Why the Markets Could All Crash - Soon!

Who in their right mind

Would want to be long right now?

Get out or get short!

Why the Markets Could All Crash - Soon

Investing is a largely probabilistic endeavor. It's nearly impossible to know exactly how the future will unfold, so instead we play the probabilities, in an effort to weigh the risk versus potential reward of a position.

And you ALWAYS have a position, whether you like it or not. All in cash? Well, that's a position too. There's nowhere to run, nowhere to hide.

Today these words hold more meaning than anytime since the Great Depression, as we sit on the precipice of perhaps an even Greater Depression. Will the government be able to inflate away its debt (and your savings) - or, will deflation exact a measure of ironic revenge on the Keynsians once and for all?

Weighing the risk/reward to the market at this point, I don't see much except for downside. I believe the trend turned down a few weeks ago, and that this has merely been a countertrend rally, a correction, within a larger move downwards.

If that hypothesis is correct, then we should see a sharp move down in the next week or two. If we see new highs, then I'm wrong.

But I think that's a low probability, given that we're rallying on low volume days, and dropping on higher volume days. This rally from last March's lows appears to be, finally, running out of steam.

Of course the market is always the final arbiter. But if I were a betting man - wait, I AM a betting man! And I'm betting on a decline real soon.

Bob Prechter: "Quite Sure" March Lows Will Break, Deflation Taking Hold

One guy not impressed by the S&P's resilience is "Mr. Deflation" Bob Prechter, who accurately called the S&P's rally above 1000 when things were looking bleakest last February, just before the markets actually bottomed.

What's Prechter got to say now? Here's a short bit he did with the guys at Yahoo Tech Ticker, where he talks about the latest inflation numbers, or lack thereof, among other cheery things:

More from Prechter: How to Act Contrary to "Market Herding"

Hat tip to good friend and occasional guest author JL for the heads up on the Prechter interview!

Everyone Hates the Euro!

A few months ago, everyone hated the dollar. Now, everyone hates the Euro!

Well, you can't blame either sentiment - both currencies are indeed "circling the bowl", albeit at different rates.

About a month ago I thought the Euro was a good short candidate, citing that there was not much attractive about it. I probably wouldn't initiate a new short position today though - it's been getting absolutely pounded, and everyone is bearish on it.

It could go down further from here, but I think the easy money has been made, at least in the short term. We'll sit back and let it correct up.

I am short the Euro via the EUO ETF, and I'll probably hand onto that, as it's more of a medium term position. But I'm not buying more right now - sentiment is just too negative.

2010 has been a good year to be short the Euro, thus far - chart of EUO, the short Euro ETF.

(Source: Yahoo finance)

Dr. Copper's Looking Green in the Face

Copper could be heading for a catastrophic collapse, writes resource expert Matt Badiali for Growth Stock Wire:

It's not often a major stock or commodity gets set up for "catastrophe," but when it does, I stand up and take note.

Most investors and traders aren't much interested in catastrophe. They won't short a vulnerable asset when a crisis is looming... and they won't buy it just after the crisis... when the asset is very cheap.

This is a shame, but it's why most people lose in the stock and commodity markets. And it's why they're going to miss a big opportunity coming to the copper market soon. Here's the story...

Put simply, speculators, rather than real demand, account for a great deal of the 120% rally in copper prices over the past 12 months. Many of those "hoarders" are in the People's Republic of China.

You can read the rest of Matt's article here.

Matt's colleague, astute trader Brian Hunt, also noticed something amiss with copper's price action - a potential 1-2-3 trend change:

And don't forget to watch copper as a "must hold" asset for the inflationary bullish case. Copper is an essential ingredient in cars, refrigerators, power lines, and electronics. However the economy is performing – good, bad, ugly – you'll see it reflected in copper prices. As you can see from the chart below, copper suffered a major decline in late January/early February (1). It has since made an effort to climb back to its old high, which failed (2).

We now have a situation where copper is set up for a classic Vic Sperandeo 1-2-3 trend change, just like the euro experienced in December. If copper turns lower – and blows through its recent low around $2.85 per pound (3) – the E-Z-Credit stimulus boom is withering.

Vic Sperandeo describes the 1-2-3 trend change in his excellent book Trader Vic - which was actually recommended to me by Brian. It's a great read if you love trading and the markets.

Improvements to the Blog - On the Way!

I've been sick of the Blogger platform for some time, and finally have decided to get things moved over to Wordpress. Blogger hasn't improved one bit since I started using it over 4 years ago - unfortunately, typical for a Google acquisition.

Stay tuned for details. Also, feedback and suggestions are also very welcome (you can email me at brett(at)commoditybullmarket(dot)com).

My Trading Activity - Still Short the S&P (Twice)

Still short baby - I have to admit, I didn't think we'd see the S&P north of 1100 again, nor did I think that second short position would ever be underwater.

It was tempting to cover one with the S&P at 1050, but I still believe the overall trend has changed - so in a bear market, you want to short the rallies, not cover on the drops.

For what it's worth, I think this is an excellent time to get short. I could be wrong - certainly wouldn't be the first time - but the risk/reward of a short position here appears very attractive to me.

Still double short the S&P.

How much longer can the S&P continue to defy gravity?

(Source: Yahoo finance)

Have a great rest of the week in the markets! Comments are always welcome and very much appreciated.