Projection Update:
What projected: S&P 850 -> 956 retest (90% chance) -> 1020
What happened so far: 956 -> 865 -> 956 retest (passed) -> 996
Today: 993.18
Within 1 week: 1020 (+- 15)
Within 4-6 weeks: retest of the 910-930 range (75%), retest of the 850-865 range (25%)
Within 3-6 months: 870-1020 whiplash (75% chance), 1100-1200 retest followed by a guaranteed large crash (25% chance)
Analysis:
We are closing in on the 1020 projection. The momentum is still upward, but we have repeatedly tested the 1000 mark, and failed, signalling indecision. The economic data and earnings coming in aren't decisively bullish either. The only force driving the momentum now seems to be the weakness-by-design of the USD. You know as well as I how effectively fear tactics work on the fragile psyche of fund managers.
Signs that we are reaching the rally's top:
- The earning season is ending. Insider selling is temporarily frozen during earning periods, so another selling force will appear soon. I don't see insider buying picking up after earning season, especially at a peak.
- Volume is low. This is a reliable sign that the trend is turning. It is not a timely indicator, since we could whiplash and slightly trend up for quite a while with low volume, but it could be forward looking in light of other factors.
- Some good earnings are being ignored. If the momentum is still strong, daytraders will be more empowered to chase after good news. They aren't.
- We have tried to do a rally close for the last few days, but couldn't. Mid-day rallies have petered out very forcefully near the end. The momentum upward maybe still strong but somebody is also selling hard.
- Ample oil supply. This is again not a timely indicator of an immediate trend turn, but it shows that in the year term, the US economy is not going to recover quickly or smoothly. Remember that mid-summer is the peak of the driving season. Just like last year's oil peak, if people ain't driving NOW, they ain't driving more later.
- Last but not least, the behavioural finance indicator. Read around cnbc.com and thestreet.com, among other popular sites geared toward retail investors and you will see an onslaught of excessively bullish articles (Dow 15000! Here we come!) backed by dubious reasoning, my favorite being patriotism. That signals the "denial" phase of denial, anger, indecision, depression, acceptance. The big fishes must make money somehow, and they make that money by exploiting the psychology of self-conscious smallfries who can't influence the market with their firepower. I trust good men like you to have no such compunction.
Now, no two charges ever end the same, and we may be off by 15-20 points either way. We must prepare for this.
Start taking profit. From the last rotation we did (the last entry a few days ago), jumping out of basic material and into home builder and commercial real estate, those sectors have rallied quite a bit and beat the sectors we got out of. So we take 50% profit now, sell things like PHM, LEN, TOL, PLD, KIM, etc.
If you are still holding basic materials (X, STLD, NUE, AA, etc.), financials (C, BAC, JPM, WFC, etc), or big oil now, get out of them decisively.
We should be at 15% long now, and then aim for 10% long at 1020. Since our 3-month projection includes a small chance of a hyperinflated stock market and vastly devalued USD, we must always have a permanent long portion as an inflation hedge.
And I repeat, we must not be shorting these days, even on downtrends. Every downtrends from here will be quick corrections, so shorting won't win much, and if the hyperinflation case happen, that might result in a complete wipe-out.
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