2009-08-23

The Stories Bears Tell

There's no shortage of bearish stories. I briefly mentioned Prechter's take. He sees a multi-year dollar rally and lower prices for just about everything else, including precious metals. His story, and many of the fundamental bear stories, are based on the large debt overhang in the global economy (though this is just a piece of the socionomic argument laid out by Prechter). Anyone predicting lower nominal prices does not expect high inflation in the near term due to debt deflation, but there are bears who expect high inflation to cause nominal price increases, even while causing a loss of value.

Fundamentally based arguments aside, I've come across several technical arguments for a market top. Some of these include a fundamental or socionomic angle.

First up is a David Singer thesis, posted at The Big Picture. He has a chart of the S&P 500 Index along with notes on the number of stocks above their 200-day moving average.
The market continues to go higher and eventually fills the “Lehman gap” up to the high 1100’s, low 1200’s, but that has to be on weakening overall strength and breadth because the market has shot up so insanely already and like I said 457 of 500 are already above their 200 day ma’s. That area is also the neckline that was penetrated long ago and is severe resistance. By that time, the overall rally will be some 85% off the lows and almost everyone will be sure that this is a new bull market. Picture the atmosphere now, but up another 200 points on the S&P. Those 200 points will be the public finally coming back on board as the message that recovery is here gets filtered into everyone’s psyche. As you have noted, the professionals are “all in”. As we move up, the public investor gets in just in time for the market to begin moving lower again in earnest…
See the chart here.

Next up, Tim Knight offers the Arcs of the Covenants. Not as much a thesis as marking a turning point on the chart, to wit:
The head and shoulders pattern we were all obsessed with early in July turned out to be bouncing off arc support as well, yet, as we know, that support was never broken. We are now all the way back to the 50% arc. Given how close we are to my oft-cited 1050 prediction (which I will hasten to add is at the low end of my 1050-1200 range of an ultimate countertrend top), we could be at an interesting inflection point here.

Just for fun, I decided to back far away from the graph and look at the arc extensions. That was just as eye-opening.

At each of the arcs, there's an interesting event. The magenta tint (where the prices cling to the arc fastidiously) shows the kickoff to the secular bull market, which lasted three decades. The arc at the green tint perfectly nails the crash of 1987 (!), and the blue tint kicks off the final parabolic ascent of the tech bubble (the frenetic 1995-2000 period where the angle was sharply higher).
Check out the chart, plus a great "Joe Kennedy Shoeshine Boy" moment.
Joe Saluzzi hits a lot of popular bearish notes in this interview:


Here's a post by someone under the pseudonym "Tyler Durden" on ZeroHedge. (Several contributers use the same pseudonym.) What are the animal spirits saying? Here's the gist:
The current cycle is a complete anomaly relative to past experience. Margin debt balances (current info through June) have increased 8.6% from the lows. But you can see the strength of margin debt growth in prior cycles. Off the charts is the only characterization that fits when comparing this experience to the present. Who knows, maybe margin debt is about to grow parabolically for all we know.

So, the question becomes, when will the true “animal spirits” on Wall Street reveal themselves? It has not happened yet. And that says liquidity and momentum support for the markets is narrow and potentially volatile. Squeezing shorts and running technical stops can work well for a while. But what happens next if animal spirits broadly are not fully engaged? For now, margin debt is telling us animal spirits are very subdued. Very subdued.
(Emphasis mine.)
My interpretation of this last story is that it supports David Singer's theory. Prechter admits he's often early on his calls and there's some corroborating theories here that suggest a possible melt-up before the final meltdown.

Bonus: The original(?) "Tyler Durden" speaking with Pimm Fox of Bloomberg, topic high-frequency trading.

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