04/04/11 BullBear Market Report

INTRODUCTION

In the last BullBear Market Report, I called for a bottom to the Middle East/Japan panic selloff while at the same time laying out the parameters for a bearish turn in the markets. The bearish conditions did not come to fruition and BullBear Traders were able to catch the exact bottom of the move after having lightened their positions at the exact top. I emphasized an overweight position in BRIC and Emerging Markets and that has proven to be an accurate call as well. We also jumped on bottoms in Grains and Agriculture as well as a long term breakout in Clean/Alternative Energy.

It's interesting to note that every round of selling since January of 2010 has been associated with some kind of alleged "black swan" news event that would supposedly, according to the common wisdom, send the markets back into a precipitous decline. There's been a general expectation that eventually some kind of calamity will knock the markets off their bullish course, but they have refused to fulfill this expectation. The recent panic over unrest in the Middle East and the disasters in Japan created a scarce buying opportunity which astute traders seized upon. It's probable that the panic may have marked the orthodox bottom to Japan's 20 year bear market as well as the resumption of the Yen carry trade. The latter mechanism will likely be a major source of liquidity to drive risk asset prices higher going forward.

The secular shift from the perceived safety of bonds to riskier assets should soon evolve to the next level as the short end of the Treasury market starts to unwind. The 2 Year Note looks ready to break out, unlocking a huge cache of capital from ultra low yields in search of higher returns. This will be a major boost to the bull market and and underlying driver for the next run up.

There's a strong technical argument for a long term top in gold, although a parabolic blow off move also remains a distinct possibility. If interest rates continue to climb, as a non-yielding fear play it may lose its appeal rapidly. On the other hand, there is also a technical setup for a parabolic 5th wave extension.

The US Dollar Index is certainly hanging out at key long term levels and there is a strong argument for a significant market devaluation of the greenback soon. This could be the catalyst for a parabolic move in gold. But rumors that the Fed may begin to edge up interest rates could keep the buck from breaking down. Recently the Treasury-EuroDollar Spread has started to move higher from a basing pattern. That could reflect expectations that the US Fed will be moving rates higher ahead of the ECB and/or renewed debt troubles in the Eurozone. If this is so, the gold bull could be dealt a technical blow very quickly.

Crude Oil seems to have had a valid breakout move. I've been looking for a C wave retracement and retest of the breakout but the market has been resilient. A sudden strengthening of the Dollar could precipitate the needed correction and provide a good long entry point.

Perceptions of "sentiment surveys" notwithstanding, there continues to be a bearish undercurrent in market psychology. I've already noted the tendency for mini "black swan" selloffs. This headline story at CNBC illustrates and continuing underlying p....

While virtually any item that could possibly be construed as bearish continues to get air time and layout space, numerous indices and sectors are now trading at all time highs without so much as a mention. Chances are pretty good you have not seen or heard about the list that follows:

Indices and Sectors At or Very Near New All Time Highs:

RSP S&P 500 Equal Weighted ETF

S&P Mid Caps

S&P Small Caps

Russell 2000

$RUO Russell 2000 Growth Index

Dow Transports

Value Line Arithmetic

AMEX Composite

Dow Jones Chemicals Index

Defense Index

RTM Equal Weighted Materials ETF

Morgan Stanley Consumer Index

Morgan Stanley Cyclicals Index

Morgan Stanley Health Care Payor Index

Morgan Stanley Health Care Products Index

Morgan Stanley Health Care Provider Index

Retail ETF (RTH)

AMEX Industrials Index

$DJUSATDJ US Auto Parts Index

$DJUSBCDJ US Broadcasting Index

$DJUSCFDJ US Clothing/fabrics Index

$DJUSNCDJ US Consumer Non-cyclical Index
$DJUSCMDJ US Cosmetics Index

$DJUSECDJ US Electric Components & Equipment

$DJUSFEDJ US Factory Equipment Index

$DJUSFBDJ US Food & Beverage Index

$DJUSFPDJ US Food Products Index

$DJUSHRDJ US Heavy Machinery Index

$DJUSRRDJ US Railroad Index

$DJUSTBDJ US Tobacco Index

$BVSP Brazilian Bovespa Stock Index

$PSEC Philippines PSE Composite Index

$KOSPI South Korea Seoul Composite

This list is by no means comprehensive and there are many more which are mere days or weeks from taking out the 2007 all time highs. Virtually every technology sector is now well beyond or very near 2007 Highs.

Permabears often site "weak breadth" as an indication that the rally must ultimately implode, but it does not seem likely that market breadth is really weak when the SPX equal weighted index is making new all time highs well in advance of the capitalization weighted index.

Nonetheless, there continues to be a valid bearish technical argument, and I will continue to maintain and evaluate a set of criteria which indicate that the market trend has or will likely change. Until then, the trend remains the trader's best friend and the trend is up. After a near term correction, SPX should continue higher in the final fifth wave of its move off the July 2010 bottom.

The full BullBear Market Report continues here with coverage of the following:

S&P 500 Chart Analysis

SECTORS AND RATIO CHARTS

WORLD MARKETS, EMERGING MARKETS AND BRIC

TECHNICAL INDICATORS

JAPANESE YEN

BONDS

US DOLLAR

CONCLUSION

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