Saturday, July 5, 2008

The warning shot has been fired

The warning shot over the bow has now been fired. As you probably remember I've been watching the coal stocks has an indication that energy is about to break. On Wednesday that warning came as the coal index plunged almost 14%. The parabolic trend has now been broken. If this plays out like 99% of parabola's play out then we should see a fast and spectacular collapse of the coal stocks as it becomes apparent to the market that the fundamental premises of this incredible rally proves false. Namely that demand is collapsing as the world continues into the global recession.

It shouldn't be too long before oil rolls over and follows coal. At the moment oil is struggling to complete the T1 move that started in the depths of the 5th year decline back in the 1st quarter of 07.

Almost every stock market in the world is telling us that the world is entering a severe recession. A recession causes demand destruction. A severe recession causes massive demand destruction. If the world goes from using 87 million barrels a day to only 82 or 83 million then we no longer have a supply shortage. As a matter of fact we will then have a demand shortage. To little demand and too much supply equals lower prices.

I've been pointing out for weeks now that the energy stocks have not been confirming oils move higher. That continued the last two days as the XOI and the OIH both moved lower. This despite the market rallying on Thursday and oil moving higher both days.

There will be a time to buy energy stocks but I don't think that time is now.

Now I think the market has gotten it into it's head that when energy breaks the all clear signal will be given. I do think we will get a relief rally. But no way is that going to be the end of the bear market. As subscribers know I've been watching Lowry's buying and selling pressure. As of Wednesday the spread between the two is the widest in 75 years.

Never in history has a bull market started with buying pressure at new lows 6 weeks into the rally. That's what we were seeing in May as the market rallied. This was never a new bull market it was always a bear market rally. The market didn't roll over in May because oil rallied. No, oil had been rallying all along. The market rolled over because sentiment finally got too bullish and there was never any institutional support behind this market.

As many of you know I think the Fed engineered a false bottom in Mar. with the bailout of BSC.
The market wasn't allowed to move to attractive levels. Levels that would have brought in the big value players. We need their money behind the market if we are going to have a sustainable bottom. We didn't get it.

Now we are seeing the COT reports roll over just like we did in the fall of 2000. So while we may get a relief rally when oil breaks don't expect it to last long. Unless the market were to fall 20% below the 200 DMA (subscribers know what I'm talking about) playing the long side in a bear market is a risky trade. Just like buying the dips in a bull market is the safe way to invest, selling the rallies is the correct way to trade bear markets.

Trying to catch rallies is going to be difficult in this environment. If you do manage to time the rally correctly it's then very difficult to time the top of the rally. In a bear market oversold levels don't mean the same thing as they did in a bull market. Oversold levels can become very oversold in bear markets.

Trading bear markets is difficult and it requires a 180 degree shift in strategies from what worked in the bull market. I will be looking to sell into the relief rally when oil breaks.

What few people realize is that when oil breaks it's not going to do anything to stop the recession or cure the woes in housing. It won't have any effect at all on the credit bubble bursting. All it's going to do in the long run is take out the one sector of the market that was still working.