Crude Oil Looks Gassed - Another Bearish Sign?

Crude oil is looking gassed - is it in the process of topping?

Over on our sister site, we explore what's happening to crude - and why this may be bearish for oil prices.

Does crude oil have anything left in the tank?  (Source: StockCharts.com)

Why Robert Prechter Sees a Major Market Top Right Here

Spent part of my weekend reading Bob Prechter's latest newsletter, which is always thought provoking.  The folks on his team were kind enough to allow us to republish this article from the April issue of Bob's Elliott Wave Theorist.

In terms of technical and sentiment analysis, I think Prechter is second to none.  He's been bearish for some time no doubt - it looks like his previous warnings and premonitions are coming to roost now.

What Do These 8 Technical Indicators Mean for the Markets?
May 10, 2010

Editor's Note:    The following article is excerpted from Robert Prechter's April 2010 issue of the Elliott Wave Theorist. For a limited time, you can visit Elliott Wave International to download the full 10-page issue, free.

By Robert Prechter, CMT

Technical Indicators

It is rare to have technical indicators all lined up on one side of the ledger. They were lined up this way—on the bullish side—in late February-early March of 2009. Today they are just as aligned but on the bearish side. Consider this short list:

1. The latest report shows only 3.5% cash on average in mutual funds. This figure matches the all-time low, which occurred in July 2007, the month when the Dow Industrials-plus-Transports combination made its all-time high. But wait. The latest report pertains only through February. In March, the market rose virtually every day, so there is little doubt that the percentage of cash in mutual funds is now at an all-time low, lower than in 2000, lower than in 2007! We will know for sure when the next report comes out in early May. Regardless, the confidence that mutual fund managers and investors express today for a continuation of the uptrend rivals their optimism of 2000 and 2007, times of the two most extreme expressions of stock-market optimism ever.
2. The 10-day moving average of the CBOE Equity Put/Call Ratio has fallen to 0.45, which means that the volume of trading in calls has been more than twice that in puts. So, investors are interested primarily in betting on further rising prices, not falling prices, and that’s bearish. The current reading is less than half the level it was thirteen months ago and its lowest level since the all-time peak of stock market optimism from January 1999 to September 2000, the month that the NYSE Composite Index made its orthodox top. The 30-day average stands at 0.50, the lowest reading since October 2000. It took years of relentless rise following the 1987 crash for investors to get that bullish. This time, it’s taken only 13 months.
3. The VIX, a measure of volatility based on options premiums, has been sitting at its lowest level since May 2008, when wave (2) of ((1)) peaked out and led to a Dow loss of 50% over the next ten months. Low premiums indicate complacency among options writers. The quants who designed the trading systems that blew up in 2008 generally assumed that low volatility meant that the market was safe, so at such times they would advise hedge funds to raise their leverage multiples. But low volatility is actually the opposite, a warning that things are about to change. The fact that the options market gets things backward is a boon to speculators. Whenever options writers are selling options cheap, the market is likely to move in a big way. Combined with the readings on the Equity Put/Call Ratio, puts right now are a bargain.
4. In October 2008 at the bottom of wave 3 of (3) of ((1)), the Investors Intelligence poll of advisors (which has categories of bullish, bearish and neutral), reported that more than half of advisors were bearish. In December 2009, it reported only 15.6% bears. This reading was the lowest percentage since April 1987, 23 years ago! As happens going into every market top, the ratio has moderated a bit, to 18.9% bears. In 1987, the market also rallied four months past the extreme in advisor sentiment. Then it crashed. The bull/bear ratio in October 2008 was 0.4. In the past five months, it has been as high as 3.4.
5. The Daily Sentiment Index, a poll conducted by Trade-Futures.com, reports the percentage of traders who are bullish on the S&P. The reading has been registering highs in the 86-92% range ever since last September. Prior to recent months, the last time the DSI saw even a single day’s reading at 90% was June 2007. At the March 2009 bottom, only 2% of traders were bullish, so today’s readings make quite a contrast in a short period of time.
6. The Dow’s dividend yield is 2.5%. The only market tops of the past century at which this figure was lower are those of 2000 and 2007, when it was 1.4% and 2.1%, respectively. At the 1929 high, it was 2.9%.
7. The price/earnings ratio, using four-quarter trailing real earnings, has improved tremendously, from 122 to 23. But 23 is in the area of the peak levels of P/E throughout the 20th century. Ratios of 6 or 7 occurred at major stock market bottoms during that time. P/E was infinite during the final quarter of 2008, when E was negative. We will see quite a few quarters of infinite P/E from 2010 to 2017.
8. The Trading Index (TRIN) is a measure of how much volume it takes to move rising stocks vs. falling stocks on the NYSE. The 30-day moving average of daily closing TRIN readings has been sitting at 0.90, the lowest level since June 2007. This means that it has taken a lot of volume to make rising stocks go up vs. making falling stocks go down over the past 30-plus trading days. It means that buyers of rising stocks are expending more money to get the same result that sellers of declining stocks are getting. Usually long periods of low TRIN exhaust buying power.

For more market analysis and forecasts from Robert Prechter, download the rest of this 10-page issue of the Elliott Wave Theorist free from Elliott Wave International. Learn more here.

Robert Prechter, Chartered Market Technician, is the world's foremost expert on and proponent of the deflationary scenario. Prechter is the founder and CEO of Elliott Wave International, author of Wall Street best-sellers Conquer the Crash and Elliott Wave Principle and editor of The Elliott Wave Theorist monthly market letter since 1979.

Why Some Key Charts Reveal the Reflation Rally May Be Tiring (Finally)

Trading From Ground Zero - We Don't Do It Enough

After going from Hero to Zero on the two S&P short positions, my March contracts expired, and I have not replaced them, instead opting to hang out in "wait and see" mode.

Contract expiration always tends to be a good exercise I find, as it forces me to ask myself "If I started over today, would I re-enter this position at current prices?" It's a question that we should ask ourselves more often - yet, we often don't, instead sitting and waiting for the market to turn our way.

Unfortunately, the market doesn't care what our positions are, it's going to go where it's going to go, whether we are long, short, or neither.

Checking in on Some Key Charts

Major indices hit new recovery highs today, with the DOW hitting it's highest mark in the last 18 months.

Trading volume remains tepid, however - as you can see from this chart of the S&P 500, this recent rally appears to lack some conviction:

Rallies have been occurring on lower volume than pullbacks.

(Chart courtesy of StockCharts.com)

Chinese shareholders have been less exuberant of late than their American counterparts, as the Shanghai Composite Index continues to flirt with a breakdown beneath its 200 day moving average:

While US markets climb everyday, China huffs and puffs.

(Chart courtesy of Yahoo Finance).

Regular readers know that China is one of our favorite leading indicators. Is China's recovery running out of steam already?

The experts at Stratfor Global Intelligence believe that China's economy will be run on lending for at least the next year (free video clip here) - the result of which remains to be seen.

Commodities, also, continue to lag the rally in equities:

Like Chinese stocks, commodities are also well off of recovery highs.

(Chart courtesy of StockCharts.com)

Bottom Line: These non-confirmations could be ominous bearish divergences, indicating the reflation rally is on it's last legs. The rally appears tired, but is not over yet.

On the other hand, if all 3 of these charts confirm new recovery highs together, we'd have to conclude that this rally still has some room to run.

Bill Gross' Take on Portugal's Downgrade and Escaping the Sovereign Debt Trap

Ever wonder what the hell takes the rating agencies so long?

Last week, leading credit agency Fitch downgraded Portugal's debtamid "growing concerns about the government's ability to service it's borrowings."

Well - duh - increased borrowings coupled with decreasing tax revenues should raise concerns. What amazes me is that the Euro traded down today on the news - this shouldn't have been news at all, everybody saw this coming from Portugal as soon as Greece got the hiccups.

If the tax revenues were coming back, there might be hope - but revenues are not coming back anytime soon, so hope is bleak, if not non-existent. Europe is an economic basketcase with declining demographics - it's completely toast.

Bond king Bill Gross of Pimco weighed in today - in his eyes, there are three factors which could, at least theoretically, allow a country to escape the sovereign debt trap:

• It must be able to print its own widely accepted currency
• Have manageable budget deficits, and
• Find investors willing to buy their bonds (Source: Forbes)

The US, for now at least, passes all 3 tests...Greece, Portugal, and the rest of the PIGS obviously do not. Much of the rest of the world does not either.

Is sovereign debt the next domino to tumble in the global financial crisis? It sure looks like things are teetering.

Why the Federal Deficit is in Even Worse Shape Than You Think

If there was any question before that the federal deficit was completely out of control and unsustainable, the successful passing of the "free healthcare for all" plan should completely seal the deal!

As you probably recall, the out-of-control debt spiral faced by our government sparked some interesting conversation at our local Casey phyle meeting about the safety, or lack thereof, of our retirement savings.

That conversation was originally inspired by a fine piece of analysis that Bud Conrad, Casey's Chief Economist, put together for The Casey Report. They've graciously given us permission to republish Bud's piece here, so read on to learn just how bad the federal deficit is:

http://commoditybullmarket.blogspot.com/2010/03/why-federal-deficit-is-in-even-worse.html

Current Positions - None

I don't really like anything long or short right now. I guess if you had to make a short term call, you'd go short, with the markets being as overbought as they are right now (20 of 24 days up).

But, that's a tough one to time. And with the markets now again hitting new highs, the bear market rally that began last March may not be over yet.

Investors Haven't Been This Bullish Since January - Uh Oh

Another up day for equities, and investors appear to be feeling pretty good about things. According to the S&P 500 Bullish Percent Index, investors haven't felt this upbeat about things since January:

Investors have been feeling on the up and up of late.

Chart courtesy of StockCharts.com

Unfortunately investor bullishness is a classic contrarian indicator - as evidenced by the recent S&P's performance - a near spitting image of the bullish index!

And what a coincidence - their rising mood has mirrored stocks!

Chart courtesy of StockCharts.com

This would indicate that a near-term pullback in the markets is likely. The breadth and depth of which could determine whether or not this bear market bounce is finally licked.

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.

One Last Hurrah For This Bear Market Rally

Not too much new here

Just a bear market rally

On it's last hurrah!

One Last Hurrah for the Bull!

Had family in town this weekend, hence the late post, but there's really not much going on anyway. This current rally feels like a last gasp countertrend rally that's just about out of steam.

Where we go from here should be quite instructive. I anticipate we're about to head down, potentially pretty violently, so I remain unimpressed by the move back over 1100 on the S&P. Markets were oversold, and to me, this bounce did nothing more than relieve some short term oversold conditions.

The markets are now short term overbought, so plan accordingly if you have a short time horizon.

Of course a move up to new highs would invalidate my theory here. I don't think it's likely, but it is possible, and we can't be too stubborn if the march higher does continue.

At the very least, I think it's an appropriate time to get a bit more conservative and careful in your trading and investing, as there appears to be a great deal more risk to the downside currently than potential reward to the upside.

In Case You Missed It - Recent Reading

Should be a fun week in the markets, so stay tuned here, and we'll deliver some mid-week updates and musings.

Here's a neat read courtesy of our boy Bob Prechter, as he explains how to act contrary to "market herding". Because Prechter is always aligned away from the mainstream, you'll generally stay clear of trouble following him, even if you take some things with a grain of salt.

And our friends at The Daily Reckoning put together an amusing slide show entitled The Financial Darwin Awards. Definitely worth a perusing.

Finally for those of you wondering how Valentine's Day worked out using a contrarian approach - quite well!

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

Still short baby - and for what it's worth, I think this is a fantastic time to initiate a short position.

I'm fully loaded up right now, so am content to hold tight and see which may the markets turn.

Still double short the S&P.

The S&P remains above it's moving average - but for how long?

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

The Debt Debacle Rolls On: Socialism's Grand Finale

Sovereign debt - all crap

Who could have expected this?

Socialism's toast!

Contrarian Valentine's Day

While I'm tempted to wish you a Happy Valentine's day, dear reader, I have no doubt that you won't be running with the herd tonight for dinner and a dozen roses.

No sir, not here - when my wife insinuated that I'd "better have something planned", I went and booked dinner reservations for tomorrow (Monday) - got last minute reservations at a top restaurant, no problem.

Somewhere, Humphrey B. Neill is smiling - it indeed pays to be contrary!

The Debt Debacle Rolls On

Given that the markets have rallied with record strength over the last 10 months, isn't it amazing at the level of negativity that persists? Kinda confirms my feelings that we're in the eye of the storm here.

While the buoyancy of the markets has brought some good news with it, it's not really been anything to get all that excited about. More relief that the financial world is not ending, than anything else.

I suspect that relief will ultimately prove to be premature.

Like an attractive, but insane, girlfriend, there appear to be some nasty skeletons left in the closet. The credit crisis was cute - like OK, she smokes a pack of cigarettes a day, two on Sundays. Now we're about to find out that this bitch is a full blown heroin addict...

Sovereign Debt: Socialism's Grand Finale

The next "shoe to drop" appears to be sovereign debt. I guess we should have expected this, as the 20th century's infatuation with socialism comes to a head once and for all.

It turns out that Maggie Thatcher was indeed correct when she famously said "the problem with socialism is that you eventually run out of other people's money." But I wonder if Maggie foresaw her United Kingdom, and our United States, continuing along the trend towards greater socialism, and less capitalism.

Yes, the Thatcher/Reagan revolution, whatever effect it had at the time, appears to be as dead as a door nail today. And granted, the size of the US government continued to grow under Reagan, so I'm not sure if we can or should count that time as a countertrend rally.

In any case, government tax receipts are falling around the world, and there is a lot of sovereign debt that is going to go unpaid. This is highly deflationary, because debt that used to exist will simply float away to "money heaven." Creditors will discover that their assets are now completely worthless.

First Dubai, now Greece - the dominoes are starting to topple. Here in the good old U S of A, the bond markets continue to fund record deficits at the federal level, but our two most socialistic states - The People's Republics of California and New York - are toast. Spreads are rising on CA's credit default swaps - the vultures are starting to circle.

The types of budget cuts that each state needs to make are politically infeasible. So, we'll likely see the states get bailed out, but eventually, they'll default on their debt. Poof - off to money heaven.

I work in Sacramento - and yes, I greatly enjoy the irony of being a libertarian/anarchist in this town. A funny thing happened when the Governator started furloughing workers, telling them to stay home 3 days a month - nothing, really. It's dead downtown on Fridays, sure, but if there's any output being missed, I honestly can't tell.

I suspect you could furlough most of the state government permanently, and nothing would really be missed either. Sure you'd have some short term adjustment, but the private sector would step in and perform any services that were seriously needed or missed. I doubt we'd miss much.

Go Long Responsible Governments, Short Socialism

Our friend Brian Hunt pointed out in his always excellent Market Notes that there's money to be made in shorting socialism:

For a picture of this tailwind, let's look at the past year's trading in the iShares Singapore (EWS), a basket of Singaporean stocks. While the high-debt, high-tax, high-regulation economies and stock markets of Europe have suffered major declines in the past month, Singapore's market has declined just a few points. This trend of "Asia up, Europe not-so-much" is going to last the rest of your life.

Source: DailyWealth

The Onion: US Stages Fake Coup to Wipe Out Debt

This is hysterical...

U.S. Government Stages Fake Coup To Wipe Out National Debt

Shout out to my good friend, and past guest author, Jonathan Lederer for sending this along.

Paging Dr. Copper

Another good tip from Hunt - copper is breaking down. He's got a nice chart at the bottom of the page that clearly shows a break of copper's upward trend.

Yes Dr. Copper, the commodity this is said to have a "PhD in economics", is starting to feel under the weather. An ominous sign?

Well if China was doing OK, you'd expect to see copper humming. So we've got Chinese indices breaking down in tandem with copper - uh oh.

Stratfor's Take on Greece and Europe

For the geopolitical take and implications, you can't beat Stratfor's George Friedman. Here's a video they released earlier in the week, discussing the Greek fiasco:

The Funniest Video of the Week Not From the Onion

It's from CNBC, of course!

Perhaps a contrarian take on the Greece situation, this joker says the solution is an "operational one" - Europe should print money and hand it out!

Hat tip to friend and reader Carson for finding this beauty.

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

Still short baby - these positions are keepers! Not a bad time to initiate a short position either, I think. Markets were up last week, a nice little countertrend rally.

Go short, or go home!

The S&P turns down.

Have a great (short) week in the markets! Comments are always welcome and very much appreciated.