CLEAR PATH

Often there are periods where it is unclear what to do next, this is not one of them. We now have a clear path in front of us, sell rallies in the next week or so. We have broken down enough in most markets now, where the short term up trends have been broken, so now we need to short the rallies. The above chart is that of the Russell 2000. Of course since the world is one trade thanks to the FED, most charts of virtually any market look almost just like this. Choose your poison. Crude, Grains, Metals, Indexes, they all look the same. Shorting any one of them is like shorting any other, so as I always say, keep your total risk in mind. If you short them all it is like taking many times the risk in just one trade. This is never a wise thing to do.

I came across something interesting this morning, a study of past crisis periods and what on average transpired. If we are to go by what has on average happened in terms of unemployment, debt, housing values, etc.. we are about on the average for most of these categories now. In other words, this is basically just a run of the mill crisis, no better or worse than any other. These are just statistics, not an opinion of someone. I have to admit, that I tend to agree with this thesis, or at least for the purposes of the financial markets. On one hand the excesses the caused all this have basically been kicked down the road, not really dealt with. This you could say should be a negative in that they won't just go away. Whatever the case may be, we do have a rip roaring bull market on our hands for stocks, and that is all that we should be concerned about as traders. Whether we "should" have one is irrelevant. We do have one.

I still maintain, that the tree needs to be shaken, and will be at one point this year. I had thought coming in that it might begin mid January, and I stated that at the very beginning of the year. So far that appears to be right on cue. The one thing that we have going on right now which is a divergence that is not good, is that the SP 500 is showing much broader weakness than the DOW 30. Of course the DOW is a very narrow group of stocks, and what this also shows is that value is leading the way. With the overall economic situation, that is what we should expect to be the case. This is a bull market, but not a tech type bubble where speculative stocks are recording moonshots one day after another. The earnings reports have mostly featured better numbers due to cost cutting and improved efficiencies more than top line growth.

The next chart shows the last time this type of thing happened, this chart shows the SP 500 vs the DOW.

Of course this was the beginning of the major meltdown and I am not suggesting that plays out here. I am just pointing out that this is a major red flag and not what we want to see if we are planning on continued upward movement. Narrow leadership is the opposite of what we want. We can't just all buy IBM only and nothing else.

The other very interesting thing that is going on here is that of the correlation of GOLD to the DOLLAR. I will talk about his tomorrow. For now the path is clear, sell rallies.