Friday, July 13, 2007

Friday The 13th. The Bulls Are On Fire And So Is The S&P 500!

This will be the last post for a while due to travel. Yesterday was a gift from the gods. It was indeed an amazing day. Everything went up. But, that's typical of this cycle. All assets up in sympathy and down in sympathy on corrections. I took the opportunity to sell into strength. A huge amount of that move was driven by massive speculation in a few stocks such as the 6% Intel move to fill a gap I talked about a few weeks ago in the semiconductor post. Teva, a large part of the Nasdaq 100, filled a gap as well. Some parts of the market leading energy sector actually went down yesterday. Another part of the energy complex completed a run yesterday that I believe portends energy weakness developing. Remember, when I posted my gold-copper pairs trade, the underlying commodities quickly returned thirty-ish percent in a few months even though the stock trade I discussed was circumvented by a takeover of Phelps Dodge. My oil and gold post this week is not a guessing game. It's a high probability event based on quantitative models and much more than what I post on here. In other words, my opinions are based on what is happening rather than what I want to happen. What I want to happen is the economy to continue positively for everyone worldwide. I haven't done so badly in energy markets. I wrote repeatedly that I disliked Valero at its mid 2006 high and said it was one of my favorite stocks as long as markets kept going up when it dropped to around $50. Now, it's up 60-ish% since then and I dislike it again.

Below is a chart to ponder on Friday the 13th. It is a linear channel or best fits mathematical channel of the S&P 500. Simple enough. Amazingly, nearly four of the last five years have been spent within a few percentage points of the blue channel line or the mid-line of this bull run. Only six brief times in five years have we actually reached the outer red channel lines. Once was the start of this bull market in October of 2002. Another time is now. That is incredibly abnormal for any market.

The rhythms of many global markets and many commodity markets are starting to synchronize around key dates and price levels. May through October of 2007 present tremendous risk for all global markets. You may think it insane to type this when we just had one of the largest single day gains in history (not in percentage terms) but I've seen things happen I didn't think possible since May. Things not seen in decades and in some cases a century of time. The speculative fervor is at an incredibly high level right now. Markets always punish over speculation: Amaranth, tech stocks, home builders, mortgage-based financial instruments, Crocs, Chinese equities, the Indian business process outsourcing market, etc. It doesn't always mean the end of the world and these events may actually develop constructively over the long term but ...........

Bear markets in this type of environment can start very swiftly with little time to react. We've seen a few warm ups including the amazingly swift falls in May of 2006 and March of 2007. May of 2006 seems so long ago and the market seems to have been up an amazing amount with nearly continual calls of new highs from the cheerleaders. Yet, the S&P is up only 15% in that thirteen month stretch. That's actually better than I would have expected but it's not exactly 1999. In other words, about average for this cycle. That's about one percent per month. We've averaged about twelve S&P points a month since this bull market started and yesterday we were up three times that. One day. Nearly three months return in one day. That is an annualized rate of what? 5,000%?

When the smart money wants to distribute to others, they appeal to the animal senses by making the greedy feel left behind. Let's back up and remind ourselves this market has also had one of the lowest returns per unit of time of any in the last one hundred years. That statistic may not mean anything to you but it should because it is a sign of impending trouble. Profits at record levels, a global expansion the likes of which the world has never seen and the rate of returns are near the lowest in one hundred years of bull markets in the S&P? What? We are now at a level when those who held through the three year bear market are back to neutral in the S&P. It's really about 38% of where the 2000 S&P was in dollar terms. Ah, I can breathe. I'm back to where I was in 2000. Life is good. It's also one of the longest periods without a ten percent correction since the stock market inception on May 17, 1792 under the buttonwood tree on Wall Street. Enjoy Friday the 13th and your weekend.

posted by TimingLogic at 10:14 AM

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