Hey everyone, this is John Chinnock (Happy John). This is my first guest post on Murf's blog. This post is intended to be an update, as well as a roadmap and guideline for those attempting to follow along with that plays that Murf and I are making. I must warn that I won't write often, but when I do it probably will be long.
Obviously these last two weeks were terrible for those short the market (i.e. me and Murf, and practically nobody else!). Unfortunately, most market tops end with a wild euphoric burst which marks the absolute very top, so just when things are breaking out and look great to the world (and horrible for me), the top could be very close at hand. Unfortunately, nobody rings a bell at the top, and stocks also always look amazing at the exact top.
Before I get into the short-term, I will humbly say that over the long-term, things are going exactly as Murf and I predicted. Everyone knows by now that we both called the "Great Crash" well in advance. Then, we both got bullish early on this year (a little too early), and were able to carve out some nice profits on the long side. Unfortunately, since we both believe that we'll see the market take out its March lows at some point, we were quicker than most to take our longside profits. However, at the time, we distinctly said to each other that this rally will go so extremely far as to actually force us to question our own bearish thesis. We said back then that at the top of this rally, the world will be proclaiming that the bear market is over, and that the economy is saved. Well, I must humbly say, that this has played out exactly as we foresaw (quick note of humility: Mike and I won't always get everything right, so we might dwell and gloat a little extra when our boldest calls come true!).
So I will say that our long-term forecast is so far playing out exactly according to plan, and nothing has changed in that regard. For those who aren't certain of our stance, I will repeat: Murf and I expect an eventual target of new lows for the market within the next twelve months if not sooner. However, now I will look at the near-term forecast. Mike and I shorted the market around mid-May, and until the last two weeks, we were doing just fine. We joked that the rally would become fierce enough at some point to have us question our own short positions, and unfortunately, exactly that is happening right now.
Short-term forecasting is not my specialty, but I will make some amateur attempts. We broke out of a huge consolidation on Thursday. Despite the market being very overbought, I see it as very crucial for the market to quickly give back this breakout early next week. As the risk of looking foolish over the short-term (which short-term forecasters usually wind up doing), I see next week as crucial for the near-term bearish case. If we continue to consolidate above the breakout zone (approximately Dow 8900 and SPX 855), we could easily have another large leg higher. I personally will be forced to at least lighten, as once the bulls begin to stampede, logic quickly transforms into euphoria, and rallies can last much longer than expected (do the bulls ever even use logic?). My fear isn't that the market won't eventually fail, it's that we'll go above Dow 10K+ before it does. At some point, as traders, we realize that it is better to make and/or save money than be right.
Again, If we do not have a big downmove on either Monday or Tuesday, I'm going to be lightening some of my shorts (not covering everything, but definitely lightening). I was lucky to make a very good chunk long from March to May, so in my mind, I'm ok with giving most of that back waiting for a market top, but I have to cut my losses somewhere. If I do lighten, I'll probably add back on a solid break below 950, of course risking a giant whipsaw by doing so.
Granted, nothing is certain, and of course anything can happen. Charts only attempt to predict probabilities. It is just my humble charting opinion that we really need to have a big down day on either Monday or Tuesday at the latest. And again, Murf and I are still 100% convinced that the market is eventually doomed to new lows. It's just all a matter of when. If this opinion ever of ours ever changes, he'll be sure to post it multiple times.
I will also point out a few things in the bears favor. These are all technical chart-based points. (for fundamental reasons, see Murf's most recent post, or basically any blog post!)
1 - We are almost tied timewise with the rally after the 1929 crash. In fact, no bear market in history has had a major rally last longer than 5 months or so, and that would end in early August. So timewise, we could/should fail anytime now.
2 - We've also rallied 50% without any major retracement. This is nearly tied with historical bear market records.
3 - The VIX (measure of volatility and fear) has returned all the way to the old levels of a "no fear" environment. This is very bearish for the market going foward.
3 - Many stocks are moving lower from earnings. MSFT and AMZN, two Nasdaq leaders, both got destroyed on Friday. Restaurants and retailers are also for the most part moving lower from earnings. BAC and WFC (two large banks) look like they want to melt, and just the overall market strength is keeping them afloat. The same goes for GE, and many other large caps.
4 - Weird charting fact: every time the 30dma crosses the 50dma to the downside since the top of the market, new lows have followed fairly quickly. If we have even one decent down day on Monday or Tuesday, the 30dma will again cross down over the 50dma. This cause and effect relationship can't last forever, so far it has held 100% during the bear market.
On a final note, for the casual non-trading readers, here is my final advice in plain English: get out of stocks! Please, sell them all. This rally has been a gift for you to recover your losses. The market has just rallied 50%! This is a gift to sell! If losing half of your retirement money was painful, imagine losing half if not more yet again from these levels! If you are over 55 years old, there is no "holding for the long-run" anymore. Now is the time to be cashing in on a lifetime of laboring, not watching it disintegrate. Yes, you might miss a little more upside, but you've already seen a 50% rally! The most giant debt bubble that the world has ever known has popped, and the crazy spending times of years past are not coming back for decades, if not generations.
At some point I'd like to do a post on how I feel that things will unfold culturally over the next few years, but I'll save that for another time.
Good luck to everyone out there.
Added graph to illustrate Johns point for long term investor (horizon in next 10-20 years)
|From WebSurfinMurf's Financial Blog|