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Have We Reached a Top?


Bullish, bearish cross-currents don't preclude a blow-off.

It's never been my position that the flow of fundamental news would turn from positive to negative overnight and in a total fashion. The world simply doesn't work that way.

When I terminated my core long position a couple of weeks ago for reasons explained in Ten Reasons the Countertrend Rally May Be Over, I outlined a series of factors I believe may manifest in the later half of 2009 and the first half of 2010. Indeed, most of these factors will be more back-end loaded, as negative factors tend to build on one another and gain momentum in time through the medium of psychology and social mood.

It's my view that the flow of economically relevant events -- and perceptions of these events --are in the early stages of a transition. In this case, a transition means the flow of relatively good news will tend to wane somewhat while there's an uptick in relatively bad news. This is what one would expect at a top.

However, it's to be expected that during the transition (or topping process), the distribution of news flow between good and bad will even out for a while.

Let's take recent data for an example. On May 14, I wrote an article positing the prospect for a short-term rebound in housing prices. At the time, I was roundly criticized for even suggesting the possibility. Well, since the article was written, we've witnessed 3 consecutive months of increases in home sales, and today we got the first month-over-month increase in home prices. This is very bullish.

Also bullish was the Richmond Fed number today as well as most of the recently released PMIs. Leading indicators have been telling us for over a month that a recovery of some sorts was right around the corner. And earnings have been beating the socks off consensus estimates.

Yet it's not all a bed of roses. The revenue numbers in the earnings reports have been underwhelming. Positive and negative surprises for revenue are running about even. However, there have been quite a few massive misses, which put a negative tinge on the revenue data overall. Some bearish analysts have started to spin this revenue data into a complaint about the bad "quality" of earnings.

Perhaps even more ominous for the future is the turn in consumer sentiment. Today's number registered 46.6 versus an expected 49 – a significant miss. This is the second straight month of declines after the index reached an intermediate term peak in May at 54.8. This is a very pronounced shift in reported sentiment in such a short time frame. Remember, psychology is the filter through which human beings see the world. This is critical at a time like this.
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