THE DEVIL IS IN THE DETAILS
To those loyal readers of my blog, I owe all of you an apology. I have completely missed something critical in my recent analysis of the World Market ( Previously known as the US Stock Market ). Before I get to that, lets look at the above chart which shows valuations and more importantly Sentiment readings. I have marked off all the times where Sentiment reached excessively bullish levels. You can see that in every instance we got decent declines, and in a couple of them, big ones.
We have been maxed out in Sentiment now for a few weeks, and we are now starting to see what happens when everyone in the world is leaning one way. The markets go the other way. There is nary a bear to be found right now. It is certainly understandable as I think most people have realized now that the PPT is determining where stock prices are going, and they are certainly not going to choose down. The whole basis for their core function is to inflate things that are declining.
The one hail mary that the world always has against this manipulation is collective strength. As I have written about over and over, volume can overpower the government manipulations of prices. We have seen that a couple of times in recent years. They cannot buy enough futures to generate the price pushes they want if there happens to be mass selling by institutions at the same time. It seems the tact has been to get the futures programs going overnight when volume is a lot lighter. This way they can reverse overnight moves pretty easily. There will come a time when collectively large institutions will sell, and that will overpower the PPT. It is almost impossible to know when this will happen, I am must speaking conceptually here. Generally 20 and 40 or 50 day lows are good spots to look for this to happen. We are not there yet, so this decline is still containable.
The next chart is the one I just completely missed. I too got caught up watching the magnificent rally and stopped paying attention to what else was going on.
I have told readers often that I think the single best tool for timing the SP 500 is the VIX. Above is a chart of the Vix with my indicator below. Notice the incredible divergence we have between price and momentum. This is the biggest one of these I have ever seen. There are 4 distinct higher lows here with lower lows in price. The last time I even found 3 was in 2004 and we had a big rally in the VIX and decline in stocks. If you pair this with the dollar basing I have been talking about, we have the makings of big problems here. Of course the VIX is highly correlated to stock prices, but not 100%. An increase in the Vix does not always mean a decrease in the SP 500, but the odds heavily favor that cause and effect relationship.
I have to admit that I also have a hard time accepting this, but it is what it is. There was also prominent divergence in the NQ index the other day which I showed in here. What this all tells me is to forget buying this dip, and to lay in wait to short the bounce. I am just hoping we get one.