Monday, January 23, 2012

Time To Wake-Up And Smell The Coffee.

We ended the day with a spinning top candle in SPX and red in DOW as well as Nasdaq. And the volume was non-existent. So far the much anticipate correction has not materialized in any meaningful way. But even when I am trying to become bullish, I am unable to find much upside in the market. 16 SPX points after 1300, SPX is sitting just below the long term falling trend line, with all parameters and indicators over stretched.
Many reasons have been given for the continued rise of the stock market. Seasonality, Greece deal, QE3 etc. Apart from seasonality, none of the other reasons are good enough. But seasonality also called for a correction in mid-January, which has not come. And without more free money from the Fed and ECB, this extended Santa rally cannot be sustained. This is a game we have seen many times over. I am not a bear per-se. So I am happy to participate in any rally and gain from it even when it is not supported by fundamentals and even when I do not believe in it. But I would rather not join in any such rally at a late stage.

Or if you would like, we are close to the “Oh Sh*t” moment as highlighted by Doug Short.

The market manipulators are doing their best to make people believe in tooth fairy. So far all their efforts have resulted in paltry 16 SPX points and have taken the market to the edge of the cliff.  GS advised its client to short 10 year treasury. In other words, they want client’s money to come out of bonds and go into equities, equities which are now at the top of the range and are at serious risk of gut-check.  Is it because they want to get out of equities at the top? Normally, it is a good practice to do opposite of what GS says. I think 10 year Treasury has reached its downside price target for now and there is not much room to go down any further.  A look at TLT will show that it is sitting on a long term support and is oversold.
Today VIX BB sell set up was triggered.  Yesterday, VIX closed outside the BB and today it closed inside BB and in green.  Such a set up signifies reversal in the market.  Whether the reversal starts tomorrow or few days after does not matter. It is not a question of if; it is a matter of when and how far. Longer we will have to wait for the correction, more significant it will be.

I think tomorrow morning we will see SPX will re-test the high of today and in all likelihood fail and roll over.  If markets were going up either on the hope of the Greek debt deal, that hope has now been dashed, per ZH.  Also it seems S&P has started downgrading the European banks. How far it is true, we will have to wait and see.  There is a lot of tail risk coming out of Europe and while technical rally has taken us this far, the next six months are going to be painful. Also I do not think QE3 is coming anytime soon. Whether we get one last up move in US stock markets will depend on how quickly we resolve this current overbought condition.

That leaves us with the situation that there is no more free money, at least for now. Will the market now wake up and smell the coffee?