Over the last few weeks market has shown pure resilience. It has refused to go down in the face of so many head-winds. But the question remains: Will this resilience result in a breakout? Or will it just attract more longs before breaking down?
Since mid-August one can see that glaring divergences have appeared across world indices. Although US indices are near the top, global index is much lower than the August high. Furthermore, England's FTSE, Japan's Nikkei, and Emerging Market ETF (EEM), are all showing serious market damage.
This kind of market action suggests that there is something wrong!! Either US markets are out of sync and will soon start to breakdown or US markets will soon pull all other markets to new highs. Based on the global economic environment with China's economic slow down, European recession, sovereign debt crisis and global political uncertainty, I think that US markets will follow the global markets and will soon start to move down. At this point, the question remains how soon, because we are running out of time in terms of the IPM bottom turn date?
Along with these developments, the sentiment indicators are showing red signals with optimism at very elevated levels. Moreover, Barrons recently came out with a Bullish magazine cover. This kind of optimism typically signifies a market top. Therefore, sentiment analysis suggests that we should be very cautious.
Along with sentiment there are some anecdotal observations that I have made over the last few weeks:
- Several stock market analysts, who have been reluctant to go long this market since 2010, have recently started buying stocks on leverage. Since these people are very influential, they must have convinced a lot of readers to buy also. Now the question remains, is the stock market going to play a hand on them and make them pay for their big bets??
- Apple recently won a huge patent fight against Samsung, giving them the ability to become the sole manufacturer of flat screen apple based smart phones. This ruling will enable Apple to sue other competitors for design similarities, thus amplifying their profit potential. However, since stock market is a forward looking mechanism, this kind of announcement (which is surely great for Apple) typically arrives at or near the top of a stock. So it will be interesting to see Apple's stock market action. If Apple does top out, it will take down the entire Nasdaq complex.
- Netflix announced in July'2011 to increase rates. At that time everyone thought that it was the best decision because Netflix had no competition. However, the stock topped within 1 week and has since declined from $306 to $55. Be aware of Apple!!
In short, although it might be very tempting to buy over here, it will be prudent to wait for SP500 and DJIA to break above 1416 and 13200 respectively, and then jump in on the long side.