New Article Published on Seeking Alpha

http://seekingalpha.com/article/277125-the-current-short-term-long-term-market-view

I've published a new article on seeking alpha regarding the short term and long term market outlook. Enjoy!

Stock Market Update for 04-17-2011

Price momentum is down, but traders should wait a day or two before building a short position as the market has some short term rally potential. Our stop is a daily close above 1327.

http://www.youtube.com/watch?v=L56W-uyUHus

Stock Market Update 04-13-2011: Continued Sideways Action Ahead

Market Update April 12, 2011

April 11, 2011 - Video Post

I go over some indicators as well as Demark sequential.

DeMark - Where to Set Your Stop

Per Jason Pearl's interpretation of DeMark's methodology, the Dow Industrial Index sell signal would get stopped out with bar 13's range added to the top tick of bar 13. So a close much over 12,097.90 would stop out the sell signal. 1.618 times the range is 12,168.95, a more lenient stop, but obviously adding to your risk level. That being said it's so rare to have a monthly, weekly, and daily sell signal line up almost perfectly in all the major indexes...

Breakdown

I've been detailing the bearish technical conditions in the market for the past few weeks now, and with Friday's strong close down, which qualified as a bearish price reversal (a close below .8 standard deviation from the 10 day moving average) in all the major indexes, I believe the correction I've been anticipating is now occurring. Judging by the extremes in sentiment and the long running divergences in breadth, the correction could be very significant.

In my last post I noted the Dow Non-Confirmation as well as the other riskier indexes breaking down ahead of the Dow Industrial average. Despite the strong move up Wednesday and Thursday, none of the secondary indexes managed confirm the Dow's high, in fact Friday the Transportation and the Nasdaq indexes managed to break the last swing low, with the Russell following close behind.

Chart 1: Dow Theory

So for now, with the sentiment extremes, the momentum extremes, the divergences in breath, and now mechanical signals telling us to sell the market, a very negative view is appropriate until at least some of these signals reverse.

Non-Confirmation Continues

A continuing theme, the Dow continues to traverse the psychological important 12,000 round number. This has seemingly garnered a lot of excitement; there is no shortage in supply of wildly bullish guests on CNBC ready to proclaiming the market will continue to move strait up. Again proving the Milgram experiment valid, the masses seem to be nodding blindly to this community of "professionals" despite them missing every major turn in the last 10 years. Meanwhile, I've been noting the deteriorating internals, the extreme sentiment, the overbought momentum, and now the other indexes seemingly topping out, thus the Dow Theory Non-Confirmation continues...

Chart 1: DJI, Transports, Nasdaq, Russell 2000

The Nasdaq appears most willing to break to new highs, though with today late day reversals in Microsoft and Amazon, I'm not sure this will happen. Meanwhile the transportation index and Russell 2000 still appear to be correcting from their first thrust down, and are running into Fibonacci resistance. 

Dow Non-Confirmation Continues, But Indexes at Fibonacci Resistance

The Dow continues to inch higher. The other indexes are much stronger today, however, as we can see they are clearly not at new highs and at Fibonacci resistance. The Dow transportation index continues to lag, and create a Dow Theory non-confirmation.

Dow Theory Meets DeMark

In my last few posts I've been noting that all the major indexes have completed TD-Sequential sell signals, minus the Dow Jones Industrial Index. As of yesterday's close however, the index has met the requirements for a sell signal under Tom DeMark's Sequential indicator. Furthermore there is an interesting Dow Theory non-confirmation forming between the Industrial index and the Transportation index.

Chart 1: $DJI with DeMark Sequential

 The setup looks remarkably similar to the setup back in late April before the flash crash, with sentiment extremes, overbought diverging momentum, and a completed TD-Sequential sell signal. Another interesting development is that the higher beta indexes appear to be falling ahead of the Dow, creating a Dow theory non-confirmation.

Chart 2: Dow Theory Non-Confirmation, Dow vs Transports vs Nasdaq vs Russell

We can see here by this side by side comparison, that while the Dow continues to chug higher, the higher beta and wider breadth indexes appear to be disagreeing for now. While these can always reverse, it's another piece of technical evidence that must be added to the already quite full bearish side of the ledger.

DeMark Marks the Top?

Since the SPX generated a TD-Sequential sell signal on the January 14th, the high thus far was set the very next trading day. Everything is in place for a reversal: sentiment extremes, diverging breadth, and overbought momentum. By some measures the market is the most overbought in decades. For example, the market has not closed below the 10 day moving average in 34 trading days (closing slightly below it today), something that has not happened in over 80 years according to sentimentrader.com.

Chart 1: SPX with Indicators

I'm just waiting for a close below .8 standard deviation from the 10 day moving average, a sign that price action has changed direction. The Russel 2000 and the Nasdaq have already closed below this line, while the Dow and S&P are still holding out. While candle patterns tend to be wrong often, they are also typically the first sign of a turn price action. They become even more predictive when all the other indicators are lined up, as they are now. Fisher transformed momentum is overbought, while stochastics look like they are starting to turn down. Coupled with all the other indicators I've been outlining on the blog (the put call ratio, McClellan, VIX, sentiment surveys, etc) and the result is a bearish mosaic.

DeMark Indicators Turn Bearish

Tom DeMark is one of the many interesting personalities I've come across during my studies of the market and market indicators. Mr. DeMark literally drew his own charts by hand while developing his own methodologies. He's always worked for large institutions that cannot trade in and out of positions easily, so finding points of exhaustion to go against the trend are absolutely paramount in entering and exited positions. His indicators really help in selling into strength and buying into weakness. His most well known indicator (though not known at all to the retail public, something I personally like) is TD-Sequential. Looking at a daily chart of the S&P E-mini, we can see that completed setups do not occur often, and completed signals even less, but signals in the ES have been very accurate when they do materialize.Which brings us to...

Chart 1: S&P E-mini with DeMark Sequential 

There have been 4 signals in the last year. The first signal which I've label A, occurred literally at the top tick in the e-mini before the flash crash, a nice selling opportunity. The next signal, B, occurred at the bottom of the summer weakness and was not reversed until C, which would have netted you 200 S&P points. Not bad. Signal C did not produce much weakness, but now we have another sell signal, D, occurring in conjunction with a host of other bearish signals. Label E for example, marks the highest reading in momentum in years. Add in the put call ratio, extremes in sentiment surveys, diverging breadth etc. In my opinion the signal shouldn't be ignored.

Market Breadth Update 1-10-11

McClellan Oscillator and Summation Index continues to diverge, continuing to signal a non-confirmation to the current up trend.

Chart 1:

Percentage of Stocks above the 40 DMA continues to possibly diverge as well. At any rate, regardless it is not at a area where I would be looking to get long.

Chart 2:

Taking a look at the absolute breadth index, the indicator continues to suggest that we are nearer a peak than a point where going long is the smart trade. The indicator is the absolute difference between advances and declines then charted as the percentage increase or decrease from the previous day’s value. Tops tend to show low numbers as fewer and fewer issues participate and hope dissipates.

Chart 3:

Many factors are currently lining up in favor a tradeable correction, and at minimum breadth argues that this is at the very least not a smart place to try and get long the market.

Current Market Conditions

Unfortunately, there is little to add to recent commentary. The market looks overbought and ready for a trade-able correction, possibly the start of something greater based on longer term indicators such as cash levels at mutual funds, dividend yields, Shiller PE, etc. 

While ideally I would like to see the McClellan higher, indicating a more overbought market internally thus more susceptible to a correction, it may be showing a bearish divergence. However I certainly have mixed feelings on the implications of the McClellan's recent behavior, as it is in the middle of the range, and it meaning arguable in either direction near term. Indicators of simple momentum seem to be in place for a a trade-able correction, especially with confirming signals from the put call ratio. So most pieces seem to be in place, and I just continue to wait for price action to produce a sell signal.

Chart 1: SPX with Indicators

One Out of Seven People in the US Require Food Stamps

http://www.bloomberg.com/news/2011-01-07/food-stamps-used-by-record-43-2-million-in-october-usda-reports.html

Out of the 312 million people living in the United States, over 43 million of them now require food stamps, or one in seven. This is an all time record as well as trend of new record highs that has been continually exceeded for 23 months strait, according to Bloomberg news. Clearly, the recession is over.

Market Sentiment - January 2011

The bullishness seems to be really spreading to every corner of the market. Several of the indicators of market sentiment have been rising to levels that generally correspond to market corrections. Some have in fact risen to multi-year highs, and have surpassed the levels recorded in 2007 during the all time high.While these measures can always get even more extreme, they are an important potential red flag.


Chart 1: Investor's Intelligence - Percent Bulls

Gauging sentiment is not an exact science, but I think this chart is pretty clear, of the advisers and newsletter writers polled, the majority of them are bullish, recently hitting a high of almost 60%. This is the highest reading going all the way back to the 2007 all time highs. Put into context, this reading is even more extreme than during 2007 because back then economy was humming along. Now however, we have extreme optimism in the face of high employment, crushing deficits, a municipal bond market crashing, European debt crisis etc etc.


Chart 2: Investor's Intelligence - Percent Bears

While bulls have been surging, the ranks of those willing to stick their necks out and go against the crowd are slowly being depleted. Other than a few "perma-bears"; Rosenberg, Prechter, etc, it seems no one thinks 2011 will be anything other than spectacular for stocks. To quote Bob Farrell, "When all the experts and forecasts agree -- something else is going to happen."


Chart 3: Bull Bear Spread

While this may or may not be the start of something more significant than a correction, it would be wise to reduce exposure to stocks or at least hedge exposure. Previously when the bull - bear spread has reached these levels, corrections have started, including the 2007 reversal off the all time highs.


Chart 4: AAII Percent Bulls

It seems that advisers and newsletter authors are not the only ones getting bullish. Individual investors, polled by the American Association of Individual Advisers, are also getting very bullish. In fact, individual investors are more bullish than they've been in years, surpassing the 2007 all time highs.

Options speculators seem to be jumping on board as well. I'm curious where the put call ratio will end up. There have now been 3 signals generated by the 5 day moving average, and it looks like there might be another signal generated by the 10 day moving average.

Chart 5: The Put Call Ratio - 5 day moving average

The current signal is very likely to be even more extreme than the two previous signals because 4 out of the last 5 days the put call ratio has closed below 1 standard deviation from the mean. Tomorrow, when the fifth day drops off, the 5 day moving average is going to move lower, much lower if the close tomorrow is again on the call side extreme.


Chart 6: VIX vs SPY

The VIX also is reflecting the rise in optimism; the VIX basically measures the cost of insuring a portfolio, once investors get complacent is ironically is almost exactly when the market is about to decline. We can see from the chart above that the current level in the VIX has recently corresponded with reversals. I would also note that the last few days the VIX has possibly started to turn upward.

I remember very clearly the bottom in March 2009; watching CNBC as stocks started to rise, every single guest said that the rise off the lows was a bear market rally, that could be traded, but ultimately had to be sold, as the market was doomed to sink even lower. I'll never forget how intense the bearishness was among the herd. Today we have the exact opposite picture. Watching CNBC as stocks hover at 2 year highs, every single guest is saying that 2011 will be great, and any correction must be bought for the market is only heading higher. All the major indicators of sentiment continue to hover near extremes while the measures of strength and breadth lag price, conditions that have accompanied almost every top.

The Baltic Dry Index Decline Accelerates

The Baltic Dry Index, a real time economic indicator of world trade continues to disagree with the myriad of Government polished data. I've noted for a over a year now how the BDI has been diverging from the stock market, and has in fact not even come close to the 60 something percent retracement that the market has been able to muster up. Most of the shipping stocks have also been lagging the general market as well in terms of percentage gains and retracement.

Chart 1: Baltic Dry Index - 6 Months

We can see that the Baltic Dry Index has not only been declining, but in fact accelerating, breaking the lower boundary of trend channel.


Chart 2: Baltic Dry Index - 3 Years

Besides accelerating to the down side, we can see that the BDI is back to 2009 levels, when the economy was basically falling apart. While the Baltic Dry Index obviously has not been a fantastic short term market indicator, one has to wonder, why the wild divergence and accelerating downtrend if the economy is truly picking up steam? It did produce a divergence in early 2009, indicating that the economy was indeed bottoming before the stock market realized it, one should at least be aware that the BDI may now be producing an opposite signal.

A Longer Term Look

While the corporate lackeys on CNBC continue to try and bilk the remaining retail investors, and convince the last few mom and pops out there saving for retirement that the market is cheap, and of good value, a look at some long term indicators of value tells a different story. Analysts, corporate shills, economists, Cramer, the major investment research houses, and the regular gurus making the rounds on the media outlets all agree; 2011 will be a great year. As Bob Farrell noted in his rules, "When all the experts and forecasts agree -- something else is going to happen."

Chart 1: The Shiller PE Ratio (courtesy of www.multpl.com)

First, the long term average is about 16. So assuming paying 16 dollars for 1 dollar of earnings is historically a fair value, the market at 23 is overpriced by 40%. But since earnings typically fall at the same time price, 40% is most likely a conservative estimate. Second, notice that in the long term, prices oscillate up, then down, then up etc etc. Bob Farrell's rule 2: "Excesses in one direction will lead to an opposite excess in the other direction." Not only are stocks expensive still, but prices are still mean reverting from the most historically overbought period ever. It stands to reason that not only will the market mean revert, but have an equal and opposite reaction. Meaning, I doubt stocks will simply "correct" but will instead trek lower for years, way beyond what almost anyone thinks possible. 

Chart 2: S&P Dividend Yield (courtesy of www.multpl.com)

Looking at the dividend yield on the S&P, we get a similar view. The yield oscillates as investors either demand safety or flee safety for risk. Investors today are historically very complacent, and even the huge crash in 2008 didn't bring the yield back to the historical mean. Until these two long term measures come to at minimum, back to their long term means, I think its very presumptuous of analysts, gurus, etc to be proclaiming the market is "cheap" or represents good value. If history rhymes; a bullish consensus plus long term indicators of value historically high, the next several years will in fact be rather tumultuous, and not the cake walk that most are now calling for.

Charts To Start 2011, Part 2

In Part 1 I outlined several predictive indicators that have been raising red flags. While it is not unusual to see a divergence or an extreme here or there  if looking across the broad spectrum of indicators, when they start to cluster, that's when high probability trades emerge. Here are some other charts of interest.

Chart 1: S&P E-mini and Momentum

Momentum is literally the most overbought it has been going back years. I prefer simple momentum indicator with the fisher transformation applied. Signals are generated when momentum gets overbought then crosses back below the overbought signal line. While no signal has been generated yet, the fact that the E-mini is the most overbought according to this measure in years is a red flag, and adds weight to the bearish case, especially since this is occurring in conjunction with so many other reversal signs. (You can read more about fisher transformation here: http://www.tradingsystemlab.com/files/Using%20The%20Fisher%20Transform.pdf)


Another phenomenon is the number of new highs, but also new lows occurring at the same time. This manifested some months in the form of several Hindenburg omens. The media focused on them intensely, but the market since rallied to new multi-year highs. I also find it interesting that while there was a lot of media attention on the Hindenburg omens some months ago, recently there has been more Hindenburg omens triggered with almost no media attention whatsoever. This leads me to believe that the previous signals failed because there were too many bears prevalent in the market, currently however, this is not an issue.

Chart 2: High/Low Logic Index

The plurality of highs and lows is not only spiking but trending higher. The last few spikes have occurred with almost no reaction. I would say that this implies that something is brewing beneath the surface of the market, and the most recent rise if very vulnerable to a correction.

While on the subject of breadth.
Chart 3: Percentage of stocks above their 40 day moving average.

We can see that the percentage of stocks above the 40 day moving average ebs and flows with the tide of the market. This presents something of a similar picture to the McClellan oscillator; either stocks have a ways to run higher before getting overbought, or this is a huge bearish divergence. What makes me lean towards the later is market sentiment and the put call ratio. The put call ratio is showing that speculators are positioned for a huge rally (with leverage). It is just so rare to see any kind of sustained move when the put call ratio is so stretched. So if sentiment indicators are already at an extreme, and investors are fully invested, the more probable interpretation of this chart is a bearish divergence.

I'll close with Bob Farrell's rule number 7: Markets are strongest when they are broad and weakest when they narrow to a handful of blue-chip names. Momentum and sentiment are running at multi-year highs, however almost every measure of breadth is showing a deteriorating internal picture. While there is no confirmed negative price action jump onto, the next profitable trade is not to chase here, but to go against the crowd and sell when the next signal emerges.