Above all, avoid the self-confident and self-important out there. Hide their views from your portfolio and children. There is no certainty.
The trouble with the world is that the stupid are cocksure and the intelligent are full of doubt.
Listening to the soothsayers in the mainstream media, it is hard to find anything wrong with this market. There is a conspicuous certainty that since breadth is confirming the move, any top, if there is one, is at least months away. That may be the normal expectation, but are we living in normal markets? I can't help but wonder if what everybody knows in the market is worth knowing.
There is one other thing. The market can do anything, at anytime, divergence or not.
Bonds and stocks have de-coupled of late. Let's take a look at this divergence. Have 10-Year US Treasury (INDEXCBOE:TNX) yields carved out a textbook undercut? On Monday, 10-year yields undercut their 200 DMA and have subsequently moved up smartly back above the 200. At the same time, TNX has tested its early February lows.
A test of a support level, especially when coupled with an undercut of a widely watched moving average such as the 50 or 200 DMA, is often times the kind of trend-change signal that traders are looking for.
While the S&P 500 (INDEXSP:.INX) and TNX both set lows in early February, stocks have marched decisively higher with the 10-year yield failing to corroborate.
Yields moved down in tandem with stocks throughout January; however, they decoupled after the February 3-4 low, remaining waterlogged. So, we are left with a divergence, a "jaws" in the action between the S&P and TNX during the last four to five weeks.
Someone is wrong here. The "jaws" underscores the potential significance of this March (possibly as early as this week) to be a major turning point.
A change in character could play out if TNX reclaims its 50 DMA while the S&P sells off back below its prior peak of 1850 (and especially Monday's lows).
Daily TNX Chart With 50 and 200 DMAs for 2014:
Daily S&P 500 Chart With 50 DMA for 2014:
While stocks and gold reacted to the crisis in the Ukraine on Monday, the dollar was unable to benefit and catch a flight-to-safety bid. This underpins the weakness in the dollar, which went into the daily Minus-One/Plus-Two sell position yesterday. This is important since the dollar shows a series of lower highs since the January and February peak.
This pattern is within the context of what looks like an Inverted Cup & Handle (bearish) on the dailies above key support around 79-79.50.
Daily Dollar for 2014 Chart With 50 and 200 DMAs:
Additionally, a weekly dollar chart for two years shows what looks like a 16-month Head & Shoulders top.
If you didn't know this was the dollar index and thought it was a stock, you'd be looking for a break to 76 on any downside follow through. It may not seem like a big move in a stock, but in the US dollar, that would be huge.
So, the position of the dollar underscores the notion of another turning point as the major indices celebrate their fifth anniversary from low.
Gold and the miners set a low right on the anticipated cycle low due in late December. Market Vectors Gold Miners ETF (NYSEARCA:GDX) broke out of a multimonth low-level Cup & Handle, and it looks like it is poised to pivot out of a Bull Flag.
So, gold also looks like it is at a turning point, verging on a possible acceleration at the fifth-year anniversary of the March 2009 low in stocks.
Remember that in 2008, there was a major pivot low in the fall followed by a rally into January preceding the crash into March 6. Stock indices set a major low last fall followed by a rally into January. Stocks looked set for a plumb-line drop into March 2014 but have been crashing up since the early February. The Square of 9 did a good job identifying that square-out at the time. To recap, 1740 (the low) is 180 degrees opposite December 31 (the time of the prior peak), so time pointed to price, and price pointed to time on February 4. Likewise, 1866 is 90 degrees square December 31. The market reacted violently (on Friday and Monday) to this time-and-price harmonic. Now, we see that March 6 aligns with a price of 1877. Will the S&P respect this vibration?
The market reeled on the actions of a dictator on Monday and exploded on the heels of his words on Tuesday. I think it says a mouthful about feverish bullish sentiment that Putin is taken as a man of his word.
People believe what they want to believe. And that's what drives markets... until it doesn't. It seems to me that the market is in a vulnerable position, subject to a swift change of heart. But, price is the point of the sword and the final arbiter.
Tuesday's explosion was followed by an N/R 7 Day, the narrowest range in seven days in the S&P. These contractions are typically followed in a few days by an expansion in volatility. The market was clearly entitled to consolidate on Wednesday after Tuesday's biggest gainer of the year.
Going into the weekend, we will get to see if a TNT (Thrust, Pause, and Thrust) pattern will play out with upside continuation. Alternatively, a lack of upside follow-through suggests the possibility that the biggest day of 2014 may have been a Buying Climax. This would only be confirmed if the market falters and if the major indices close at or near the lows of the week, which seems like a stretch. So, the normal expectation would be to see more upside today and Friday. A lack of momentum within two to three days of Tuesday's spike suggests that it was a squeeze with the market being vulnerable to an air pocket having squeezed out the vast majority of shorts.
This feels like a mirror image of the pattern in 2008-2009 when smart money bought blood on the Street in the fall of 2008, but if they were adhering to their discipline, they were stopped out on the plunge lower in February and March 2009.
The really smart money, recognizing the possibility of a flush out, bought back when the S&P recaptured the fall 2008 low (741). The second mouse got the cheese.
A similar pattern was repeated at the major higher low in October 2011, two months following the August climax low.
So, the late December and mid-January peaks around S&P 1850 remain pivotal. Trade back below those levels with authority may point to a squeeze out at the highs, a false throw-over, mirroring the flush out and false undercut setting the major lows since 2009.
The position of 10-year yields and the dollar indicate the potential for such a turning point in stocks. Presently, there is a remarkable degree of complacency surrounding bonds, the dollar, and stocks. With this week's bungee shrugging off geo-political concerns, stocks have become a shrine to complacency.
Don't get me wrong, momentum is a great religion as the fastest moves occur during end runs, but momentum won't get you into financial heaven. At the end of the day, toga parties won't save your financial soul.
Never confuse your position with your best interests or your best interests with fortune telling. Anything can happen here. We are in uncharted waters, and the captains of politics and finance have no idea.
The market ran up 260 weeks into a top preceding the crash in 1987. The market ran up 260 weeks into a top preceding a crash in 2007. This week marks 260 weeks from the March 2009 low. This October will be 144 Fibonacci months from the fall low in 2002. That was the low following September 11 one year earlier. Going back 144 months from the 2002, there was a fall low in 1990. This was the low following the Gulf War and the invasion of Kuwait. Is a war cycle due to hit? If we are going to see a big low on this 144-month or 12-year cycle in 2014, then there is a high staring us in the face.
Certainty? I am certain that it's as hard to sell here as it was to buy in March 2009. I am certain that there are as many players now who are as confident about an upward trajectory over the next five years as there were those in 2009 who never thought in a million years the major indices would hit new all-time highs just four years later.
Five years ago who could even entertain the idea that the S&P would be at 1870 today? If 2009 was a generational low, a la1932, then it's worth noting that it took 25 years for the market to eclipse the 1929 high.
These things are unknowable. What is measurable are the cycles, although the degree to which they will exert their influence must be read as time and price unfold and square-out. What is measurable are extremes in sentiment that when coupled with cycles indicate when risk is high and caution is warranted.
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