First to answer m22au's question, here is a link to a graph of the Coppock indicator (click on the small red download button and scroll down to pg 4 -- you must have Acrobat):
http://www.investech.com/visitors/special1.html
Second, the II numbers are out for this week and they show an almost exact position as last week. This level of bullish sentiment has been the hallmark of tops in the past (do I need to repeat that?).
What surprised me most about sentiment or psychology this week was the market reaction to the Ryadh bombings. This was the big one, what many had been waiting for; the return of al-Qaeda. They are back, reorganized, restored and as deadly as ever. The death toll was reported at 29. This is clearly a lie. In fact it is more likely 10 x that number. It was a great tragedy. And it was the signal that the world is still very unstable. But what was the reaction in the market? Exactly.
I wanted to concentrate on something which a lot of people have been talking about recently, myself included. Today the bond market rallied to a historic level (not seen since the 1950's). I had already mentioned three ETFs that provided ways to play this on the stock market: SHY TLT LQD With the exception of the short duration SHY, the other two look like classical break out plays.
For some this is shocking but for others it is rather logical when you consider the recent statement of the Fed and their already stated position of 'whatever it takes' to stave off deflation. Of course, this is a neat-o way for the Fed to be safe from claims that the real reason they are reducing rates (or flooding the market with liquidity) is the weakness in the economy.
As well the sentiment was hinting strongly that this was about to happen. On April 23 2003 Hulbert mentioned that the newsletters he followed were rather ho-hum about the already scorching hot bond performance. The contrarian view being that if this was not a real rally, the newsletters would have jumped on the bandwagon. That they were skeptical was important. And on May 8 2003 Brimlow mentioned that the
best bond market timers were long.
Very long.
The bandied about cliche is that the bond market and the stock market are taking different sides. One predicting a weak economy and the other a strong economy (in the second half).
I wanted to take a slightly different take on things and quote from Mark Boucher's "The Hedge Fund Edge" which, unlike its title, is really about everything financial.
Boucher talks about the liquidity cycle and explains that this follows a pattern. The "first recipient of the new money are the banks, who in turn loan the money to the bond market forcing interest rates down all along the yield curve." The steeper the yield curve, the greater the incentive to borrow from the Fed at the discount rate and loan to the long bond market at a higher rate. Then it flows from bonds to stocks as portfolio re-allocators begin to respond. As well corporations can get easy credit and become flush with cash for new ventures. Then primary and secondary offerings begin to happen. This feeds into the actual economy as new jobs are created and capital put to work. But this process takes a long time. From 6-18 months to work itself out.
Actually ever since 1954 virtually every stock market advance (as measured by the SP500) was preceded in time by a bond market rally (decline in bond yields). As well the tops in the SP500 correspond with sharp drops in bond prices (and higher rates). "This is not just arcane academic theory, it is cause nad effect and is an extremely valuable too lin determining the right time to aggressively buy or move out of equities in any one country."
Is this what is happening? I don't know. What causes me to toss and turn in doubt is that never before has the Fed reflated a bubble so close after it popped. What they are doing, basically, is drinking at 11am to cure the hang-over from last night.
Will the sheer amount of liquidity (its a lot!) force the market up? If it does, it will be a very, very, very bad thing. The market is not 'cheap' now. It shouldn't be rallying. The yield, the P/E and other metrics show that this would be a wobbly platform for the launch of a new bull.
But the Fed is resolute. They are a very powerful player in the market and they might just force the hand of the other players. If this is a new bull, it won't be because of valuation, or because of a new group of stocks rising to lead the market, it will be simply pure liquidity that will trump everything else.
Specifics?
So if you want to be long this market...what should you buy? Obviously the stongest among the strong. And that right now is biotech.
Still bearish on transports and it looks like
I'm not the only one. And continueing to peel out the gold position (wish I had picked up the commodity and not just the stocks!
)
And on a slightly off-topic mode...I was trolling the web and happened to find TraderMike's new messageboard at
www.timingwallstreet.biz (TM for those that don't know is Mike Swanson who started trading, I believe, in the '00s and made some fantastic calls about the market and the economy and now has a hedge fund as well as his timingwallstreet.com site)
So, naive little me, I sauntered over there to lurk for a few days and decided this week to introduce myself and to congradulate TM and his group for a great messageboard and wish them well. I also made the faux-pas of inviting the members of that messageboard to check out our humble digs on ET.
I had no idea that this is the equivalent of hitting an old lady over in their universe. No sooner had I posted that, than it was erased and I was called
an "arse", a "SPAMMER" and "parasite" in this other thread.
Seriously funny!