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Is the Stock Market Setting Up for a Crash?


See both sides, even if you don't agree with them.



Editor's Note: Todd posts his vibes in real time each day on our Buzz & Banter.

"There's a fear down here we can't forget; hasn't got a name just yet."
-- Grateful Dead

With the S&P a stone's throw from the 2012 high-and yes, it's a pebble toss when one day's price action could trigger a new high-I'm reminded of something I wrote back in the spring.

I remember it because in all my years of writing-with all the "cumulative comeuppance," "socioeconomic malaise," "last bullet pointed inward," "downside disconnect," and "scary bearish" analogies-I had never before written that word.

The word was "crash."

I'm not talking about my cat-although he's pretty freaky-I'm talking about a crash. When the wheels fall off the wagon. When traditional metrics stop working. When systems fritz, stocks break down, and there is true capitulation in the marketplace. Think of it as social mood manifesting through the stock market. In real-time.

The thought that I shared way back when was along the lines of, "If we continue to rally into the election without a meaningful pullback, the stock market will be vulnerable to a crash."

This isn't an attempt to capture page-clicks or make a name for myself-I already have a reputation of being pretty bearish (despite my two-sided trading approach this year) and I certainly don't need to perpetuate that. Rather, it's abject honesty as we edge toward the most important psychological catalyst of the year-the election.

I've included a chart of the S&P dating back to March 2009 for purposes of perspective.

You will see-as we already know-that the index more than doubled since those fateful days (for a glimpse into my head at that time, click here). The sky was falling, folks stocked up on canned goods, cash was withdrawn from banks; it was a picture-perfect recipe for a face-ripping rally through the lens of maximum frustration.

Fast-forward to today; $15-odd trillion of stimulus has been thrown against the system formerly known as capitalism-with the promise of more at every turn-and we're eking out 1.5% GDP. The stock market is up double-digits and folks are again chasing performance, but not many people are doing particularly well. I'm talking about Wall Street, but it of course extends to Main Street.

It reminds me of an interview I gave in December 2006 when I shared that "we're living in concentric bubbles" and what concerned me most was "all-time highs in the Dow but nobody is really feeling like we're at living at all-time highs; we have the haves and have-nots and the middle class is being eradicated or is in the process of being eradicated."

We often say that the chasm between perception and reality is where profitability is found. Make no mistake, this particular edition of the stock market is ripe with two-sided risk-this is the weeding out process we've been fingering since 2000 when we posited The Long Hard Road. Inherent in that dynamic is that it's not gonna be easy; even if you're right on the direction, it's tough to nail the timing as well.

For purposes of full disclosure, I punted my long exposure earlier this week and I'm currently positioned with some short paper in Google (GOOG) and the NDX (QQQ). But, as my soon-to-be bonus daughter, Mug, would say, "It's not about that." These are small bets-hit-it-to-quit-it trades with hopes of squirreling away some financial nourishment one acorn at a time. I have very tight stops set; as I said, it's not about that.

There is one variable that I must note as it potentially shifts this discussion. My original thought was, "If we rally into the election without a meaningful pullback, the stock market will be vulnerable to a crash." The pullback from April to May, as circled on the chart above, measured 10.5%.

If the trading gods deem that to be meaningful enough, all bets are off.


Twitter: @todd_harrison

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