Saturday, March 3, 2012

Shake, Shake, Rattle, Rattle But No Roll.

That was the story for the week. I think there are hardly any bears left in town. And I forgot how long the major indices have been going up without even a 1% correction. But the fuel tank is empty and the rocket has been going up on vapors as you can see.
Today McClellan publication has sent out their chart in focus with the following commentary.
The McClellan Oscillator went below zero back on Feb. 14, and has remained negative ever since.  But that has not stopped the major averages from moving up to new multi-year highs. 
Having the Oscillator drop below zero can sometimes be seen as a "sell signal", but it depends on what else is happening in the market.  It is certainly not a positive factor to have higher price highs appear while the Oscillator refuses to confirm that strength. 
Seeing the price indices make higher highs with the McClellan Oscillator down below zero says that the former pace of the price advance is not being sustained.  It is like a Mercury rocket which has run out of fuel but is still rising, and the slowing pace of the rise is a precursor to splashing back down in the ocean.

The problem is all divergences take time to work out and as of now price action says that the trend is up. The market action of Friday was that of confusion. While it did not make a new high, it did not take out the old low or make a new low as well.  Some of the indices like Russell 2000 and DOW-Transport have turned south and are in the sell zone. The divergence between SPX and Transport is worth taking note;

(Hat tip: dynamic hedge)

Let us see if we can find any other clues. On Friday the 10 yr treasury interest fell by almost 50 BP and TLT rose almost 1%. By itself that is not a big deal but if we look at the position of the commercials on JPY, it may be saying something. The commercials were net short in JPY two weeks back and both JPY and US treasury yields were falling.
Now they have turned net positive on JPY and yields have started to rise.  When JPY rises, bond price also rises.
When bond price rises, equities fall (normally) as you can see from the last 5 years comparison.

It is not a done deal yet and we have to wait for the confirmation .

Michael Stastny is a Maths Professor in Spain.( I think now he is in Vienna) Sometimes back in 2010 he had an inspiration and he converted SPX in Euro and compared it with Nikkei. The result was stunning.
So, the upswing that we are seeing now is not totally unexpected and we can expect to get more in the year 2012. The next three years will be the end of the print and inflate economy.  That ties neatly with all other technical and fundamental indicators that I am following and developing. When you have a road map it becomes easier to navigate.  

In the mean time, the trend table has not changed much and gold continues to be on sell signal. I am expecting a bottom in GLD in the price range of  $156-158.

Thank you for reading . Please forward / retweet the post to your friends and join me in Twitter. (@BBFinanceblog). As always, I welcome your comments and suggestions. Hope you are enjoying your weekend with your loved ones.