An Everyday Commodity With Record Bearish Sentiment Against It Right Now

While oil has been on a tear during the reflation rally, it's cousin natural gas has not received the same love from traders.  "The Natty", which currently is languishing around $4, couldn't be hated more, writes Steve Sjuggerud for DailyWealth:

Specifically, right now, there are more bets against natural gas by large speculators than there have ever been in history.

The old rule about the large speculators goes something like this... They're "wrong at extremes, and right in between." Right now, we're at the greatest extreme, ever. Chances are, they're wrong.

The thing is, all these bets against natural gas have to be reversed... That means we must see billions of dollars worth of "buy" orders in natural gas futures, because that's the way these traders close out their trades. So the price of natural gas could rise dramatically – and possibly soar – just in the normal course of all these large speculators entering billions of dollars worth of "buy" orders to close out their bets against natural gas.

I love it.

Now think about this... Natural gas has a permanent price "floor." When it gets particularly cheap, energy companies want to substitute natural gas for what they're using – whether it's oil of some kind, or coal, or whatever.

It sure has been a tough past few years for The Natty - hovering around 5-year lows!

Source: Barchart.com

Why is natural gas so hated?  In short, there's too damn much of it available right now.  Commodity prices are amazingly efficient at correcting supply/demand imbalances.

When Natural Gas spiked in 2006, and North America was reportedly running out of it, producers went to work, and figured out how to extract it from new places, like shale.  Supply went way up, and prices collapsed - not bad for a "free" market!

If you're thinking about a speculative position here, the natural gas ETF ticker is UNG.

And if you're looking for a great supply/demand breakdown, here's a great piece of natural gas fundamental analysis by Casey Research's David Galland.

Contrary Investing Weekly Wrap: Fear is Dead; Delinquencies Skyrocket; Marc Faber - and more!

No Fear, Again: Market Participants Are Opting For Extra Yield, Risk Be Damned

Last week, a buddy from college sends me an email:

"Hey, I got a little bit of cash sitting around, earning next to nothing in a savings account. Anything you'd recommend to get this cash working for me?"

"Not really - everything looks pricey right now...hey, does that mean you paid off your law school loans?" I asked.

"Actually no," he informed me.

I suggested he may want to work down the debt first, no matter how low the interest rate.

Meanwhile, California pension funds are still counting on a cool 8+% annual return to deliver on existing obligations - based on historical returns, of course, which only includes the greatest bull market of several generations.

Anyone want to take the other side of that bet?

Not to be outdone, junk bond funds are back in vogue once again. And of course, the crappiest quality bonds are the hottest!

Chart courtesy of EconomPic Data.

It's hard to believe that this time last year, we were talking about how Return OF Capital was the new Return On Capital!

So is everything rosy again, or is this "reach for extra yield" mentality exactly what a bear market bounce is supposed to engender during it's final phases? My bet is on the latter, but in any case, we should find out soon!

Nothing To See Here - VIX Hits 18-Month Low

Volatility on the S&P is nowhere to be seen these days - perhaps the market crash was merely a figment of our imaginations!

The VIX is low, and it continues to head lower.

(Source: Yahoo Finance)

As you can see from our experience in 2008, when the VIX breaks out, it breaks out in a big way. So a breakout on the VIX would be a good cue for us to start slamming the PANIC button as hard as humanly possible.

But for now, all is calm in the markets, as February's drop now looks like a pebble tossed in the pond in hindsight.

The VIX could continue to head lower - who knows - but one would have to expect a spike in our future again sooner rather than later.

Scary Chart of Delinquency Rates Skyrocketing

Can you spot the trend?

Chart courtesy of http://www.calculatedriskblog.com/

Hat tip to friend, reader, and monetary expert Dave for sending this gem along.

For further reading on the real estate trainwreck, check out this interview with real estate entrepreneur and guru Andy Miller.

The Hidden, Historic Bubble That Could Burst Any Day

Of course we're talking about...

...all at once now...

Muni bonds!

Yay! Of course, municipalities far and wide have no way to pay back their increasing deficits amidst falling tax revenues.

Of course you knew this already, being an astute reader and no doubt a contrarian thinker. But the mainstream press is even starting to catch on.

The Contra Costa Times reports:

Declining income from property, sales and other taxes coupled with growing pension obligation debts and the residual effects of the financial meltdown are inflating a dangerous bubble in the $3 trillion to $4 trillion public bond financing market.

If the bubble bursts, agencies will be unable to borrow, and would cancel or postpone public projects such as school construction or building roads and highways. At worst, governments could default and upend the historically safe municipal bond market.

"This is the most serious municipal debt crisis in U.S. history, including the Depression," said Denver-based attorney Jeff Cohen, who represents bond issuers and buyers. "Arizona has huge problems. So do Nevada, Illinois, New York and New Jersey. And California has the same credit rating as Kazakhstan."

Small to mid-size public agencies, in particular, have been hit hard, said Cathy Spain, director of the Center for Enterprise Programs at the National League of Cities.

Not only has public agencies' income dwindled, but they can't even buy the bond insurance that would lower their borrowing costs. Most of the bond insurance companies, who participated in the mortgage-backed securities shenanigans, spiraled out of business during the bank meltdown.

Get your popcorn ready - this should be a doozy!

Also check out Robert Prechter's thoughts on why you should run, not walk, from these "safe" muni bonds.

Why Marc Faber Is Predicting A Large Correction Right About...Now

About a month ago, Marc Faber told Bloomberg that we could easily see a correction of 20% if the S&P topped 1150 and approached 1200.

Well, it seems like we're just about there, so we'll see how Faber's near term musings fare in the weeks ahead.

You can check out a video of Faber's Bloomberg interview here.

Some other thoughts from Faber:

• He thinks the Euro is very oversold, and can rally to 1.40 before going lower

• Doesn't see anything much good about the Euro, or the Dollar, for that matter

• Debt monetization is inevitable in the long run

• He likes precious metals and Asian currencies - says "most currencies are sick"

• Better to be in stocks than bonds over the next few years, because he expects increasing inflation

Faber's book Tomorrow's Gold is excellent by the way - if you haven't read it, and you are a Faber fan, I'd definitely recommend you pick up a copy.

Interestingly Faber was a deflationist when he wrote the book almost 10 years ago, and has since flipped to the inflation camp, because he believes that sovereign printing presses will overwhelm broader deflationary forces.

Further reading: Why Marc Faber sees no way around US inflation.

A Few More Links, In Case You Missed Them

• Sir John Templeton's Final Memo: We're Screwed

• How to Answer Your Census, Christopher Walken Style - Hilarious Video

• Robert Prechter's Deflation Primer - What You Should Know

My Current Positions and Market Outlook

The trend of all markets still (yes, still) appears to be up, but the risk appears to be predominantly to the downside. The only trend that appears to have changed for certain is that of the dollar, which is currently taking a breather after a multi-month rally.

The US dollar's trend is officially UP. It's well above it's 200-day moving average.

(Chart courtesy of StockCharts.com)

If the dollar is indeed the linchpin of the financial equation, then we'd expect the other markets to roll over one-by-one in turn here. We shall see if things play out this way.

(PS - Here's why I concur with folks who believe the dollar is the linchpin of the global financial markets).

I am still in wait and see mode, with no long or short futures positions.

Have a great week in the markets!

No Fear, Again: Market Participants Are Opting For Extra Yield, Risk Be Damned

Last week, a buddy from college sends me an email:

"Hey, I got a little bit of cash sitting around, earning next to nothing in a savings account. Anything you'd recommend to get this cash working for me?"

"Not really - everything looks pricey right now...hey, does that mean you paid off your law school loans?" I asked.

"Actually no," he informed me.

I suggested he may want to work down the debt first, no matter how low the interest rate.

Meanwhile, California pension funds are still counting on a cool 8+% annual return to deliver on existing obligations - based on historical returns, of course, which only includes the greatest bull market of several generations.

Anyone want to take the other side of that bet?

Not to be outdone, junk bond funds are back in vogue once again. And of course, the crappiest quality bonds are the hottest!

Chart courtesy of EconomPic Data.

It's hard to believe that this time last year, we were talking about how Return OF Capital was the new Return On Capital!

So is everything rosy again, or is this "reach for extra yield" mentality exactly what a bear market bounce is supposed to engender during it's final phases? My bet is on the latter, but in any case, we should find out soon!

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.

Bob Prechter: How to Act Contrary to "Market Herding"

Here's a great guest piece by Robert Prechter, author of what is currently my favorite investment newsletter, the Elliott Wave Theorist. Bob talks about a subject that's probably as near and dear to your heart as it is mine - market herding.

And if you want to read more, at the end of this piece there's an offer from Prechter that'll allow you to check out the entire issue of The Elliott Wave Theorist.

***

Robert Prechter on Herding and Markets' "Irony and Paradox"

To anyone new to socionomics, the stock market is saturated with paradox.

February 18, 2010

By Editorial Staff

The following is an excerpt from a classic issue of Robert Prechter's Elliott Wave Theorist. For a limited time, you can visit Elliott Wave International to download the rest of the 10-page issue free.

Market Herding

Have you ever watched a dog interact with its owner? The dog repeatedly looks at the owner, taking cues constantly. The owner is the leader, and the dog is a pack animal alert for every cue of what the owner wants it to do. Participants in the stock market are doing something similar. They constantly watch their fellows, alert for every clue of what they will do next. The difference is that there is no leader. The crowd is the perceived leader, but it comprises nothing but followers. When there is no leader to set the course, the herd cues only off itself, making the mood of the herd the only factor directing its actions.

Irony and Paradox

To anyone not versed in socionomics, everything the stock market does is saturated with paradox.

• When T-bills sported double-digit interest rates in 1979-1984, investors saw no reason to abandon their T-bills for stocks; when T-bill rates were low in the 2000s, investors saw no reason to put up with the “low yield” of T-bills and sought capital gains in stocks. The first period was the greatest stock-buying opportunity in two generations, and the second period was the greatest stock-selling opportunity ever.

• When long-term bonds yielded 15 percent in 1981, investors were afraid of Treasury bonds even though they were about to embark on the greatest bull market ever; in December 2008, when the Fed pledged to buy T-bonds, rising prices appeared so strongly guaranteed that the Daily Sentiment Index indicated a record 99 percent bulls, just before prices started to fall.

• When oil was $10.35 a barrel in 1998, no one made a case that the world was running out of black gold; but when it was 7-8 times more expensive, some three dozen books came out arguing that global oil production had peaked, a theme that convinced investors to begin buying oil futures…about a year before the price collapsed 78 percent.

• In the second half of the 1990s, the idea that stocks would always be the best investment “in the long run” became popular just as a long period of superior returns was coming to an ignoble end. A new study... shows that as of today the S&P has underperformed safe, boring Treasury bonds for the past 40 years, since 1969.

• Just when nearly everyone -- including world-famous investors -- finally panicked and conceded in February-March 2009 that the financial and economic worlds were in dire shape, the market turned around and shot upward in its fastest rally in 76 years.

And so on. The exogenous-cause model fools investors exquisitely. One reason is that rationalization follows upon mood change. Mood change comes first, and attempts at reasoning come afterward. Socionomists recognize that social mood is primary and has consequences in social action, so we never have to wrestle with paradox. This orientation does not mean that we are always right. It means only that we are not doomed to be chronically wrong.

To succeed in the market, you must learn initially to embrace irony and paradox, at least as humans are unconsciously wired to interpret things. Once you get used to the world of socionomic causality, the irony and paradox melt away, and everything makes perfect sense...

***

Read the rest of this classic Elliott Wave Theorist issue now, free! You’ll get 10 pages of Bob Prechter's unique insights on:

• Why Finance and Macroeconomics Are Not Subsets of Economics
• How Correct Are Economists Who Forecast Macroeconomic Trends?
• The “Beat the Market” Fallacy
• Stock-Picking Geniuses or Just a Bull Market?
• Index Funds and Diversification
• Market Confidence vs. Certainty
• Observations on Corporate Earnings
• Why Being a Bear Doesn't Equal "Doom & Gloom"
• More

Visit Elliott Wave International to download your free 10-page issue.

Lowest Levels of Bearishness in 22 Years Indicate Downturn May Be Imminent

Regular readers know that I'm a big fan of Bob Prechter's investment analysis. One of my favorite aspects of his work is the use of sentiment indicators as a market timing mechanism - that is, when everyone is bearish, you should be greedy, and when everyone is bullish, you should run for the hills.

In this guest piece, Prechter's colleague Nico Isaac analyzes current investor sentiment...read on, and think about whether you should hop on the investment train leaving the station, or run for the hills!

***

New Year: New Economic Boom? Why 2010 Should Be One to Remember
January 19, 2010

Elliott Wave International's latest free report puts 2010 into perspective like no other. The Most Important Investment Report You'll Read in 2010 is a must-read for all independent-minded investors. The 13-page report is available for free download now. Learn more here.

By Nico Isaac

In the realm of market psychology, there's a big difference between optimism and extreme optimism. The first is seeing the glass half full. The second is seeing the glass half full deep in the heart of a bone-dry desert. In finance, it's what we call "Buying the Dip" mentality -- when all outcomes, even losses, are cause for celebration.

We are there now.

To wit: With a new year upon us, the mainstream has already come up with a fresh tagline to define the next 360-or so days. It even rhymes: The Bull Runs Again In 2010. This projection is in no way "in spite of" the fact that the U.S. stock market just finished its first decade of negative returns since the Great Depression; it's because of that fact.

See, according to the mainstream experts, this "Lost Decade" of abysmal stock performance (in which the Dow ended 9% in the red, the S&P 500 - 24%, and the NASDAQ Composite - 44%) is the very foundation on which a new bull market will apparently be born. One economic scholar recently coined the phenomenon the "Slingshot Effect" -- the more severe the downturn, the faster the recovery. (Associated Press)

Adding to the upbeat chorus are these recent news items:

"The horrible decade has wiped out all the excesses of the previous two decades and put us back on track for more normal returns." (USA Today) -- AND -- "It may be the best of all possible worlds." (Business News)

Back in the late 1990s, when the "unstoppable" NASDAQ began to experience regular days of double-digit drops, it was "Buy-the-Dip." Now, it's "buy the entire lost decade." And, as the Dec.31, 2009 Elliott Wave Financial Forecast Short Term Update reveals -- current sentiment readings "continue to show that stock market bears have packed up and moved to Florida for the winter."

The Dec. 31 Short Term Update also reveals two mind-blowing charts of the S&P 500 versus Investor Intelligence Advisors Survey Percentage of Bears -- AND, the S&P 500 versus the percentage of "Fully Committed" bullish advisors since 2000. The current reading is the lowest bearish percentage in 22 years.

Take one look at the evidence, and you'll see that a defining pattern emerges: Low levels of bearishness have consistently coincided with one kind of market move. Combine this picture with the other measures of investor sentiment like momentum, volume and Elliott wave structure, and the evidence tilts overwhelmingly in favor of an unforgettable year.

Elliott Wave International's latest free report puts 2010 into perspective like no other. The Most Important Investment Report You'll Read in 2010 is a must-read for all independent-minded investors. The 13-page report is available for free download now. Learn more here.

Nico Isaac writes for Elliott Wave International, a market forecasting and technical analysis firm.

Ed. note: I am both a subscriber and affiliate of Elliott Wave International, and highly recommend their work.

Boy, Is CNBC Yucking It Up Today!

I'm working from the road today, so I've got the nice benefit of having CNBC on here - man, are they yucking it up today!

With the Dow hitting a new 2009 high, I haven't heard anyone expressing any skepticism - "all the stars are aligned for higher stocks" is something that was just pronounced!

Best part of the day so far, they just paraded out a dollar bull like a sacrificial lamb, asked him when he was going to give up on that losing trade, and then cut to commercial during his response.

Of course I have been wrong for the past few months on this, so you are welcome to ignore my musings as you'd like. Worth noting that even I felt like throwing in the towel on my bearish stance midday today - and you know what happens when the last bear finally capitulates...look out below!

A Look Into Record High Trading Volume...And What It Says About Investor Confidence

The following article was adapted from the November 2009 Elliott Wave Financial Forecast and reprinted with permission here.

Steve Hochberg and Pete Kendall produce stellar analysis for Elliott Wave International - two of my favorite guys in the biz - here, they take a look at trading volume, and what it says about investor confidence. Read on, and enjoy!

***

Finance's Euphoria: The Epilogue -- What Record High Dollar Volume of Trading Says About Confidence

November 6, 2009

Until Nov. 11, you can read the rest of this brand-new report for free, during Elliott Wave International's FreeWeek of U.S. forecasts. Learn more about FreeWeek, and download the rest of this report and others for free here.

By Steve Hochberg and Pete Kendall

When Wall Street’s total value of assets rose to a “mind-boggling 36.6 percent of GDP” in late 2006, The Elliott Wave Financial Forecast published a chart of U.S. financial assets literally rising off the page.

The Financial Forecast observed that financial engineers had “found a new object of investor affections—themselves” and asserted that “the financial industry’s position so close to the center of the mania can mean only one thing; it is only a matter of time” before a massive reversal grabbed hold. Financial indexes hit their all-time peak within a matter of weeks, in February. The major stock indexes joined the topping process in October 2007 and in December 2007 the economy followed. Subscribers will recall that one of the most important clues to the unfolding disaster was the level of financial exuberance relative to the fundamental economic performance.

This chart of the value of U.S. trading volume (courtesy of Alan Newman at www.cross-currents.net) reveals that the imbalance is far from corrected.

Incredibly, total dollar trading volume is even higher now than it was in 2007 when the economy was humming along. In June 2008, dollar trading volume also defied an initial thrust lower in stocks and the economy, eliciting this comment from the Financial Forecast:

The chart of dollar trading relative to GDP shows how much more willing investors are to trade shares in companies that operate in an economic environment that is anemic compared to that of the mid-1960s. A basic implication of the Wave Principle is that the public will always show up at the end of a rally, just in time to get clobbered. This chart shows that it is happening in a big, big way now because the market is at the precipice of the biggest decline in a long, long time.

Total dollar volume continues to rise despite further fundamental financial deterioration. Yes, GDP experienced a one-quarter, clunker-aided uptick of 3.5 percent in the third quarter. But the economy is in far worse shape than it was when we made the above statement. In fact, its recent performance on top of the decades-long economic underperformance (which is discussed extensively in Chapter 1 and Appendix E of the new edition of Robert Prechter's Conquer the Crash) means that industrial production just experienced its worst decade since 1930-1939. Total manufacturing employment slipped to 11.7 million people, its lowest level since May 1941 when it was 33 percent of all jobs. According to Bianco Research, manufacturing now accounts for only about 9 percent of the workforce. Finance anchors the economy now, which makes it far more susceptible to non-rational dynamics.

As Prechter and Parker explain in “The Financial/Economic Dichotomy” (May 2007, Journal of Behavioral Finance), a financial system is not bound by the laws of supply and demand in the same way that an industrial economy is. In finance, confidence and fear rule decisions. “In the financial context,” say Prechter and Parker, “knowing what you think is not enough; you have to try to guess what everyone else will think.”

We do know one thing: When everyone is thinking the same, the opposite will happen.

Right now, record high dollar volume of trading shows that confidence, at least on this basis, has reached a new historic extreme.

***

Read the rest of the 10-page November 2009 Elliott Wave Financial Forecast now, when you signup for Elliott Wave International's FreeWeek of U.S. forecasts. FreeWeek ends Nov. 11, so please act now to get an enormous wealth of current market analysis and forecasts -- for free. Learn more about FreeWeek, and download the rest of this report and others for free here.

Steve Hochberg and Pete Kendall are co-editors of the Elliott Wave Financial Forecast.

Do Earnings REALLY Drive Stock Prices? The Answer May Surprise You

Growing earnings lead to increasing stock prices. Of course.

Or do they?

The folks over at Elliott Wave International say this is an old wives tale - and I have to admit, they make a compelling, interesting case.

Read on, for an eye opening challenge of this basic assumption!

***

Earnings: Is That REALLY What's Driving The DJIA Higher?
The idea of earnings driving the broad stock market is a myth.
October 23, 2009

By Vadim Pokhlebkin

It's corporate earnings season again, and everywhere you turn, analysts talk about the influence of earnings on the broad stock market:

• US Stocks Surge On Data, 3Q Earnings From JPMorgan, Intel (Wall Street Journal)
• Stocks Open Down on J&J Earnings (Washington Post)
• European Stocks Surge; US Earnings Lift Mood (Wall Street Journal)

With so much emphasis on earnings, this may come as a shock: The idea of earnings driving the broad stock market is a myth.

When making a statement like that, you'd better have proof. Robert Prechter, EWI's founder and CEO, presented some of it in his 1999 Wave Principle of Human Social Behavior (excerpt; italics added):

***

Are stocks driven by corporate earnings? In June 1991, The Wall Street Journal reported on a study by Goldman Sachs’s Barrie Wigmore, who found that “only 35% of stock price growth [in the 1980s] can be attributed to earnings and interest rates.” Wigmore concludes that all the rest is due simply to changing social attitudes toward holding stocks. Says the Journal, “[This] may have just blown a hole through this most cherished of Wall Street convictions.”

What about simply the trend of earnings vs. the stock market? Well, since 1932, corporate profits have been down in 19 years. The Dow rose in 14 of those years. In 1973-74, the Dow fell 46% while earnings rose 47%. 12-month earnings peaked at the bear market low. Earnings do not drive stocks.

***

And in 2004, EWI's monthly Elliott Wave Financial Forecast added this chart and comment:

Earnings don’t drive stock prices. We’ve said it a thousand times and showed the history that proves the point time and again. But that’s not to say earnings don’t matter. When earnings give investors a rising sense of confidence, they can be a powerful backdrop for a downturn in stock prices. This was certainly true in 2000, as the chart shows. Peak earnings coincided with the stock market’s all-time high and stayed strong right through the third quarter before finally succumbing to the bear market in stock prices. Investors who bought stocks based on strong earnings (and the trend of higher earnings) got killed.

So if earnings don't drive the stock market's broad trend, what does? The Elliott Wave Principle says that what shapes stock market trends is how investors collectively feel about the future. Investors' mood -- or social mood -- changes before "the fundamentals" reflect that change, which is why trying to predict the markets by following the earnings reports and other "fundamentals" will often leave you puzzled. The chart above makes that clear.

Get Your FREE 8-Lesson "Conquer the Crash Collection" Now! You'll get valuable lessons on what to do with your pension plan, what to do if you run a business, how to handle calling in loans and paying off debt and so much more. Learn more and get your free 8 lessons 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.