Market Insights from a Seasoned Professional

"I noticed your reference to a couple of well-connected analysts (Stack and Goepfert) who have been correctly positioned for the market's up trend over the past year or more. The fact that they are starting to get "twitchy" with a few  warning signs of overall market weakness setting in, suggests their opinion deserves some attention. However, that is not to suggest a bear market lies just around the corner. Before that happens, some signs of increased selling pressure, beneath the "cover" of manipulated "strength" in the big cap indices (DJIA, SPX, etc.) should show up. Short term, there persists some "overbought" profiles that could accompany further dips before year end.

The internals over the past couple of months show an ABSENCE of any significant selling pressure, BUT, possibly more importantly, there has been a distinct lack of buying pressure, as well. The paid-to-play idiots are understandably fearful of selling anything, regardless of any intellectual convictions but on the other hand, the lack of buying pressure suggests the "greater fools" have gone on vacation. Thus, the market has in effect, "drifted" higher with such artificial support as short covering, etc. Without meaningful buying pressure, showing conviction on the part of the "long" crowd, combined with the overall timidity of the short sellers (who have been "abused" for a long time), the line of least resistance has been up.

The first thing to look for is enough "downside", spread over either "distance" (time) or "magnitude" (price) or both, to effectively arrest assorted up trend definitions (trend lines, EMAs, etc.) and turn them flat. This process will encompass one or more "failed" rallies that can not turn the trend back "up" from "flat". Thus, a defined "top" can be presented to enough players to prompt some selling disciplines. As I have suggested many times, we have yet to see what the robots and hedgies can do to a market once they decide to switch from buyer to seller. This could become one of those prime time "discussion points" as a newly "educated" crop of young, inexperienced financial reporters and so-call "journalists", and newly minted portfolio "managers", who up to now, have been bull market cheerleaders. The time tested "rules" still apply - namely, "confidence" is merely "fear" asleep. News always follows the trend because "reporters" who lack any real understanding of markets, will simply go with the flow as they follow their emotions.

Meanwhile, I continue to ponder the unlikely POSSIBILITY (as opposed to probability) that all the robots read the same scary headline, and try to exit together. I think about this because the memory of the October 1987 crash is still fresh. Same process - the "mechanics", armed with so-called "portfolio insurance", and armed with the smug confidence of the typical "herd animal", all tried to perform the same tactical exit simultaneously. Our firm made local headlines because we had exited virtually all equity investments a month two earlier, informing our clients that something didn't feel right (those pesky "squiggles" again). The crack opened up after lunch with the DJIA, SPX, etc. losing 22+% within a 90 minute span. Goldman Sachs went technically bankrupt within about 30 minutes (but bailed out by Greenspan the next day). The "thing" rattled a few cages for several weeks but by year end, everyone had settled down. In those days, financial leverage, compared to today's version, was virtually non-existent. Of course, there was techanical leverage from a limited number of derivatives, mostly put and call options. Today, the financial and mechanical leverage that exists is beyond comprehension so if we do get one of those very rare "episodes" where all leveraged "bets" change direction simultaneously, well.... 

It is safe to assume that "headline roulette" has been a dominant theme for many months. So far, the headlines have been biased to the upside. They won't stay that way forever, so despite suggestions from recently converted "bears" to "abandon your brain" and just buy stuff, it might be the time to start using your brain - or at least, wake it up. The most important problem for a newly converted "bear" is the inability to realize they were right after all. Then they rationalize hanging in and selling the "next" rally, but they rarely do. Hoping to get even after feeling foolish, leads to cascading losses and ultimately, margin calls. I have seen this classic process many times, having learned the right lessons early on, as a retail broker in the 1960s. By the time my partner and I went "professional" in the 1970s, we had paid the dues and figured out how the game was played. It (the game) has never changed. Only the names and faces, and the assorted leveraged devices, have changed, but the cycles continue to go up and down within the same parameters. (time and magnitude being the variables)."

Comments from a seasoned pro and contributor over at the website