MERRY CHRISTMAS

9 OUT OF 9

As I noted yesterday the tech sector has broken higher out of the recent coil. It appears to be trying to drag the rest of the market with it but I also noted this isn't a particularly positive development. It would have been better if the market had broken down as we would then expect the decline to be brief followed by a much stronger surge higher. Now we are faced with the odds being for this breakout reversing soon followed by a much longer correction.

I'll also note that 9 out of the last 9 years tech has experienced a significant correction during the first quarter, often in January.

The worst corrections have tended to follow after powerful moves in December.

I think the breakout of the coil now puts tech into that camp.

Another warning sign for everyone listening to the media hype tech is found in the point and figure chart.

Whenever an asset puts 20 X's in a row without a correction it's in an extremely overbought condition and subject to a hard reversal.

The cubes now have 19 boxes checked without a correction and heading directly into the seasonally weak 1st quarter.  

This probably isn't the best time to follow the herd.

THE COIL HAS SPRUNG

I've noted before that contrary to popular belief the initial move out of a coil is often a false move usually followed by a much stronger and more durable move in the other direction.

Well it looks like the coil is going to break up this time. It is certainly breaking that direction on the Nasdaq 100.

Option traders have now gone ballistic buying calls. Usually not the best sign for continued strength over the next two months.

The next thing I will point out is the duration of this daily cycle. Today is day 35. The daily cycle rarely lasts much longer than 40 days. In `04 during similar circumstances, namely the topping of the second leg of the cyclical bull, the daily cycle stretched 45 days.

The market then entered a multi month correction that eventually served to separate the second leg of the bull from the third. The Nasdaq initially corrected much harder as it entered the seasonally weak first quarter.

I was hoping the coil would break down and give us a nice clean move before initiating the third leg of the bull. This break higher now lowers the odds of that happening significantly. It now becomes more likely we are going to see an extended complex correction similar to what happened in `04.

We should see some short term follow through to this breakout but as we are on day 35 and very late in the daily cycle, trading this breakout will probably be better suited to day traders or very short term traders as it's unlikely to last very long.

I'll have more in tonight's update.

ONLY ONE LEFT

A true secular bull market should be characterized by expanding volume as more and more investors jump on board. If not expanding at least steady volume. In the next series of charts you can see that the cyclical bull from `02 to `07 followed this pattern.

You can also see in all these charts except the last one that this cyclical bull is not behaving like a true bull market should. In every case volume has been shrinking as the bull progresses. In every case the 60 week exponential moving average of volume has turned down.

None of these are in true secular bull markets and I dare say this cyclical bull is walking on thin ice. I really doubt we will see more than 3 legs up this time and it certainly won't last anywhere near as long as the last cyclical bull. I have my doubts it will even make it past 2010, probably not even past the middle of the year if inflation explodes like I think it will early next year.

There is one and only one secular bull market left. It's the one market where the fundamentals are not only still intact but improving every day as governments around the world try to again produce prosperity with the printing press. I dare say it's never worked in history and it's not going to work this time either.

I'm just baffled by the fact that supposedly intelligent people in governments around the world can't take the time to pick up and read a history book.

I'm dumbfounded that policy makers can't comprehend the fact that the exact same policies they are pursuing now are the ones that caused the implosion of the global financial system and put us into the worst recession since the thirties.

If too much spending and too much debt are what got us into this how can any sane grown up think that more spending and more debt are going to get us out? Albert Einstein said the definition of insanity is doing the same thing over and over expecting to get a different result. I guess by that definition the Fed must be insane.

We are pursuing the same policies that Roosevelt followed in the 30's that turned what should have been just a nasty 2-3 year recession into the Great Depression. If we don't stop and change course quickly we are going to get the same result he did and the same result Japan did when they went down this path.

We've already lost one decade in the stock market do we really want to lose another or two or three?

Oh by the way, here is the only remaining secular bull market.

STILL WAITING

I thought this was an interesting comparison. The last cyclical bull managed to reach the 50% retracement before falling into a mild corrective phase.

The S&P has now tagged the 50% retracement and despite extremely bullish seasonality and very positive economic and employment news it's been unable to push through this level. Smart money knows it's way too late in this rally to press the long side any longer. That's why we continue to see negative money flows and why the distribution days are really starting to pile up. Big money is stepping aside for the time being and the emotion driven retail trader just doesn't have enough firepower to push this market appreciably higher.

I know it's taking it's time but the correction will come just like it did in `04. I'm expecting the correction this time to unfold much quicker than it did during the last bull. Actually that multi month decline in `04 was the longest 2nd leg correction of all 7 bull markets spawned in the depths of history's most devastating bear markets.

Everything is moving much quicker this time, both bear and bull phases. I'm hoping the correction following this second leg will continue the pattern of rapid moves. Ideally I'd like to see something in the neighborhood of -10% to -14% in 3-4 weeks instead of 6 months.

A sharp violent correction like that would be just what the doctor ordered to reset sentiment back to extreme negative levels. And that's what we need to initiate the third leg up in this cyclical bull market.

CAN THE MARKETS AND THE DOLLAR RISE TOGETHER?

In a word no! Not as long as the secular bear market remains in force. Ultimately I don’t believe the market will be able to hold up in the face of a stronger dollar for very long. Temporarily it can certainly do the unexpected. We all know how the market loves to prove everyone wrong. I dare say 99 out of 100 people if asked two weeks ago where the market would be if the dollar rallied back to 77 would not have said over 1100.

But for the last 7 years this relationship has held up when looking at the big picture.

The best the market has been able to do is drift sideways during any major dollar bounce. This big picture correlation will continue to hold up until this secular bear market is over. I don’t see that happening until two things occur. First we need to clean all the excess debt from the system. That certainly hasn’t happened yet. As a matter of fact the nitwits that started this seem hell bent on proving they can cure the world's debt problem by creating oceans of more debt. I dare say the market is going to continue to prove them wrong.


The second thing that needs to happen is the next big world changing technological breakthrough must occur. The last secular bull rose on the back of the personal computer and the internet. The one before that on the electronics revolution and television. I still think the next secular bull will ride a wave of biotech advances that will vastly improve the standard of living for the human race.


Until that technology starts to come online, whatever it is, the only fuel for further market advances is going to have to come from currency debasement. Real productivity is the only thing that is going to lift the markets and the dollar at the same time.


So short term the market can certainly make us all look like fools but the big picture fundamentals have not changed and those fundamentals will eventually start to drag on the markets as the dollar rally continues.

TRADE SMART

So often we as investors get caught up in the daily movements of the market that we forget to step back and look at the big picture.

A great example are the posters who come on the blog repeatedly warning that the market is going to rally, get on now or risk missing the move, the market never falls in December, blah, blah , blah.

You know what I say? So what! Who cares! Let it rally, but it will do it without me. Why you ask? Well let me start off by showing you what markets don't do.

Markets don't go straight up. When they do they often come straight back down.

Here's is what markets do. They rally for a period of time and then they go through a period of profit taking to cool off.

I've noted on the chart that it's pretty rare that the market will rally for more than 20-23 weeks without a corrective move. This market is on week 22. That means it's getting dangerous to continue pushing the long side. The market is overbought.

Now certainly it can rally further. If it were to make it up to 1156 it would tie the second largest two leg rally in history (1904). But I have to ask what's the point of trying to catch the last few pennies?

Eventually it will correct. It's much safer waiting for the correction and buying the dip than trying to catch the last few percent of the move. If you get caught at the top then you just end up riding the correction down with no dry powder to use at the bottom. I dare say there are probably a few gold bulls that know what I'm talking about?

We already have multiple signs of excess speculation and some evidence the smart money has been exiting in preparation for an imminent correction.

Now I'm not saying one needs to be short, just that now is probably the time you want to do like the smart money and build up cash to use when the correction comes.

Folks there are times when the right move is to just sit and twiddle your thumbs.

Now is one of those times!