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Smart Money Is "Selling the News"

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Easy money has once again created giant bubbles in commodities and global stocks and bonds. As these bubbles naturally deflate or pop, volatility and fear will once again spread across all markets.

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Editor's Note: The following is an edited version of the Grail ETF & Equity Investor newsletter by Ron Coby and Denny Lamson using their proprietary Lamson Grail Timing Indicator. Learn more or sign up for a free 14-day trial

The "sell on history" trade is on as stocks, bonds, and especially commodities are being sold off after the widely anticipated news on QE2 and elections. When everyone in the world is basically on the same side of a trade (like now; short the dollar/long everything else) then violent reversals can happen as smart money sells into strength. The confidence in the Federal Reserve's ability to weaken the dollar and raise the value of stocks, bonds, and commodities is almost universal in thought and action. Funny enough, that universally bullish everything-but-the-dollar trade makes absolutely no sense. Why would bonds rise if inflation rises and commodity prices explode? The bottom line is that the "buy on mystery" trade in September and October is now turning into a "sell on history" trade in November. Friday and Monday's action is evidenced of that.

The bulls have a friendly Fed on their side and the money-printing Ponzi scheme (QE2 program) has begun. These POMO purchases (QE2) are designed to pump money into the economy and the stock market. The Fed has a very aggressive asset-purchasing daily schedule heading into Thanksgiving. This bond-buying program began Friday and was met with the smart-money bond traders hitting the Fed's bid then and also on Monday. The 20+ Year Treasury Bond (TLT) and the 1-3 Year Treasury Bond (SHY) are both breaking down in price right in the Fed's face. It will be both embarrassing and concerning if this downtrend in long- and short-dated bonds continues. It appears that the Fed is foolishly willing to buy high now and risk selling bonds later at much lower prices when the bond market forces the Fed to unwind. The Fed will look very foolish if that nightmare scenario happens. According to our timing indicator, a US bond crisis could be early in the making right here, right now.
The bulls also have seasonality in their favor. The "Sell in May and go away" trade is over as we head into the historically bullish months of November and December. Also, the fourth quarter of the second year of the presidential cycle has an incredibly bullish track record going back 100 years. Finally, the Geyser Breakout of nine weeks ago on our Trend Indicator has a bullish track record going back more than 50 years. The other positive for markets is that we have the easiest Fed chairman in US history, who has publicly unveiled his risky monetary game plan. Simply stated, Ben Bernanke hopes to explode liquidity to pump up the stock market. He foolishly hopes that he can purchase an enormous amount of bonds to keep interest rates low while simultaneously raising inflation expectations (totally nonsensical). He feels that this will create a new wealth effect and that the stock market will lift the real estate market and the economy higher.

Right now there are several reliable bearish warning signs that could derail the Fed's bubble-blowing plans. The Russell 2000 was the leader off the March lows, and has put in a giant double top soon to be confirmed as our shorter-term Grail Timing Indicator is on a sell. Insider selling is extremely high, so smart-money (informed money) insiders are selling into strength. This isn't a good sign for the stock market. The number of bulls in the AAII polls (the uniformed money) reached 58% last week. This is a bad sign as it's the highest number of bulls seen since the market top in 2007 when the Dow Jones Industrial Average peaked at 14,000. The Volatility Index (VIX) hit the lowest levels seen since that 2007 peak and the recent April 2010 peak. The Stochastics and MACDs are overbought on the daily, weekly, and even the monthly charts, so risk for a mild correction turning into a nasty correction is rising.

As far as the Grail is concerned, we're getting early sell signals all over the place in stocks and commodities. We have sell signals on the 60-minute charts extending to the daily charts. The Fed's reliable rally on melt-up Monday saw smart money continue to sell into strength and the selling on the good news continues. Selling high is an intelligent game plan. That's why those who do so are called the "smart" money. The sell-off into mark-em-up Monday is a bad sign for this market.
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No positions in stocks mentioned.
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