Wednesday, June 06, 2007

Is Leonardo Fibonacci Awakening The Three Bears?

I'm out of commission with some type of bug so I'm going to throw up a relatively quick post. I see alot of bullishness from prognosticators quoting bearish sentiment readings. As I've said on here time and again, sentiment is but one leg of successful investing. It also has the potential to be the weakest unless at tremendous extremes such as existed in 1982. Many of these same prognosticators were yammering about negative sentiment in 2000 as well. Yes, many sentiment points at the very peak of the largest bull were indeed bearish causing many to expect higher prices. Sentiment has and always will fail those using it at many key moments in time. In addition, sentiment is typically a coincident measurement to price and many times simply another way of measuring the same data. In other words, it is not typically an independent variable but rather a function of price. Very few people seem to get this simple point. It seems some of the more qualified on Wall Street are starting to figure this out. Finally, I recently read a rational explanation of put/call ratios which came to the conclusion it was a coincident indicator and really a function of price.

Be it options ratios, Rydex ratios, short interest, futures data points through COT reports, oscillators, sentiment surveys or anything else, they are typically measuring the same thing or are misinterpreted. And, as history has shown time and again, they work until they don't. Think you found the Holy Grail of sentiment? Think again. It will eventually fail in a big way. Guaranteed.

Last July before the mega cap rally and the China blow off I wrote on here that mega caps, Chinese equities and energy were the likely remaining assets yet to be shoved even more. So, what has outperformed since that comment? Mega caps, Chinese equities and energy. Was I using the latest sentiment gadget to make this call? Hardly. All I need to know is how to model human behavior reflected through price and a clear understanding of the Wall Street herd's behavior. The only sentiment doodad you need is price. Therefore, the best time to aggressively load up on stocks as overvalued as today is when prices have collapsed. What do you think Wall Street sentiment will be then? Small caps down 50-70% or more? The Wall Street engine will have ground to a halt, asset allocation models will have low equity allocation, there will likely have been large layoffs in the financial sector, most hedge funds will have lost their appeal, Mad Money will be off the air, etc. That's a good time to buy. At this point in time, waiting for a 10% dump or waiting for some four year cycle bottom which was supposed to happen last year yet is still being called the four year cycle is more yammering. Real money for most is made by catching the majority of market moves over many years or decades. In that respect, catching the exact top to a major wave is rather meaningless. What is important is to miss the mess. In other words, we aren't going to get a ten percent correction then start another five year run which triples today's prices. That is, unless the dollar collapses and the Fed destroys the dollar through its actions. I doubt that will happen. If it does, I'm moving to Switzerland to live on cheese fondue and chocolate.

This levitation process we are seeing is not generally bullish. We've made next to no progress in the last six or seven weeks in the major averages yet marginal new highs have happened nearly every day. So much so that the action has caused many who would be otherwise cautious to change their view. Even though on a percentage basis the gains have been almost imperceptible in the big picture. The market tends to do that to people.

As of this past week, we have possibly put the final pieces together in achieving a very high risk point in nearly every asset market globally. Let's cycle through a few that are relevant to US investors as a matter of convenience. Energy stocks and energy futures are retesting very strong Fibonacci resistance levels with much less sponsorship. Gasoline spreads are at very unsustainable levels. Many other late stage industrial commodities are in a similar situation including uranium which hit a four decade resistance level as well as the new semi precious metal, copper. The last of the supply chain commodities, milk, has had a massive move recently potentially signaling the end to the commodities game. The three equity bears are awakening from their slumber as well. Dow bear, the leading major index in this run has hit a major Fibonacci resistance level. NYSE Composite bear, the most encompassing earnings bubble index this cycle has hit a major Fibonacci resistance level and small cap bear, the biggest valuation mess in the US has hit major Fibonacci resistance. And, the biggest baddest bear of them all? The S&P has hit a major Fibonacci resistance level and more importantly a Fibonacci time zone in the S&P has hit this week. That time zone from the 2000 top in equities is the first one reached in two calendar years. Every sophisticated Fibonacci trader on earth knows these points and there are lots of Fibonacci traders. Unfortunately, they aren't going to telegraph it to the general public either.

Now, before I close, let's go back to a comment I made earlier this year. Many have been saying we need a massive spike higher in a blow off top for the major market to end this cycle. I used a historical example of a similar cycle to prove that is absolutely not true. Now, I used an example rather than an explanation but if you think about it, I'm sure you can figure out why this is so. Those who are making such a statement don't understand market dynamics and what really drives various bubbles. This cycle is going to end at some point, likely between here and September, and when it does, it will most likely end with a whimper in the S&P. For an explanation of Fibonacci analysis, click here.
posted by TimingLogic at 12:05 AM

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