BullBear Trading: Stock and Financial Market Technical Analysis

Introduction to 02/15/11 BullBear Market Report

Here's the introduction to the latest BullBear Weekend Report:


US equity markets have continued to make higher weekly closing highs, climbing relentlessly in defiance of calls for a pullback or a resumption of the bear market. Treasuries broke down from a month long consolidation and resumed their downtrend as capital continued to exit the perceived safety of fixed income for risk assets. Gold appears to have completed a correction of its recent decline and may be set to join Treasuries in a downtrend as investors exit safe haven plays. The Japanese Yen may have finally made a significant, long term top (and a bottom for Dollar.Yen) and if it breaks out soon it may signify a resumption of the carry trade, which would mean that another major liquidity stream is coming online to power the stock market rally even higher. The US Dollar Index may have found a bottom and there is some potential that it may climb together with US stocks as investment demand for big cap, developed nation companies appears to be the emerging story. There are some technical considerations which suggest a minor top may be due sometime soon. The worst case of the likely scenarios is a correction akin to the August 2010 decline. The likelihood of a top to this run resulting in a resumption of the bear market is low, but as always we must keep our minds open to the possibilities and keep one eye on the mouth of the bear cave.

Certain world markets--largely in Asia--have been in a downtrend since November and others, such as Korea's KOSPI, have experienced strong selling very recently. This has placed many traders and analysts on alert for a big decline. Indeed it is worth keeping a sharp lookout to determine whether these divergent markets are leading a topping process. A dramatic divergence between US and other developed market equities (Europe and Japan) and much of the Emerging Markets and BRIC markets has developed since the November bottom. At this moment I actually regard this as a bullish development.

First, from a sentiment perspective, the outflow from these select emerging markets has been developing since November and only now has it garnered recognition in the investment and analysis community. That in itself may be a sign that a bottom is near. Also, that investors are apparently taking profits from their emerging markets trades and moving capital into developed markets is a sign that investor confidence has returned. The considerable differentiation among world markets may be a sign that the phenomenon of a universally rising liquidity pool driving all prices higher may be in the process of being replaced by more long term allocations of capital based on real investment decision making. While that may not reflect the common wisdom at this time, markets are generally forward looking and likely reflect a range of factors that are as yet generally unknown.

Second, there are some technical signs that the markets in question have completed a three wave corrective pattern and are now ready to bottom and rally. Friday saw some strong buying and at the time of this writing Asian markets are generally up 1.5-2.5% with India's NIFTY leading the way. Investors and traders may want to give the emerging markets and BRIC segments some consideration as a long entry opportunity at this time.

In spite of the ongoing rally, the general sentiment backdrop continues to be significantly pessimistic. A review of any popular investment analysis blog site shows a continued prevalence of negatively biased themes both in the editorial content and in the reader commentary. Even now as I write this CNBC Asia is featuring an analyst who is calling for a major currency and sovereign debt crisis, calling it "Financial Crisis II". These kinds of views are still common and even prevalent. My point is not that there couldn't be such a crisis, but rather that the broad public and even many informed investors continue to fear the markets and disbelieve the rally. The sentiment environment conducive to a long term top does not yet appear to exist.

I'm keeping an eye on recent moves higher in LIBORLIBOR-OIS spread (LOIS) and Treasury-EuroDollar (TED) spreads. If there is to be a renewed credit crisis it should show up in interbank credit spreads. Barring a major, sudden disruption of credit and liquidity, I generally expect the uptrend in US stocks to continue, with the potential for lesser degree corrections from time to time. Longer term projections indicate a top on the order of the April 2010 peak coming in the vicinity of the 2007 highs or near a 100% retracement of the prior bear market.

The greater threat to our trade at this time is not the risk of a major (April 2010 level) correction but that we exit our position too soon. The best thesis continues to be that we are in a Major Wave 3 advance within the context of a bull market.







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