Thursday, March 10, 2011

Tops Take Time To Form

During the week of February 10th, 2011, I was on vacation.  Normally, vacation means vacation although I will monitor the markets.  I try not to do any writing on the blog, and the subscribers to the Premium Content service know this.  However, during that week the Rydex market timers became the most bullish they had ever been - not only since this rally started but since the data began in 2000.  Interrupting my vacation, I sent a "special report" to the subscribers of our Premium Content service, and I present those comments below.
Comments from the Rydex Report, February 9th, 2011, part 1
Comments from the Rydex Report, February 9th, 2011, part 2

While we can say "good call", I would prefer to make several observations.  

One, tops take time.  These extremes were 20 trading days ago.  This is not a long time by any stretch, but  in this instant gratification world we live in, we want it now.  However, market tops don't work that way.  Two, the markets really aren't too much off their multi year highs, so why worry?  The SP500 is still sitting above its 50 day moving average.  Yes, equities have been facing headwinds for a while, and pullbacks at this juncture should be welcomed.  The markets are just getting repriced.  Third, let me clarify what kind of market top we are talking about.  At this point in time, this is not a top that will lead to a bear market.  Prices should continue lower and sentiment should turn negative.  Stocks will be bought and a bounce will ensue.  It will be the quality of that bounce that is important.  As there is always hope, failure of that bounce will lead to a bear market.

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hettygreen said...

Sell (short) in May? A June secondary top would 'rhyme' nicely with 1930 although, proportionate to the length of this rally, it will probably take at least two years of declining prices for a full blown bull capitulation to occur. I'm sure all inverse ETF's will be banned long before then.

Wait for the retest. Always good advice for capital preservation Guy.

Guy M. Lerner said...

Hi Hetty

I stated the "normal" course of events should be increasing bearish sentiment before we get a bounce; we will need lower prices to get this; then we get a bounce and it will be the failure of that bounce or not that will determine the market's ultimate fate

May is just around the corner!

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