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Wednesday, January 10, 2018

Daily update 1/10

Pause day.

The market opened in the red this morning, but there was only a little selling pressure as the low was made in the first 30 minutes.  Breadth was -59%.  New highs dropped considerably to 167.  New lows increased considerably again to 56.  The dip buyers came in to take advantage of the sale prices.

The futures came back to the upper channel line and bounced.  ADX is turning down so we have lost some momentum.  They are still in accelerated mode until they close back in the channel. 

The green count turned down from overbought.  That is probably going to be the peak of the count for this bounce.  That does not mean peak price is in though.  

There was news out of China overnight that they are contemplating reducing their purchases of U.S. sovereign debt which sent the futures down.  I don't see any sign the current bounce is over yet.  The market could pick right up again from here.  The dip buyers did not waste much time before they made their presence known.  I am not seeing any sign people are looking to book some profits.  The market might need a catalyst to pullback.

Yesterday Bill Gross said the move up in the 10 year broke a 25 year trend line signaling the grand bond bull market is over.   A global rise in rates seems likely anyway with all the talk of global growth.  With the ECB and BOJ cutting back on buying and the FED doing QT a reduction in purchases by China would certainly add to the upward pressure in rates. A lot of people theorize a slow rise in rates would be good for stocks.  At some point rising rates would probably cause stocks to stumble.  I have no idea what level that might be.  I have heard many different opinions on that subject and I do not have the knowledge to make a reasonable guess.  It will be important to watch how fast and how far bonds go down if the selling picks up.  A fast move would be more likely to cause trouble.  Every "expert" I heard on CNBC today expects a slow rise in rates.  The experts aren't always right of course.  The bond market sometimes has spats just like stocks do.  

Tom McClellan was on CNBC today and was slightly different then what I thought I heard before.  A few months ago I thought he was expecting the bull market top in March.  Today he was saying he expects a top in March and pullback into Aug.  Then the bull resumes with new highs eventually.  That fits with the four year cycle.  There is usually a decent pullback in the second year of the presidential term.  The 2014 move down was very short lived.  They are usually longer then that such as 2010 and 2006.  When they come in a bear market they can be severe like 2002.  The 1998 cycle low was close to 18% off the high.  The 1994 cycle was prolonged, but not very deep.  So maybe the current melt up takes a pause mid year then resumes into year end.

One more comment on bubbles.  The fact that a market in a bubble keeps going up does not mean it is not a bubble.  It seems to me that for most people the more an asset goes up the less likely they are to believe it to be a bubble.  This is another thing I do not understand about human behavior.  The R2000 has a TTM P/E of 134.  That is a bubble.  No amount of going higher will make it less of a bubble.  Usually the more a bubble goes up the bigger the crash is when it pops.  The Dow utility index as a P/E of 31.  I suspect it has never been that high in the history of the index.  Bubble.  I am sorry to keep harping on this subject while the market is flying up.  However, I think it is important.  I would rather someone gets tired of me and stops reading the blog, but takes action when things go crashing down then to see people lose 50% of their money again.


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