Saturday, November 10, 2012

Oversold Markets and Cliffs.

The following two charts are from Bespoke. The 1stone shows that on a daily basis S&P 500 is 2.5 standard deviation below its 50 DMA.

The last time it was in such a situation was in summer when it got an oversold bounce and then tanked again.

The 2nd chart shows that % of stocks above its 50 DMA.

Even that is close to extreme.

Yes trends are down but few things are not lining up yet. For one, gold and silver is showing some strength even when US$ is up. Since 2008-9, when Bernanke started his QE, all risk assets have moved together and gold and US$ have moved in opposite direction. Now we are seeing that both gold and US$ is moving in the same direction. Is this a temporary anamoly  or beginning of something more problematic?

Secondly, crude is up for the last few days even in the face of rising dollar and falling stocks. Are commodities diverging from equities?

Third, Euro did not break down 1.27 and Euro/Yen held the all important 1.00 line. As you can see the correlation of Euro/Yen and SPX, unless that line in sand is broken, I do not see stocks going down any further.

And the cycles for Euro/Yen, although close to a top, have not topped yet .

So will we see an oversold bounce soon and if so how far it will go?

I think it is quite possible that a good bounce is due but I do not think it will close anywhere above 1440-1450 in SPX. If we get there, it will be an excellent opportunity to reduce the long positions and add some short positions.

Pandits are talking about the grand bargain and compromise. But I do not think that will come till the last moment, which is by end of the year. Remember how these wise guys played Russian Roulette with debt ceiling? Why it would be any different this time? So definitely we would look for a good sell off and no bottom can be expected before the middle- end of December. This by the way would be a good buying opportunity. Keep your buying list ready.

In the mean time, I have started scaling in Nat.Gas and will most likely scale in short position in equities after the oversold bounce. The expected top around Mid-November seem to have inverted and will most likely be a bottom (short term) but we are not done with selling yet. If anything, it will be a good opportunity to sell.

Do keep in mind the time scale. This sell off will possibly last till 3rd week of December and it’s a rainbow trip thereafter for few more months. The real cliff is still few months away.

Thanks for sharing my thoughts and thank you for your donations and supports. Please remember to disable Adblock and if you plan to use Amazon for your Holiday shopping needs, remember the link here. Have a great weekend folks.