Excerpted from the January 4 edition of Notes From the Rabbit Hole.
Since late November we have been following potential bottoming patterns in US and global stock markets with Inverted Head & Shoulders in the Dow and S&P 500 and a clear series of higher highs and higher lows in the Hong Kong market. Bullish divergence has been present throughout the bottoming process in our often watched 'panel' indicators like MACD and RSI. You name a major global market... Europe, Japan, they are all following some version of the bottoming scenario.
Personal bullish indicators came in the form of many bearish emails I received from different people, including some who do markets for a living. This generally reflected the sentiment that drove the following chart - the TBT ultra-short 20+ year treasury bonds - to a fearful extreme.
The question is, how long can 'hope' be held down? No matter how bad things are - and they are very bad - there is bound to be a technical reset of human emotion. I have been bullish for several weeks now in anticipation of this reset hinted at by the pervasive bearish sentiment and bullish divergence on most stock, market and asset charts. But it is just that, technical. Sad to say that the hopes and dreams of millions can fall into the category of 'technical' or 'sentiment' indicator, but that is what is happening in my view.
TBT, which I recently bought in one account to hedge t-bill and short term treasury funds and in another simply as a stand-alone trade, has been due for a recovery of some kind as asset markets rise, fear begins to subside and a pale representation of the global casino of yore rises from the ashes of Armageddon '08. In other words, if we are correct in the view that markets are due for relief from historic downside events, long term interest rates should rise as the fearful herd begins to feel as though it is missing the boat and/or missing THE bottom. When signs of this greed seep into the major media, it will be time to prepare for the next leg down in human hope and, quite likely, markets.
The rough game plan at this point allows for some stories to take root about the new New Deal, perhaps even a new Camelot as the evil 'Bushies' are blamed for everything. It allows for fantasies about how roads, bridges (what the heck, why not planes, trains and automobiles too?) and network infrastructure can put America back to work as it digs itself out of its economic problems. I am long this fantasy as you know http://biiwii.blogspot.com/2008/12/kings-is-dead-long-live-king.html via Microsoft and Cisco along with increased positions in the positively correlated commodities, which will be looked at in more depth later in today's report. In general, the target for the fantasy will be in the areas of the various 200 day moving averages, which will obviously be declining as time goes on.
The Dow and S&P are often shown in NFTRH, so for a change and considering large, debt-free tech is my non-commodity vehicle of choice for the would-be rally, here is a look at the Nasdaq 100 current daily status.
NDX has tentatively broken above short term resistance but we are tempered by the fact that this is done on still low holiday volume. MACD is becoming constructive and importantly, after rising above the EMA 20 that contained any upside during the panic, the index has now closed above the more significant SMA 50 in a show of strength. The noted target is measured off of the bottoming pattern and risk will be defined as increasing upon a break and close back below the SMA 50.
The game plan will, as always, be molded, shaped and defined as events unfold. But right now it looks like hope is set to outperform and this can be tracked via our gold ratios http://biiwii.blogspot.com/2009/01/another-indicator-turning-gold-oil.html as gold comes under pressure in relation to other assets (including notably, silver) after its moon shot vs. same.
The gold miners have now doubled off the bottom, which I believe is a reflection of the market's realization that their fundamentals were greatly enhanced by the downside terror of Q4 2008. But they could be set to take a temporary back seat during Relief '09 as the herd's endorphins are released into the markets. Later in the report I will illustrate how I am rebalancing in alignment with this expectation. With the personal speculative portfolio now having virtually doubled off of the October bottom, it has been a good lead up to 'January effect' season and I expect more gains over the coming months. But any rally must be accompanied by risk management and ongoing attention to the herd's sentiment because this is only a bear market rebound. Anyone reading more into it at this point is jumping too far ahead. With any luck, hope will spring eternal... or until spring at least.