Wednesday, May 23, 2007

Thanks, Alan

The market surged again this morning. The S&P 500 was at a new lifetime high. As was the Russell 2000. As was the Dow 30. It looked like Dow 14,000 was just around the corner.

Then Alan Greenspan - bless him - threw some cold water on the excitement by speculating the Chinese market was overheated and headed for a fall. That's all it took to render the breakout (shown in green) moot (shown in pink).

Now, the Old Tim would have been dancing around shouting about how it's the end of the world. But the New Improved Tim With Integrated Timing (figure the acronym out for yourself), severely humbled over the past year, will do nothing of the sort. Indeed, if you think back to Greenspan's most famous declaration ever - - "irrational exuberance" - - it might be instructive. He said it on December 5, 1996, and you can see the brief aftermath here:

But if you take a longer view, you will note that the irrational exuberance had barely even started. The market went up hundreds of percent more, as measured by the NASDAQ.

Not to say that I'm unhappy with today's small tumble. A look at the major indexes shows they are very tired. Here's the S&P 500:

And here is the broader Major Market Index ($XMI):

There's an interesting article by Herb Greenberg about the fact that brokerage margin debt is at a never-seen-before high. Obviously people are willing to go into debt on a widespread basis to buy into the recent mania. If you think the shorts are only going to get squeezed worse, you might want to check out this blog which focuses on opportunities to go long on stocks that may be squeezed up.

I am still short Akamai (AKAM), and its head and shoulders pattern (an obvious favorite of mine) is nicely intact.

AutoZone (AZO) is finally getting serious about falling.

Carnival (CCL), which had some recent strength, is again at a relatively low-risk zone for shorting.

Housing stocks, strong yesterday, are a safer short now. Here is Essex (ESS):

Infosys (INFY) is inching ever-so-slowly toward its neckline. If and when the neckline is broken, a substantial fall would seem in order.

Martin Marietta (MLM) may have double-topped here, and it is far above its supporting trendline.

Morgan Stanley (MS) is sporting a nice shooting star today. Granted, many recent shooting stars have been rendered moot by the market's strength. Still........

And Whirlpool (WHR) is likewise far enough above its supporting trendline to present an attractive short (or put-buying) possibility.

There's a ton of economic information coming out tomorrow morning. It should make for an interesting session.


Prometheus said...

Greenspan finally just said what numerous people time after time have said on CNBC. It's not a new idea. We've seen shocks like this before and all it will take is some twisting of the news tomorrow to keep the rally going. It's the same thing over and over again.

Gary said...

I just had to post an observation on the China bubble tonight since it seems to be on everyones mind.

tommy t said...

Tim, FYI the S&P was not at a new high 2000 it was up above 1550 intraday.

SimpleTrade said...

Gary, I checked your site and your point about China bubble is not correct. Yes, only 50 millions out of 1.3B people are in the market. Do you know in China more than 800 millions people are not living in the cities with less than $1 a day of earning? So 55 millions is a huge number to be in the stock market, and maybe only 10 millions should be there, with 45 millions borrowed money to invest.
China's middle class is very small compared to US. Now people are talking about China like it's a developed country, it's not!
It will crash and it will end badly. We'll see Shanghai index lower than 3000 this year. Just don't know when, but it's coming!

Holdem or Foldem 德州牌手 said...

Hi, simple,

I have a lot of chinese friends and I know even if China market is a bubble, there is no such a possibility to burst badly.

China government is trying its best to keep SSE around 4000 level.

For 3000 correction, I just think never be there.

Brian said...

I like those housing shorts Tim mentions…perfect patterns and great risk/reward entries right now. ESS and AKAM are great. But my rules won’t let me short with a market like this. Anyways, some things I’ve noticed:

RSI on weeklies of all major indices are oversold, and MACD on weeklies has reached the same levels it did when the 2003 rally petered out in early 04. Not calling a top, but am cautious on longs.

BSC – Tim mentioned that before as a short, but I’m holding a long…it’s been in a perfect, beautiful ascending channel for 5 years now…and every pullback to the 200 day has been a great buy. This won’t go on forever, but that’s what stops are for…until then, it seems clear where the odds lie. It’s also sporting a little inverse head and shoulders over the climax bottom in March.

CCL – Tim mentions as a good short. But does anybody see a massive inverse head and shoulders here!!! Tim’s trend line is just above the neck line. Thomas Bulkowski has a great book – Encyclopedia of Chart Patterns – that gives historical stats for major chart patterns (Tim…you recommended this to me a while back…thanks!). Inverse head and shoulders patterns have 5% failure rates (that’s PRE-breakout), 38% average rise, and 83% hitting their targets based on the measure rule. Why bet against that?

$TRAN – Utilities and industrials have long since rallied, Dow theory says trannies should be next. It’s also been consolidating for a year now. Rising oil might thwart that, and it hasn’t really broken out yet. I’m cautiously holding a long on the ETF (IYT), betting that oil is priced in. Might see a pullback near term though. Thoughts?

Does anybody know of any more recent work that gives stats of success and failure rates for common chart patterns? Bulkowski did his study from 1991 – 1996, so things must have changed since then, especially since so many patterns are more widely followed now. Then again, mass psychology never changes, which is why we care about charts, right?

- Brian

Tim Knight said...

"I have a lot of Chinese friends and I know even if China market is a bubble, there is no such a possibility to burst badly."

Phew! That's a relief. Lord knows, your friends would be the first ones to admit it if they were in a bubble that was going to burst. Thanks for clearing that up for all of us.

Dennis said...

To me the noteworthy event of the day is not Greenspan's Chinese bubble comment but the 30 year bond yield breaking 5%. This could potentially drag the equities down. I think we will get a better handle of this development next week.

4profit said...

Many didn't think the bubble in 2000 was going to happen either. Right before the lovely drop in 2000 Time magazine named Alan Greenspan one of ten people who mattered. said, "People Who Mattered. Here is our list of 10 people whose lives or deaths touched many of us in 1999. We begin with the man many credit with keeping America's economy soaring as the decade ended.
ALAN GREENSPAN- If you believe that the booming American economy is the story of the 1990s, then Federal Reserve Chairman Alan Greenspan gets my vote as Person of the Decade. The American economy will mark its longest period of uninterrupted expansion this February. During the past nine years, the U.S. unemployment rate has fallen to 4.1%, the lowest level in three decades, while inflation has remained under 3% and interest rates have remained relatively low. The stock market remains at record levels, and productivity grew twice as fast in the 1990s as it did in the 1980s. No one person, of course, can claim credit for this performance, but over the past dozen years, Greenspan's quiet confidence and masterly control of the nation's money supply have done much to convince consumers and Congress that the investment-driven economic growth is real." More at

Gary said...

hahah All I was trying to point out is that we are not getting the typical denial that accompanies most bubbles and that there is still a huge population left in China that could still conceivably enter the stock market yet. If they do then the market could still have a ways to go.

Brian said...

Yes, China may likely be entering or is already in a bubble. But right now looking at the charts, I see incredibly bullish patterns. Amex China index $CZH has broken out of an inverse head and shoulders patter, and China etf FXI has as well. FXI is actually pulling back to it’s broken neckline for a perfect low-risk entry.

Tim – I remember a while ago you said you’d take submissions of bullish charts to post. I’m sending you a chart of FXI as part of your bull challenge (although I’m less bullish now than I was months ago…for American markets at least). I see an inverse head and shoulders, and a correction that visually bears a striking resemblance to the last correction in 2006. The only cause for concern is the high volume during the recent pullback. But look at the volume during the 2006 pullback – it was also significantly higher than before. Also notice that prices didn’t pierce the 200 EMA nearly as much as they did in 2006 and 2005.

A guaranteed winner? What is? Possibility of getting creamed by some news event? Sure. Would I bet the farm on it? No, it’s too volatile, and potential risk of another fall like February. But is this a good low-risk entry trading in the direction of an insane bull-market? Definitely. The trend is your friend right? (so long as you’re out when it ends)

Leisa said...

Dennis--bonds are definitely taking on an ominous tone. But the bond market has been notoriously wrong. I almost wonder if this is their equivalent of 'throwing in the towel'.

I'm still watching the US consumer. The entire world depends on them (and it has been nice to see some intelligent conversation in the media about it.

Gemma Star said...

4profit, thank you for the reminder.

4profit said...

OK Tim now you can dance the happy dance.