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Thursday, November 7, 2013

Daily update 11/7

I think I might have gotten this one correct.  From last night's update "SPY retested its key reversal day high.  Market internals are weak.  There was a move from risk assets to more defensive stocks.  Gee, that kind of looks like a top to me.  Buyer beware."

They started selling the gap up from the start and continued all day.  Every single index in my daily watch list  ended significantly in the red.  Here is the daily SPX chart.


SPX closed below last week's low and the 18 SMA.  The volume increased quite a bit.  This is the second key reversal day from the 1775 area.  I think we will see some follow through given the weak internals I have been talking about for quite some time now.  Lets zoom in to the SPY 60 minute chart.


SPY broke down from the lateral channel it has been in for several days.  The next chart support I see is marked by the new green lines.  That comes from the circled price action and the Sept. high.
It may bounce back up to test the under side of the horizontal channel, but I think we will get into that support zone soon.  I think that will only provide temporary support.   When a pullback starts with the breadth indicators negative it is pretty rare to stop above the 50 DMA which is below the Sept. high at the moment. 

Sentiment surveys indicate market participants are heavily long.  The prevailing talk I saw in the media before today was that the market could only go up through year end.  I have seen a number of pieces by people making a bearish case that specifically said not until next year.  I believe that there is a very low level of hedging gong on.  Why hedge if the market can only go up?  That leads me to believe a pullback here could gather some steam as longs lock in profits rather then loading up hedges.   Will we see the 200 DMA before this is over?

There were two significant news events today.  The U.S. GDP came in much better then expected at 2.8%.  Some people speculate that the selling was because of tapering fears from the stronger data.
The other piece of news was the ECB lowering rates.  The first look at GDP is very unreliable and to me is meaningless.  I don't know if that was really the catalyst or not.  However, I find the ECB news to be very significant.  After 6 quarters of negative growth in the eurozone they had a slight positive reading in quarter two.  People were out proclaiming the recession was over.  Obviously that is not the case with the ECB lowering rates.  One of the keys to the expected profit growth for next year was a recovery in Europe.  That rug just got pulled out from under everybody.  Money managers all over were probably asking themselves what is the ECB worried about.  After all is said and done it is profits that count. 

There are a lot of things about this current situation that look like a bull market top.  There is rampant speculation to say the least.  Single digit junk stocks doubling and tripling in days.  People are speculating in Bitcoin like there is no tomorrow.  But wait there is more.  There is a company selling shares in athletes ability to make money from endorsements.  I mean really.  I find that totally amazing.  To top it off the Russell2000 index has a P/E of 87.  Yep, a true bubble valuation.  There is a very real possibility this is the final high of this bull market.  The price pattern is considerably different then 2000 and 2007.  However, I have always had this nagging feeling that this top would be hard to see from the price action.  The atmosphere sure feels like the top.  I guess we will see.

Bob

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