The wall of worry is about as steep as it gets. The weight of evidence points to a top in the market. Here are a few of the negatives that are stacking up like cord wood.
Although I have used charts of the S&P 500, the metals will be influenced by the same cyclical forces.
1) Investors intelligence suggests complacency among public investors and the gurus they listen to, are at extremes last seen at the highs in 2007.
2) The Baltic dry index keeps falling, suggesting that products and materials are not moving by ship, or at least the cost to lease the ships is falling, indicating a lack of demand. Please go to my blog for latest Baltic dry chart.
3) Mutual fund cash is at record lows, indicting that most funds are already in the market.
4) General Motors came to market, usually the timing of big IPOs have an eerie way of marking market tops.
5) The put/call ratio imbalance that showed that a large number of puts had been sold in October has been worked off. The puts were sold by the Fat Boys and bought by the public, but I believe most expired in November. The public has not purchased new puts, so now they have exposure to downward movement. I have the latest put/call chart on my blog.
6) China is stepping on the brakes.
7) Interest rates have been going up on the longer term debt instruments. Putting the housing market in peril. Prices are falling and so are sales.
8) My proprietary sentiment indicator is as bearish as I have seen it.
Those are just a few and I haven't even touched on Europe and the exploding piigs.
Meanwhile, the Inflationists and Deflationishs are squabbling over who has made the poorer calls and missed the most moves. That seems to happen whenever the market starts going sideways. The reason is that getting the fundamentals right, does not mean you will get the market direction right.
I wrote a FSN article back in October, entitled Warning, Stock Option Imbalance! May I suggest that if you have not read it yet, that you do so before reading this. At that time everyone was certain that the markets were going to the moon. In the article I suggested that nothing was going to happen because the public were buying puts as insurance and the Fat Boys were selling them. At the same time the FBs were going short. I suggested a spike to new highs followed by a pullback into the 3rd week of November was likely.
That is what has happened. Now we see the puts expired worthless and the Fat Boys are back knocking at the door, looking to cover their shorts.
We have a nasty looking head and shoulders top forming as well. The public and small funds are teetering on the precipice of another sell off. The tone of the media has turned more bearish and they are already trotting out the perma bears . This time there is no signs of traders buying protection against a market decline.
Fat Boys win again
Below is a chart of the S&P futures for December, it mirrors the S&P 500. It graphically shows how we reached the point we are at now. We have formed a head and shoulders top pattern because of the dynamics created when the public loaded up on puts last month to try and beat the Fat Boys. You can't beat the Fat Boys, all you can do is join them. The put options all expired worthless and the FBs kept the premium. Now price has fallen back to where the public bought their stock, so no profits there either. This time the public is not buying insurance. On top of that, they are loaded long and are totally exposed.
In the longer term chart below, I have highlighted the above area in red to put things in perspective. The situation looks dire and one has to wonder what will keep the market up.
Interestingly we find ourselves in the same situation as we did 1 year ago. We have made or are about to make a trading cycle low (green arrow). I say have, or are about to, because cycles are unreliable and they can shift, for now I have it logged as coming at the end of October. We are coming to the end of the month and we are pressing down and squeezing the breakout buyers like we did last year. There is a difference however, notice that last year we didn't come back as far into the previous low. Coming too far back is never a good sign.
Here's the thing
Look what happened when we topped out the rally in early 2010. Due to cyclicality, we fell back into February. It seems to early to fail.
If we top out and start to fall now, we should fall all the way into February again and it won't be pretty.
Even with the horrible fundamentals that I highlighted earlier. Even with the ugly chart pattern. We have to be open to a solid year end rally occurring again this year.
Why?
There are two fundamental reasons.
First of all, we know Bernanke and co. want to see higher asset prices. They probably don't want a stock market plunge putting a damper on our Christmas spirit and purse strings either.
Secondly, there are a lot of Christmas bonuses tied to fund performance at year end. If you are the Fat Boys, why not let the funds buy the price up into a strong, year ending close. Sell to them, then kick the stool out from under them early next year. They make easy victims.
There is one fly in the ointment, the market usually doesn't do the same thing twice in a row. That ominous head and shoulders pattern that we see in so many markets, including gold, may be sending the right signal after all. Trouble is, when it is obvious, it usually doesn't happen.
Lets face it, the Fat Boys can kill this overbought market in a heartbeat if they choose to. Maybe they will, but for now, against all odds, I still believe in Santa Claus.
The markets are manipulated by an elite few. I call them the Fat Boys. If you don't know their methods, you will always be struggling. I offer training in how they work. Please visit my site for more information on how to work with them. If you are not with them, you are a victim.
