Same "Bull," Different Year ~ The Risk Averse Alert

Monday, January 04, 2010

Same "Bull," Different Year

Just look at NASDAQ appearing to lead the way higher...


Then take a peak under the covers and realize something is not right...

$COMPQ cumulative

Same "bull," different year, demonstrating much the same technically lagging character in the U.S. market's trend leader as has persisted since March bottom. What's more this technical lag is revealed in every NASDAQ measure presented here from time to time.

NASDAQ's leadership ruse (with leadership appearing true on the surface, but woefully MIA under the covers) has been working overtime since late-October. During the month of October NASDAQ had begun to turn over, appearing to lead the market lower again, then out of the blue and without technical warning, the entire U.S. market was gripped by a relatively low volume drive to new highs, post-March '09 bottom. (Volume exceptions occurring only on days when secondary offerings for zombie U.S. banks were being fed to the rats.)

However it was widely held, large-cap issues that initially led this most recent drive higher, post-October '09. NASDAQ, price-wise, only showed "leadership" once big money went on vacation starting mid-December. It was only then, too, that NASDAQ's technical underpinnings were taken off the mat. A subtle nuance, no doubt, but very much worth noting, considering how this fits the broad theme I have used to describe the market's entire advance off March bottom: contrived.

It bears repeating that, the manner in which volume increasingly is diminishing — no matter how persistent is this trend — is a telltale sign of complacency. This is not the wall a bull market is said to climb. In holding positions (rather than selling in fear and worry) complacency plainly is revealed.

This same volume trend yet again (and rather surprisingly, too) defined the character of trading today. That this should be revealed at the start of the New Year confirms the notion that, the market is in the firm grip of a complacent spirit.

Mark these words: complacency never is rewarded. More than just a handful of players who know better — who appreciate how fraught with danger is our financial world presently — will wish they had acted differently starting this New Year.


Same revealing story on the Big Board, too. Duly noted is relative strength (RSI) appearing to present a March- and July-like short squeeze slope of ascent.

On both counts, too — NASDAQ and NYSE — momentum (MACD) continues its relentlessly drawn out fade. Again, this is nothing but a demonstration of the spirit of complacency believing March '09 marked bottom. This belief will come in handy when the lug nuts come off. One might imagine, too, the number of players waiting for a pullback only grows as the market persists in holding up. This likewise will come in handy.


Fewer bullishly poised NYSE-listed issues + Higher NYSE = COMPLACENCY.


Barf bag anyone?

Complacency in the face of deteriorating technical conditions on the one hand gives warning of trouble to come. On the other hand, that the market continues holding up despite deteriorating technical conditions but confirms the Elliott Wave view of a C-wave unfolding off March '09 bottom.

Once this C-wave is completed, but another waits in reverse. Are you ready for a much larger replay of the May '08 - March '09 unraveling? There is every reason to believe disaster looms.

Fast Money
* * * * *

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Anonymous said...

Good God Man! Will you stop at nothing to contrive reasons to be bearish? I knew there was a reason I dropped this site from my RSS feed.

People married to a view can never see the other side of an argument and their singular focus on proving their dubious position "right" blinds them to the reality going on and developing around them...

"There is *every* reason to believe disaster looms"? Really? Every reason? There's not a single thing that gives you pause that your thesis could be wrong? I'll grant you that there are many reasons to be cautious, but there are also plenty of reasons to not be... You state categorically that one side of the argument is right and don't lend any credence to the other side.

Your focus on the Nasdaq is all the more entertaining. Lets not forget that this is an INDEX comprised of real companies making real products - not financial chicanery like the big financial firms. The largest 5 components of the Nasdaq Composite are MSFT, AAPL, GOOG, CSCO, and ORCL. Would you rather own innovative American companies (many of which get a substantial portion of their profits from non-US sources) or would you rather hold greenbacks that you claim are going to be devalued?

If “the trend is your friend” (as you state on the side-bar of your website) why are you fighting it tooth and nail all the way up? As John Maynard Keynes once famously stated: “When the facts change, I change my opinion. What do you do, sir?” Despite the fact that US Stock Markets have risen 60%+ from the bottom, you refuse to say we are in a bull market.... What would it take to get you to admit you are wrong? A 100% move? 150%? I’m just curious.

TC said...

"There's not a single thing that gives you pause that your thesis could be wrong?"


Check out the volume on those 4-letter pigs of the Pump and Dump you cite. Where's fear? Gone. Doesn't exist. All complacency. All short-sighted, late-90s like chasing for performance. Not good. To answer your question, I would rather hold cash than these over-valued, fattened PIGS.

If you have been around here for a while, then you know I was looking for major indexes to react back to the areas to which they have. I was expecting this to occur sooner than it has, however. Were indexes to move to new highs, then I'd admit I was wrong.

You have to understand. My intention here is much more long-term oriented, than it is toward daily trade prospects. There are dozens of other places you can go for that.

During the upcoming collapse I anticipate there will be some fine short-term trading opps using index options, however.

Good luck to you when the bottom falls out. Indeed, this is the subject of Tuesday's post upcoming. You might check back and see what you're up against. It's not good.

Anonymous said...

I have one very long comment that I will split into 2 (comments can only 4,096 characters long apparently...)

So here is part 1:

Well this is certainly not the response I expected:

“No. NONE”

Well, it’s hard to have a debate with someone who cannot see the possibility that their thesis could be wrong and to me, flexibility is one of the defining characteristics of successful traders/investors.

“Check out the volume on those 4-letter pigs of the Pump and Dump you cite”
I would love to check out the volume…Oh what do you know, the avg. daily volume from December was quite a bit lower than the avg. daily volume for the rest of the year. I wonder if that has anything to do with seasonality… Well look at that: the same EXACT thing is observed in 2008, 2007 and 2006. Amazing how that works...You mean to tell me that less people transact in stock in the month of December than the rest of the year? What a revolutionary discovery – I smell a Nobel prize in economics…

As for your “overvalued” claim, that must be the first reference to valuation I’ve seen on this blog. Let’s take MSFT for a moment… Even after doubling from the March low, it still trades at only 14x free cash flow and sports a 1.7% yield. Not to mention it has how much cash on the balance sheet (and no debt)? Or even a high-flier like Google at 20x free cash flow, dominance in search and a foothold in the burgeoning “cloud computing” category, no debt, tons of cash – what value would you ascribe to that business? I don’t understand how a person basing their trading on Elliot Wave, MACD, RSI, etc is making valuation arguments (and over-valuation claims that are made without a shred of empirical evidence).

Part 2 coming up...

Anonymous said...

Part 2:

As for your claim that “I was looking for major indexes to react back to the areas to which they have” you’ll have to point me to those posts. My eyes keep drifting back to some of the posts telling people to set up for big-time calamity. I present the following sampling (all things in quotes are directly out of your posts):

4/25/09 - Your advice to “Bail”: “Right now, it simply appears there could be more trouble ahead. There's little evidence stocks are being accumulated with conviction….Forget about it. I am zeroing my 401(k)'s stock market exposure, and putting the proceeds in a safe money-market alternative.”

7/20/09 (following an almost 7% weekly advance in the S&P) your synopsis was as follows: “As far as I am concerned the volume behind the market's most recent advance ... in conjunction with a typical RSI pattern coincident with a 5-wave advance ... along with momentum that's still fading (MACD) ... spells trouble.” Or this quote (which sounds an awful lot like your previous post): “In fact, underlying weakness is only all the more glaring...” And then you close your post with this: “Do keep these facts in mind as you hear misguided claims that, tech is leading the market higher. The truth is quite the contrary! Tech continues leading the market lower. It is only a matter of time.” The actual truth is that from 7/20 until now, the tech sector has outperformed the general market (QQQQ or XLK vs. SPY)

8/21/09 - One month later: “You know what is rather remarkable? Analysis here does not need to be stretched one wit to justify an extraordinarily bearish posture.” And then in the 3rd paragraph: “…growing underlying technical weakness will overwhelm greed with fear. Indeed, my general expectation of a turn for the worse expressed over recent months is but being confirmed by all the simple technical evidence I present here” Returns from 8/21 to year-end: SPY: 8.23%, SHY: 0.47%, AGG: 1.78%.

9/2/09 (a great entry point to go long the S&P on its recent pull-back) – You tried to call a top…Again.

9/23/09 – “The Great Nasdaq H&S Top”. I won’t get into what a complete bastardization this is of what a “head & shoulder’s pattern” actually looks like, but a top, it was not …

10/20/09 – I’m getting tired of typing…

The examples are just too numerous and I don’t need to belabor the point. If you keep calling a top, I’m sure one of these days/months/years you’ll get it – A broken clock after all is…oh never mind.

And finally, you close with this: “Good luck to you when the bottom falls out.”

And when the bottom falls out (said with such certainty!) I’ll follow the market and let the market tell me where it wants to go. My stop-losses will get hit and I’ll go short. I won’t try to twist the data so that the 2nd or 3rd derivative conforms to my pre-determined conclusion.

In short:
*I’ll let the facts dictate my market moves, not let my moves dictate how I see the facts.*

TC said...

I'll break up my replies.


Look at volume over the entirety of the duration of each issue's advance off bottom. Not just December. As prices have increased, have more and more shares been offered up for sale most every step of the way higher?

Were this in fact a bull market following last year's bear, then more shares would be offered up for sale, this out of worry/fear normal in bull markets that the preceding bear market will reappear.

Do you see this right now in any of the 4-letter PIGS you are enamored with? No. Therefore, what's driving these issues is COMPLACENCY such as keeps far more holding in hope of further gains than selling in fear/worry that last year's bear will reappear.

So, per that Nobel you smell, you've got a great nose.

TC said...


As per valuation this ties into those fundamental comments I make regarding the credit system: that mountain of mispriced risk wrapped up in hundreds of trillions of dollars of debt securities the so-called "talent" created via the greatest Ponzi scheme the world has ever seen -- structured finance. Bear in mind that, the big fish who own companies like MSFT and GOOG (and probably for reasons you cite, among others), also have their fingers in this mispriced risk (much of whose value now is momentarily being supported by the lender of last resort). Indeed, the greater reason for last year's equity sell-off principally was due to equity's overvaluation relative to debt securities that were collapsing in value and likewise were not yet explicitly backed by Treasury and the Fed. The manner in which these collapsing debt securities had been leveraged by no means helped this valuation disparity and only added to equity selling pressure as debt securities margin calls were furious. This leverage has NOT gone away.

If only this were the worst of it! As the sovereign debt issue demonstrates, serious problems higher up on the securities food chain are beleaguring the effort to support a very precaurious global financial arrangement.

You do appreciate how debt and currency markets DWARF equity markets, don't you?

So, with tremors growing in both debt and currency markets, I am to believe that GOOG's and MSFT's free cash flow makes these shares safe from being sold on account of a growing probability there will be desperate financial interests trapped in huge debt and currency positions sometime soon?

This free cash flow ... was it around in '08? If so, your beloved suffered despite it.

Plainly, what's at risk will in all probability dwarf '08. That questions are swirling re: the worthiness of U.S. Treasury securities should be front page, headline news every day until the issue is resolved. Instead, the Tory press would have us believe the likelihood of a downgrade is remote, let alone the possibility of default. Don't believe it.

So, it is from this macro perspective I call equity overvalued -- a reality demonstrated most vividly in '08, and whose truth has yet to see its climax. Indeed, I go so far to call equity dead money. The past 10 years in MSFT amply support this case.

TC said...

PER Anonymous' "Part 2" above...

Let me make something clear. In the grand scheme of the vast majority of my posts, I am never trying to "call" tops or bottoms. Rather, I am only trying to identify reasonable possibilities, assessing technical evidence and gaining some sense of where things stand amidst some larger, intermediate-term trend. In fact if you read me closely enough, you might occasionally come across a message that might appear to contradict what I had said the day before (this, of course, in the spirit of maintaining a reasonable measure of analytical flexibility). Be that as it may, in reading over each of the quotes of mine you cite I find myself still agreeing with the message I was conveying!

Per my 401(k) -- the 4/25/09 post you cite -- I am happy to be in cash right now. Of course, I was in cash when the market came unglued in 2008 (much as I was from January 2000 - February 2003), having finalized this move in May '08. Following the 2008 collapse -- a throttling I unfortunately did not possess enough foresight to recognize as being a great stock index options trade opportunity (unlike the case in 2002) -- and right at the '08 bottom (11/20/08), I moved 401(k) capital back into U.S. equities, and in picking up a single digit gain over those five month I also endured the Jan-Feb '09 setback. Yeah, I got both in and out too early. Whatever. Life goes on. (I would encourage you read my last post under "401(k) For The Record." It addresses this issue of timing and I stand behind the message to this day.)

I'm not going to address every post you cite. Likewise, I am not interested in trying to convince you that in as much as you are letting facts dictate your market moves, so too am I. Everyone goes about investing differently. Like I said, my commentary foremost is meant to gain some better sense of the larger trend identified principally via Elliott Wave formulations. My twist on this involves interpretation of other, simple technical measures (as well as observations on relationships of trading occurring on both major U.S. exchanges -- hence my interest in NASDAQ Composite performance relative to the NYSE Composite) in combination with relevant observations about our contemporary experience. Inasmuch as free cash flow apparently is among valuable measures you interpret (right now bullishly), I have my own toolset. Bottom line, however, is we are each interpreting facts we find meaningful for whatever reason. So, we happen to disagree right now. What do you know ... they say that's what makes a market!

I'll dig up links to posts that suggested current levels to which major indexes have risen were a reasonable, counter-trend rally objective in the larger bear market I believed then, as well as now, has been unfolding since October 2007. Again, my conviction, then and now, is as much grounded in fact as is your contrary point of view.

Anonymous said...

I was going to rip into some of these points made in your earlier responses, but I’ll let it go. I’ll leave you with a few clarifications:

You misinterpreted my remarks and wrongly assume that that I am “enamored” with these stocks (not sure why you are calling them PIGS other than an attempt at humor – Most people involved in finance use the term “PIGS” to refer to crappy sovereign credits such as Portugal, Ireland/Italy, Greece, and Spain…but I digress). I was simply putting some numbers to your assertion that stocks (in particular the NASDAQ) was substantially overvalued. You provide no data on any valuation metric that you are basing this assertion off of. You can use P/Trailing Earnings, P/Forward Earnings, P/FCF, P/EBITDA, EV/EBITDA, etc etc.

As I’m sure you know, any index is simply a collection of securities, in this case equity securities. And nowhere did I say they were “safe” places to park cash. They are equities for God’s sake – they are risk instruments! If you want safe, buy a CD. The point is that to determine a company’s theoretical value you have to use some sort of model/metric to determine that…

As for your arguments about debt, I’m not arguing that point. I don’t disagree, but it still has nothing to do with what my comments are and have been about. My comments have been about having a pre-determined viewpoint & trying to twist technical indicators to conform to that view and not being flexible enough to realize that the market doesn’t care about those “fundamental” reasons to be bearish. There will indeed be a time to be bearish, but I don’t think we’ve seen any confirmation from the market.

Allowing your fundamental bearishness to affect seeing all the great technical reason to buy this rally has allowed you to miss a great profit opportunity. As we head into the new year this is a good lesson to learn.

TC said...

Yeah, I know, "pigs" is over the top. Yet considering the performance of many of the tech darlings over the past decade, just how far over the top is debatable. Sorry to assume you were enamored with some of these. My bad.

I disagree with you, though, about the implication of my having a pre-determined viewpoint, trying to "twist" technical indicators to conform to that view and not being flexible enough. More to the point, I disagree that, first, you can have any point of view at all WITHOUT some pre-determined perspective whose confirmation you seek. It is, indeed, by the manner confirmation is gained that should dictate how flexible you should remain at any given moment. This leads to my second disagreement. I certainly am not "twisting" anything. Rather, I am identifying certain known characteristics of Elliott Wave constructs using basic technical measures from the schools of Joseph Granville, Larry Williams, et al. as benchmarks. Then, yes, interpreting certain notable fundamental and technical conditions in a manner fitting possibilities supporting a very bearish, Elliott wave-based case. Yet how else is proof of perspective given so confirmation might be made?

The observation that NASDAQ's notably weaker underlying condition relative to NYSE's (in EVERY manner in which I am given to compare the two, these being several) indicates animal spirits typical of sustained advances over the past forty years -- effectively revealed via relative NASDAQ outperformance -- are AWOL, thereby substantiating the case that, the advance off March '09 bottom is but a counter-trend rally [in a larger bear market]. Basically, absent animal spirits history suggests this rally is vulnerable to attack.

I agree with your claim, though, the market doesn’t care about those “fundamental” reasons for being bearish. In twenty-five years I have discovered wisdom in humility. Truth be told? This discovery makes all the more shocking our exceptionally apparent, fraud-rife environment! Could the magnitude of it be any more glaring? Has not the past 10+ years seen an ever-larger avalanche of leveraged risk come tumbling down, again and again. Is there not now, indeed, possibly even a call of duty to meet?

Still, bearish I remain because technicals very much confirm the Elliott Wave probability I believe too likely, near-term, as ever yet to lament being exceptionally risk averse here.

Per my analysis of indexes (specifically, NASDAQ v. NYSE) this strictly intends to gauge psychology underlying equity markets. I have very briefly written about this before. I find keeping an eye on the NASDAQ v. NYSE relationship a Jesse Livermore-like exercise in tape reading: discerning the "story" underlying "the trade." Short- and intermediate-term, I find this a useful means of qualifying Elliott wave possibilities.

Thus, the trend I fear the friend here bears equal notice...

The Dow Jones Industrials could fall to 3600 tomorrow and still remain in a long-term uptrend. (To be sure, relatively speaking, time-wise, this could happen any day now. It is a confirmed Elliott Wave possibility by my way of substantiating things.)

Resiliency off March bottom, price wise, indicates a third wave has been unfolding, this one being a wave C. Likewise, however, there are other characteristics of the advance off bottom curiously suggesting "something is just not right" -- classic B wave behavior -- this revealed, for example, by AWOL animal spirits (found on NASDAQ).

So, wave C completes wave (B) and now wave (C) down HARD is due next?

This is me fear.

If I might humor you (and I mean it)...

Get that P/Crap and put it in the toilet where it belongs: can't you see the things they measure are mentally sick, like the kind hiding some three-letter disease? Didn't you hear? There's been an epidemic! (Its virulence is to be feared, too.)

Anonymous said...

2 parts:

Ok, this will be my last comment and then we can both agree to disagree…

The most telling indicator for me is price, pure and simple. No matter who you are (A fundamentalist, a technician, an elliot wave enthusiast) everyone looks at price and it doesn’t lie. Whatever internals you are looking at should be confirmed by price – if not, the internals are meaningless (as we can see by all the failed tops you called). When the “ever larger avalanche of leveraged risk comes tumbling down” price will show you the way…

Jesse Livermore argued for the path of least resistance. The path of least resistance over the last several months is up. A series of higher-highs is{drumroll}… bullish. Once the indexes start making lower-lows, I’ll get bearish. He also said that the big money was made by sitting on your hands – Quit trying to outguess the market.

As for Elliot Wave analysis itself, I’ll defer to David Aronson (whose “Evidence Based Technical Analysis” would be a good book to add to your collection) who said the following:

The Elliott Wave Principle, as popularly practiced, is not a legitimate theory, but a story, and a compelling one that is eloquently told by Robert Prechter. The account is especially persuasive because EWP has the seemingly remarkable ability to fit any segment of market history down to its most minute fluctuations. I contend this is made possible by the method's loosely defined rules and the ability to postulate a large number of nested waves of varying magnitude. This gives the Elliott analyst the same freedom and flexibility that allowed pre-Copernican astronomers to explain all observed planet movements even though their underlying theory of an Earth-centered universe was wrong. (found on p.60)

Finally your point on using multiples (P/E and the like) to value stocks… I don’t claim it to be the be-all/end-all of trading/investing. What I do say is that when someone talks about “valuation” (as you have referenced in the past) that word has to mean something. Ascribing “value” to a piece of paper (a stock certificate, a bond instrument, et al) is based on expected cash flows from that instrument, be they coupon payments, dividend payments, liquidation value, etc. When you claim that something is “overvalued” you are implicitly saying that there *is* an intrinsic value and you think its current price is far in excess of that value. How do you derive that intrinsic value of a stock? Let me guess, when the “C” wave crosses the “V” wave and moons align in harmony?

Sorry…I couldn’t resist…

You say: “can't you see the things they measure are mentally sick, like the kind hiding some three-letter disease?”
I have no idea what this means. Be that as it may: Is Apple not selling Ipods and creating earnings? Is Proctor & Gamble not selling toothpaste & toilet paper? Or Google selling advertisements? The earnings are real, creating profits, and the stock price reflects how big or small those profits are and of course people’s confidence that those earnings will continue into the future...Are there companies that would freeze up if debt markets take a leg down? Of course. Are there sound companies making sound products trading at below intrinsic value? Ditto on that… So, if your contention is that such-and-such index is “overvalued” I assume you have some hard data to back it up. Not this nebulous concept that it could collapse at any moment or that just because many companies have sick balance sheets that *all* companies have sick balance sheets, because that is simply not the case.

...Continued in next post...

Anonymous said...

Many people have quite successfully disregarded fundamental analysis altogether and use only technicals to guide their investments, but these people don’t speak of “valuation” because they don’t care. They care about price - where its been and where its going.

But we’re getting off track. My main point about inflexibility still stands. Your blog is dangerously close to becoming a Chicken Little / Boy who cried wolf type of scenario. If a crash actually is fast approaching, no one will believe you because of all the false-predictions. If we fall 7,000 Dow points tomorrow, you’ll have my most sincere apologies for questioning your wisdom and I hope I can find some good barter materials to get some soup & water. Until then though I’ll keep an open mind to ALL possibilities and all outcomes.

Non-Farm Payrolls tomorrow (a “fundamental”) could provide just the catalyst you need for your apocalypse scenario. I hope it works out for you.

In the meantime consider this – Indexes by their very nature have an upward drift to them. Failed issues are removed/reduced when they go out of business and newer entrepreneurial companies are added to take their place (Why do you think Citigroup & AIG are no longer in the Dow?). So last year’s dow is not the same as this year’s just like last year’s Nasdaq isn’t the same as this years.

Pick up a copy of “Triumph of the Optimists” and re-read Reminiscences. I’m not sure all the investment lessons from that book have really sunk in...No Offense intended…

TC said...

Per Livermore's admonition that "the big money was made sitting on your hands," were you promoting this back in May 2008, too? How about January 2000? (In neither instance was I suggesting "sitting on your hands" was sound equity strategy. Quite the contrary, just like now.)

As I have already said, I ascribe to notions of "value" such dynamic risk as is present in the entirety of all asset classes, such as might become burdensome to the riskiest of them all. Given the wide ranges within which stock prices swing, I do not believe this risk (let's call it systemic) always is effeciently factored into a stock's price, nor can it be.

Again, when I am claiming equity in general is "overvalued" I simply am stating my belief those profoundly growing, still grossly leveraged debt risks are likely to become chaotic problems. Indeed, that is why I believe equity is more than just overvalued. It is dead money.

Per the things your Ps and Crap measure -- the so-called financial performance of companies -- how can you believe any of it given how rampant has become fraud? Not only that, look how easy it has become simply to lie because no one fears prosecution. Take the case of Alan Schwartz. Ridiculous. That this is so widespread -- no matter its absence in companies whose earnings you find attractive -- represents but another component of "systemic risk" weighing on equity "valuations." Whether your favorites are "companies that would freeze up if debt markets take a leg down" is irrelevant. Rather, if these stocks are in the portfolios of money managers whose holdings in some other, seemingly unrelated area are under duress, then there's a good chance holdings of what your Ps and Crap say are good companies likely will be sold, much as was the case in '08 (right BRKA? ... -50%).

To be among the less than 16% of investment newsletter writers presently bearish makes me "Chicken Little?" By what stretch of Polyannish logic? Again, your remark only substantiates the point of view I expressed back in August.

Anonymous said...

So you have no idea what "value" is...Earnings = Crap. Hard to argue w/ that rock solid logic.

I get it. Thanks for explaining.

Best of luck.