Monday, February 18, 2013

This time will not be different - The Finale

In the last few weeks I displayed some of the divergences that are present in the market today. In this post I will provide you with some more interesting facts, which will conclude my compilation of the reasons why this time will not be different. I will remain mum on the issue from here on and let the market speak for itself.

Since this bull market in stocks has begun in 2009, the biggest decline occurred in 2011, when technology sector did not confirm new high on SPX. Tech is the largest sector of S&P 500, with 18% weighting right now. Head and shoulders is one ugly chart pattern.

click on chart to enlarge

Hedge funds are now bailing out of gold and piling into equities in droves. Those are some of the brightest minds, but their performance has been less than stellar and has lagged S&P 500 for the most part of this bull market. The fear of Eurogeddon kept them overinvested in gold and underinvested in equities in 2010 and 2011, producing strong equity rallies as they had to get back in and play catch-up. The fear is now gone, as Eurozone is supposedly fixed, hence the gold dump. And the greed has taken over, as they are thinking that this stock market rally got away from them. So now, after SPX is up 125% from the lows in 2009, they suddenly rediscovered the stocks and are at their highest equity market exposure since two months before the previous bull market peaked in October of 2007. This is usually a contrarian signal which leads to steep corrections.

click on charts to enlarge

Speaking of contrarian indicators... Newsletter writers are now as bullish as they were in 2000. Their sentiment reading at or above 70% has produced a valid selling signal on SPX in the past.

click on chart to enlarge

And finally, this is one of the most interesting facts I have seen yet. The chart below displays the correlation between SPX and Eurodollar futures. Adventure in Centrally Planned Paradise may be waiting just ahead.

click on chart to enlarge

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