Saturday, July 14th, 2007
When I turned on CNBC on Friday, it almost seemed like a stadium in a Latin country just after the home team won the soccer game. So much joy, so much positive energy. It reminded me of the times of March 2000 where CNBC seemed like one huge party.
Then when I turned on Bloomberg radio, reality came through. They were interviewing fund managers who were very bearish on the market and others who stated to pile into bonds. The reason was because of the reports that came out on Friday showing very weak retail sales. One notable fund manager came on Bloomberg stating that he thought the DJIA would be 15% lower now at the end of the year when it was now.
One television station was reality where as the other one was all hype and drama. CNBC has been the greatest contrarian indicator of our time. Maria coming on during 2002 stating that we should all short the market and then 2003 being a landmark year.
So with that said, I present to you the reality of the market. The following chart demonstrates the percentage of stocks on the NYSE that are above their 50 day moving averages.
There is a pattern on this chart that is quite notable. For example, at the start of 2006 everything was very bullish. The indexes trended higher and there were no notable breakdowns to be found. However, this chart shows that from Jan 2006 to May 2006 there was a notable change from 85% to 60% of the NYSE stocks moving above their 50 day moving averages. Then followed the big dump once the 60% level was achieved.
So the pattern forming is the following. The chart will hit 85% then there will be a pullback as fund managers either go to cash or pile into the leading stocks as they perceive an overbought condition exists. This usually takes the funds months to do as they sneak quietly out of certain equities. Now as the pullback occurs, the NYA index trends higher, but the index is now relying on less stocks to go higher.
At the 60% level traders are using a high amount of leverage in leading stocks and not diversifying. When all of the buying power finally runs out then there is a resounding selloff in even the leading stocks and then the NYA composite takes its big dump. Everyone is using stop-loss orders at this point so even very minor pullbacks will cause huge sell-offs. On the other hand, since everyone is using a large amount of leverage anything can trigger a huge percentage gain.
Over the summer when everyone is away the indexes will always tend to either trend higher or lower due to lower volume. There are fewer traders out there right now. The problem or solution occurs when everyone gets back from vacation. In September, when all the traders are back, what will they do when they turn on the monitors? Crashes, panics and pullbacks seem to occur in October. If these indexes keep floating higher during the summer, then a large panic is setting itself up to occur as the traders get back from vacation.
I can only conclude right now that the the NYA is overbought at these levels. There is too much confidence in the air amongst the retail traders. The real professionals have snuck out and are waiting for a larger dump. The retail traders are busy bidding up RIMM ever higher just like they did with KBH in 2005 loading up with as much of the common stock as they can fully margined.
The anecdotal contrarian indicator is CNBC, the retail traders station, where as Bloomberg tends to shine the real light on things.
When I turned on CNBC on Friday, it almost seemed like a stadium in a Latin country just after the home team won the soccer game. So much joy, so much positive energy. It reminded me of the times of March 2000 where CNBC seemed like one huge party.
Then when I turned on Bloomberg radio, reality came through. They were interviewing fund managers who were very bearish on the market and others who stated to pile into bonds. The reason was because of the reports that came out on Friday showing very weak retail sales. One notable fund manager came on Bloomberg stating that he thought the DJIA would be 15% lower now at the end of the year when it was now.
One television station was reality where as the other one was all hype and drama. CNBC has been the greatest contrarian indicator of our time. Maria coming on during 2002 stating that we should all short the market and then 2003 being a landmark year.
So with that said, I present to you the reality of the market. The following chart demonstrates the percentage of stocks on the NYSE that are above their 50 day moving averages.
There is a pattern on this chart that is quite notable. For example, at the start of 2006 everything was very bullish. The indexes trended higher and there were no notable breakdowns to be found. However, this chart shows that from Jan 2006 to May 2006 there was a notable change from 85% to 60% of the NYSE stocks moving above their 50 day moving averages. Then followed the big dump once the 60% level was achieved.
So the pattern forming is the following. The chart will hit 85% then there will be a pullback as fund managers either go to cash or pile into the leading stocks as they perceive an overbought condition exists. This usually takes the funds months to do as they sneak quietly out of certain equities. Now as the pullback occurs, the NYA index trends higher, but the index is now relying on less stocks to go higher.
At the 60% level traders are using a high amount of leverage in leading stocks and not diversifying. When all of the buying power finally runs out then there is a resounding selloff in even the leading stocks and then the NYA composite takes its big dump. Everyone is using stop-loss orders at this point so even very minor pullbacks will cause huge sell-offs. On the other hand, since everyone is using a large amount of leverage anything can trigger a huge percentage gain.
Over the summer when everyone is away the indexes will always tend to either trend higher or lower due to lower volume. There are fewer traders out there right now. The problem or solution occurs when everyone gets back from vacation. In September, when all the traders are back, what will they do when they turn on the monitors? Crashes, panics and pullbacks seem to occur in October. If these indexes keep floating higher during the summer, then a large panic is setting itself up to occur as the traders get back from vacation.
I can only conclude right now that the the NYA is overbought at these levels. There is too much confidence in the air amongst the retail traders. The real professionals have snuck out and are waiting for a larger dump. The retail traders are busy bidding up RIMM ever higher just like they did with KBH in 2005 loading up with as much of the common stock as they can fully margined.
The anecdotal contrarian indicator is CNBC, the retail traders station, where as Bloomberg tends to shine the real light on things.
