ruinously bad bear trap for shorting the broader market, much like last summer was! The "buy the dips" guys could actually be right.
Let's temper this
technical analysis with
fundamentals.
- The credit markets are a wreck. The mortgage securitization pipeline is dead and not coming back for anything other than GSE-grade paper any time soon - if ever. Nor should it. Even if this does not extend beyond the housing market it already has and will continue to screw consumer spending, which has a very high probability of leading to a recession. Housing will continue to fall apart for at least another year.
- The "LBO Put" has driven markets higher since summer of '06, when it really got cranking. In fact it can be argued that basically ALL of the gains since then and then some were due to this "Put" of liquidity and the fact that you couldn't short crap companies without risking having your head cut off the following Monday. This is now gone.
- Consumer debt overhang continues to grow and has shifted out of MEWs to credit cards. See #1.
- The number of analogies to "firing on all cylinders" has radically increased. Well, if you're doing it as best you can now, there's only one direction to head for corporate profits from here, right?
Add all this up and I see a market headed for trouble - but one with risks
on both sides.
Therefore, my view is that while I
do think we're staring into the maw of a New Bear Market,
I am not willing to commit big money to the short side of the broader market until I have confirmation of a new primary trend.
As a noted before, a break above 1520ish on the S&P would cause me to abandon a view that we are staring at a new intermediate-to-long-term trend change. I do not believe, given the macro backdrop, that this is possible. But - you have to go with what the market
does, not what you want it to do.
Now individual sector bets and daytrading the futures? That's a different matter. But on the macro level, this is what I see at the present time.