Update On The S&P

First off I have to reiterate my perspective that this is a dangerous market. There is an enormous amount of data that leads me to believe we are in the process of putting in a very meaningful stock market top. A top that fulfills all of the characteristics of a major bull market peak. Some additional points to consider include a measure of the global liquidity environment which peaked in May of 2006 and similar U.S. measurements which peaked in late April/May of 2007. My most important buying pressure gauge has fallen precipitously after reaching astronomical heights not seen for decades if not since 1929 or 1946. It is now reacting as it did in the run into 2000. Conclusion? This is not a run of the mill correction and the market tone has changed. As an aside, we surpassed the levels seen in the blow off peak into 2000 in May of 2006 and reached major heights in standard deviation readings this year. So much for dour sentiment surveys. They do not reflect the incredible greed exhibited in the market. And, we have passed the pivot off of the 1994 low, Fibonacci time zone from the 2000 peak and reached key Fibonacci levels on the S&P, NYSE and Dow. While these last points are arcane to almost everyone, they should be taken very seriously. Especially because this market has been driven by technical professionals and not the general public.

As I wrote last week, I believe the market is yoyo-ing right now because quantitative funds and hedge funds are likely in the early stages of blowing up or unwinding significant losses. So, why has the market yoyo'd instead of dropping more? Three possible contributors. Many of the favorite strategies used today involve both long and short positions in the markets. In other words, whipsawing rather than a clearly defined direction might be because of unwinding market neutral positions which involves buying and selling. Then there are those who are likely rotating to defensive sectors. In today's market that is business technology and semiconductor issues as a generality. Not because they are cheap or safe but they are perceived as both cheaper and safer than this market's prior leaders. Is that a positive negative versus a double negative? (Mutual fund managers don't get to pull their money from the markets as individuals do.) Additionally, there are many who believe the global economy will pull the wagon if the U.S. falters. They are buying the dips. Remember, many are still focused on some notion that this is a containable U.S. subprime mortgage problem. It is far from such.

As the chart above shows, the S&P is developing a bearish megaphone pattern. (The same long term pattern I showed for Goldman Sachs in the April 12, 2007 post.) Now, patterns can morph but I expect we will eventually head lower as this pattern resolves itself. We're grappling with a channel bottom and key long term support here so any rally attempt really needs to develop rather quickly or we could see another meaningful swoosh down.

Many are interpreting this levitating yoyo-ing action as bullish or that the bears cannot take the market down. The market has exhibited incredibly weak action with only one day in the last month I would consider constructive. If the massive volume is quantitative funds unwinding levered positions, and it nearly has to be to explain massive and never before seen volume numbers, then a positive perspective on the levitating could be completely invalid. The correct interpretation might be that the unwinding is actually putting a temporary bid under the markets. (A view I believe is more plausible.) So, as volume abates and by implication unwinding of leverage has completed, so does the ability to abnormally ram the markets higher with heretofore levered tactics.

One final note. Many market technicians are pointing to oversold oscillators as evidence of an impending rally. Those oscillators have been oversold for weeks and still no rally. Oscillators are incredibly unreliable trading tools. The market was oversold post 1929, 1937, 2000, 1987, 1973, 1998 and dozens of other meaningful times that didn't develop into rallies. The market will tell us when it wants to rally. Predicting rallies in this environment is not a healthy exercise.