Market Melt-Up Meets Y2k New Era Believers ~ The Risk Averse Alert

Monday, November 16, 2009

Market Melt-Up Meets Y2k New Era Believers

One of the Fast Money traders tonight claimed the stock market is in the midst of a "melt-up." Well, well, is that so? This exact language I used here many, many months ago ... much, much nearer bottom when a melt-up was something to look forward to.

Indeed, characterizing trading now as a melt-up might better be likened to the early-Y2k period when we were in the midst of a "new era of technological progress."

Get it? ... Got it? ... Good!

Now, tell me... If "no one believes the rally" (as some continue claiming), then where are the stubbornly bearish parties whose influence raises this disbelief? We know this much: they're not writing investment newsletters.

We know this much, too: they're not selling their long holdings...


Volume once again remained relatively subdued today. With so much disbelief you would think there would be a lot more selling into such strength as we are seeing! Truth is, though, there's a thousand times more hope prevailing these days. This fact is made plain by volume's persistently declining trend since March bottom, revealing the majority believes the rally will continue.

The microcosm of the past month likewise should be seen as but extending a trend that has been in place over the past decade ... wherein highest volume registered during an advancing period never exceeds the highest registered during the declining period preceding it.

We saw this during the advancing period from 2003-2007 in comparison to the market's preceding, 2000-2002, declining period ... and we are seeing it yet again, with the advance off March '09 bottom failing to produce volume rivaling that which was registered during last year's bloodbath. This disparity reveals yet another face of distribution.

The red boxes drawn in the above RSI panel highlight those two prior, CME-driven short squeezes demonstrating gross imbalance between the buy- and sell-side — notably atypical behavior. Each was followed by periods wherein further $SPX advances were considerably constrained — the recent instance more so than the prior. Those behind this are seen dribbling their long positions (as evidenced by diminishing volume) to the sea of suckers who make up the vast majority of investors. Again, such reveals the bear camp is in complete command.

Over recent months since July's rocket higher, relative strength has been persistently fading in absolute terms, as well as increasingly languishing in relative terms, too. Still, though, in each of the three, highlighted, advancing instances following July's launch we see no compelling evidence of such healthy, RSI balance between the buy- and sell-side as typically coincides with a sustainable advance. So, every step of the way higher, not only are accompanying technical conditions weakening, there is no sign whatsoever of any transformation in the makeup of the force behind it. Revealed, then, is the character of a short squeeze from start to finish.

SPX 5-min

This exact same character similarly is presented in the microcosm of the past ten days viewed at 5-minute intervals. Likewise, the greater extreme to which relative strength imbalance successively has been carried apparently was necessary for creating conditions in which remaining long positions might be slowly offloaded (and surely, volume reveals that, slowly is all the market can bear).

Furthermore, and as predicted...


Although both NYSE and NASDAQ Composite indexes today reached new highs, post-March bottom, both exchanges failed to produce such expansion in the number of listed issues registering new 52-week highs as otherwise might confirm the market has further upside remaining.


Finally, the short side still remains gun shy ... seen by their apparent unwillingness to take on new short positions hedged with call options. Again, this typically is the setting just prior to a reversal of upside fortunes (see Valuable CBOE Put/Call Ratio Education).

Is something big about to go down? Something big ... like, say, the U.S. Treasury? Might it be time for free market swine to begin dumping their Treasury holdings, while simultaneously firing up such partners in crime here in the U.S. of A. as might dutifully corner the Chinese? Whatever is coming down the pipe, chances are all things will not be what they seem...

Fast Money
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