Saturday, March 25, 2006

Masquerade Bull

You won't recognize me today because I've stuck these bull horns on top of my furry head. I want to make an earnest attempt to make a bullish argument for the market, since I think taking an opposing view is probably healthy. I'm still a bear at heart (albeit less passionately so, given the market's frustrating behavior), but let's take a look at some charts which point up instead of down.

First, there's the Major Market Index ($XMI) from the Amex. This index is pretty unusual in that instead of ascending, pushing up against a resisting trendline, it's formed a nice inverted head & shoulders formation. It just barely sneaked above the neckline recently, but should it clearly break above this neckline, it could mean a clean run up to about 1,180 (its all-time high) based on traditional measurement methods.


Argument number two is the fact that the market isn't seeming to "break", even in the face of a lot of bad news. We've got a war going badly. We've got what was formerly the mightiest corporation of the planet (GM) teetering on bankruptcy. We've got personal bankruptcies at an all-time high. And we have interest rates which have blasted higher and have taken the steam out of the housing market.

So where's the collapse in the stock market? Nowhere (yet). Here, for instance, is a chart comparing interest rates (black graph) to the S&P 500 (blue graph). Notice that the stock market not only doesn't seem to care about the higher rates, it actually seems to defy them!


Argument number three is the recent breakout of the Dow 30. For many months it was pushing up against resistance. It has broken above this resistance, and it has not gone beneath it. So the upward line that was resistance is now support. I'd mention the same thing happened to the Russell 2000 on Friday.


Lastly, a similar argument for the NASDAQ Composite. Besides the breakout, it's even got a cute tiny inverted H&S pattern above the breakout, which also suggests an upward push.


My bearish hope is that all of these charts represent the "last gasp" in the bull market we've seen over the past three+ years. But until and unless the prices clearly exhausted themselves and change direction, it's going to remain a frustrating, day-by-day wait.

9 comments:

Kapil Khanna said...

I think your market observations are spot on. When a reversal occurs, there will be definite signs and lots of opportunites on the way down.
From a cyclical point of view, the last bull market lasted nearly 5 years and the bear market 2 years (1/3 rule- Bear markets last 1/3 the time of the prior bull market). At the tail end of the earlier bull market, the general market was euphoric. Where we are currently, its been a little less than 3 years and things are no where close to be euphoric.

costas1966 said...

I will have to disagree with kapil and the euphoria argument. There are different kinds of euphorias. The euphoria that took place in 1999 Nasdaq will not be matched so we need to put things in perpective. Also the euphoria does not have to be in the stock market. I think in the current economic cycle the euphoria skipped the equity markets exept in the commodity related equities. The euphoria in this cycle was in real estate for its most part and in commodities. I must say that the real estate mania was far more greater than the internet mania of last decade and it has penetrated a much greater percentage of the population and became a much greater percentage of the household wealth. Houses in coastal areas had actually tripled and quadripled in a matter of 4-5 years. In the same areas houses have gone up from 10 times rents ro 40-50 times rents. I will have to say that the euphoric stage of the housing bull market ended last summer and now we are waiting for it's aftermath, which is an economic slowdown and I think recession. Now where does the stock market fit in? I think the euphoria in the markets was in commodity stocks, in home builders, is mortgage reits and in reits. I have to say that we saw the peak in the housing stocks and mortgage reits. The bull market in reits is having the final blow off stage with a spectacular rise the past 4 months even with rising rates. The commodity equities are mixed, energy seems like it has peaked while steel is still strong and gold and silver may have another leg up. I also forgot the tranports which I think they are having their final blow off stage as well. So there has been euphoria in certain sectors in the equities but it is close to coming to an end. Now you can say that the markets broke out yada yada yada, but from a personal experience so far this year I have made most of my money on short sales. I am sorry to say but that would have not been the case in a roaring bull market where I would have had my head handed to me on a plater if was short stocks. The tape does not show it yet but to my opinion this bull market is close the an end. Technically the market has made new highs exept the Nasdaq but the breath insists on being very weak. As I have showed before in charts the a/d line peaked in early 2004.
This is not the market that I trust its fine if you daytrade it or if you do some swing trades with strict risk management, but it is not the type of market where you get fully invested and you buy and hold with the assuption that you will be rewarded handsomely in the future.

Super Bull said...

Trader Tim, I am glad that you finally see the light. Welcome to the bullish camp. It is a waste of time trying so hard to make a little money timing the occasional corrections. It is much better just to buy and hold stocks for this roaring bull market.

Tim Knight said...

Super Bull,

I'm not switching camps. At least not yet. I was simply trying to see things from another perspective and offering some non-bearish views.

This is anecdotal, but I'd point out something interesting.......Frank Quattrone was crucified after the collapse. Prison sentence. Banned for life from his profession. In the past week alone, the judgment was set aside (for a retrial) and the ban has been dismissed.

It's almost as if, now that the market is strong again, all is forgiven. I'm just waiting for an investment bank to scoop him up and tell him to "go get 'em, tiger!"

It just seems that the zeitgeist has returned to the devil-may-care days of the late 90s in more ways than one.

- Tim

Mr.President said...

Hi Tim,
I found your website not long ago and I’m glad I did!
I’m new to trading and like to learn more. I have been learning for six years on my own.
Nice charts and educational material. Thank you.

My opinion market will to go up because it has to catch up with inflation plus some rewords for investors. The DOW JONES INDUSTRIAL AVERAGE will go to 15000 to 19600 before year 2010.

Mr.President said...

Hi Tim,
I found your website not long ago and I’m glad I did!
I’m new to trading and like to learn more. I have been learning for six years on my own.
Nice charts and educational material. Thank you.

My opinion market will to go up because it has to catch up with inflation plus some rewords for investors. The DOW JONES INDUSTRIAL AVERAGE will go to 15000 to 19600 before year 2010.

PB said...

Dear BULLS:

Forget about da' bears ... this is your market, so go ahead and listen to Mr. President up there and start your buying earnestly, 'cause as you can see the DJIA is about to double! WOW!!! Yes, even after the greatest bull-market of all, there is another one right in front of your eyes ready to explode! Driven by what? Well of course the consumer! They are going into debt just as fast as the US gov't. Oh don't worry Mr. Bull, just keep buying, 'cause money grows on trees, and the US can do no wrong!

Thanks for reading the above BS!

PB said...

Hey Tim:

What a turnaround! Although I am not a bear at heart, I am just afraid of the sharp violent moves the markets can experience, and these are always to the downside. As such, with you starting to wave the bull flag, we must be near some sort of a blow-off top when the best of the bears has switched camps.

Chris Berte' said...

Trader Tim, You've gone to the Dark Side! Blasphemy! Who are you..and what have you done with Tim?!?