Wednesday, June 6, 2007

The start of the big one or just another normal pullback in an overbought market

The market is now in the process of working through another pullback from overbought levels. Is this the start of the big one or is it just a minor correction? If you are a bear my first question is what is your signal to cover your shorts? You do have a plan don't you or are you just flying by the seat of your pants. Flying by the seat of your pants isn't typically a very profitable way to invest I'm sorry to say. So lets take a look at the odds shall we. First off odds number 1 the COT is showing the most bullish signal since 2000. If you take away the short signals then the odds of a profitable trade from a COT long signal are almost 9 to 1. Those are pretty hefty odds to fight against. Next every intermediate rally so far in this bull has lasted 21-32 weeks so far. This rally is only 11 weeks old. Again pretty rough odds to fight. Next, every intermedite rally has topped out with major momentum and money flow divergences on the weekly charts. There are none yet. No help there. The historical data for the last 110 years show an average gain of 34% for final legs up in bull markets. 3 days ago the S&P was up 12% for this leg out of the Mar. bottom. Still a bit short. The final legs up last on average 6 months and 6 days this rally is only a little over 2 1/2 months old. Quite aways to go yet before we even get close to average. Sorry I'm not helping yet. The third year of a presidential cycle has on average produced a 26% gain in the markets. As of 3 days ago the market was only up 9% for the year. Hmm still not what we're looking for. As of today the S&P is down a whopping 1.23%. It is possible that you have caught the exact top in this bull market but I think I've shown that the odds are way against you. I prefer to trade with the odds and I certainly won't be fighting the kind of odds I've just laid out for you. Seems more likely that we just got another buying opportunity. BTW I've mentioned in the past that I think there is a good possibility that we could see a major bottom in Oct. Oct. would satisfy the historical data. The rally would have a chance to mature and Oct. has historically had some of the most hostile declines in history. Keep in mind this is only a guess because nobody can see the future.