So this is when I use my blog to go through my own mind's musings. This is really why I blog. Test my own thoughts once I write them down.
This whole discussion below is centered around a core fact. That I believe the markets are overvalued and fundamentally will be heading lower at some point. If that is my premise than it just becomes a timing issue. I am not trading something I don't fundamentally believe. It also wouldn't matter except for the fact that I am looking to place index bets which I don't do very often.
I mentioned in a previous blog I thought the market may have topped last Monday and I am continuing to try and figure that out. The market today did a quiet decline today. What I mean by that is it just started going and kind of eased its way down all day. People blamed on the Barron's piece on the GSE's but I thought that was stupid. Article had what everyone already knew. The market also went down as oil went down which was interesting.
Looking at the markets we are now overbought. The length of the rally has not been as long and looking at the S&P it has not been as violent. I think both are possibly it may be misleading.
The rally has not been as long but I think the bull story is much weaker than it was in the October and April rally as it was in January when the rally was shorter. October was after the Fed first stepped in. Things fundamentally were still alot better and some historical precedent (even if I thought it was flawed) that the Fed saved the day. Then you had the April May rally which was also a long rally and here you once again had the potential for things fundamentally changing if confidence was suddenly restored to the system. The credit markets improved initially. Now it is more like January when you have none of that. Credit markets are hemorrhaging with the CMBX hitting the widest spreads today since this thing started, the ABX at its lows and the CDS spreads widening. Nothing changed in July besides some technical issues with shorting forcing a giant short squeeze. The Merrill Lynch news that everyone herald as a bottom was simply just bad news. You also have world markets crumbling in this latest rally. People will point to oil and the dollar but oil going down (no plummeting) is hardly a sign of strength. So bottom line is the the length and depth of a counter trend rally should be shorter.
What about the violence of the move? Once again I think this is misleading. The S&P 500 has only rallied 8% from low to top compared to moves of greater than 10% previously but dig a little deeper and the rally has been much more substantial and violent. The Russell 2000 rallied 17% (similar to the April rally) but in half the time. The XLF rallied over 35% from top to bottom, by far the biggest rally in the XLF in the counter trend rallies. Why has the S&P 500 been the losing duck? Well it may have to do with energy rolling over. Remember in this rally companies dealing in commodities have gotten slaughtered and that makes up over 20% of the S&P. The Russell 2000 actually has more of its makeup in financials than the S&P 500 does.
All we are talking about is probabilities that we are done making new highs. So fundamentals are not part of the current discussion.
A couple of things to watch. One is the S&P moving below 1274 tomorrow. Another is Goldman. Why? I think traders are watching this very closely. It is right at 160 where it has bounced every time before. It has moved down from 183 to 160 in a week (much bigger move than the markets) and I have heard there is alot of chatter on the trading desks about some problems at Goldman and Goldman breaking 160. If it does that I really think it could bring down the entire markets. I know traders are watching it. You should be also.