Source: Toby Connor, GoldScents (4/20/11)
"What we're seeing is a secular bear market at work grinding away at valuations."
The bottom came on day five of the move out of the coil (usually a coil will reverse in three to five days). So if the pattern plays out like it normally does, we should see the stock market move to new highs.
Now, for those of you that are playing the Bollinger band crash trade and/or the VTO trade, put a stop below Thursday’s intraday low. Technically, this is modifying the rules of the trade but there are a couple of warning signs that have sprung up (more on that in a minute.)
The reason I'm suggesting a stop as opposed to following the normal rules is if the half cycle low gets violated, the market will have initiated a new pattern of lower lows and lower highs. Don't forget we are only four weeks into an intermediate cycle. If the coil pattern were to break down and the market starts to head lower this early in its intermediate cycle, the odds will increase significantly that the cyclical bull has topped and the next leg down in the secular bear market has begun.
As most of you know, I've been expecting the secular bear to return sometime this year. I was expecting it to happen a little later but if the coil fails then there is a good chance the bear has arrived a little earlier than I was expecting.
Now here are the warning signs I was talking about. First off, we've seen two large selling on strength days in a row. That by itself is just a mild warning sign because this indicator hasn't been terribly reliable lately. When it does get it right it's often early. So take that one with a grain of salt.
The next warning is the action in AAPL. If you recall last week I mentioned that I watch AAPL as a sign of speculative demand in the market. After getting deeply oversold AAPL had a chance to rebound and reverse the pattern of lower lows and lower highs. It has failed miserably and is now on the verge of confirming another lower low.
Another negative is the action in the banking index. The BKX was not able to hold above support at 52, and is now in jeopardy of breaking below the Japan bottom.
All in all I think if the market can't catch a bid next week and breaks that half cycle low the best course of action is to get the hell out of Dodge and ask questions later. It's just way too late in this cyclical bull market to hang around once things start acting iffy.
Folks, the general consensus is that earnings will reach record levels this quarter. Think about that, record earnings yet the stock market is still 16% below its all-time high.
What do secular bear markets do? That's right, they compress P/E ratios over time. We have record earnings yet the market isn't willing to pay the same price for those earnings as it did in 2007. Heck, earnings have almost doubled from the 2000 top but the market is still priced lower. Folks, what we are seeing is a secular bear market at work grinding away at valuations. Actually, not only are we seeing valuations fall but we are also seeing earnings artificially inflated by currency debasement. The market isn't fooled. That's why it's not willing to pay up for those phony earnings.
Now let me ask another question. Do bull markets top on bad news? No, of course not, they top on good news. What could be more bullish than record earnings? On the other hand, what would be more bearish than a market that can't translate those record earnings into higher prices and instead we see the market drop through earnings season?
We've now got two lines in the sand. A break above 1340 and the cyclical bull is still intact. A move below 1300 and the odds are high that the secular bear has emerged from his two-year nap and is ready to get back to work.
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