Monday, April 12, 2010

Are There Any Stock Market Bears Left?

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Of course I know there are, but not many are currently betting on a bearish outcome according to the data available to me. I don't blame them. I am not interested in shorting the general stock market here, but I may start selling some intermediate term call options in the next week or so if this market manages to keep going higher.

In no particular order, here are a few of the amazing data points that I never thought we would reach during this bear market rally. First up, the equity put to call ratio ($CPCE), using the 10 day moving average to smooth out the daily noise (a 6 year and 6 month chart follows, as that's all the data I have access to):

Next up, the Volatility Index ($VIX) over the past 4 years:

The anticipated 3 month S&P 500 volatility ($VXN) versus the current volatility index ($VIX) has also spiked to a new high (a $VXN:$VIX daily ratio chart of the past 30 months follows, this time frame selected because this is as far back as my data goes):

The NYSE Summation index is also majorly overbought and set to decline. Last week's Investors' Intelligence survey reveals that the percentage of bears is back below 20%.

Yet overall breadth remains fairly strong/the cumulative New York Advance Decline line continues to chug higher, junk bonds and the financials are still moving higher, and the long end of the yield curve has taken a rest after threatening to spike significantly higher. The bottom line is that risk is unacceptable in general stocks right now, but that doesn't mean the market can't move a little higher. From current levels, however, a significant advance is highly unlikely given the data presented above and all risk is to the downside in general U.S. stock market indices for the short to intermediate term.

Though many Gold bulls fear stock bear markets, especially after the collapse in Gold stocks during the Great Fall Panic of 2008, I continue to believe that the general stock cyclical bull market is actually holding Gold stocks back. I still think a rhyme of the 1973-4, 2001-2003 or mid-2007 to early 2008 periods may be coming, where Gold and Gold stocks rise to new highs despite a flat or falling general stock market. People who think Bernanke's printing press will save the stock market for good forget that rapid price increases in commodities are not good for the stock market, nor is a rapidly rising long term interest rate. Further "liquidity" support via fiscal and/or monetary policy threatens to cause one or both of these events.

Interesting times for sure. Still waiting for a greater short-term pull back before re-investing recent trading profits back into Gold stocks. Gold will continue to outperform the general U.S. stock markets until the Dow to Gold ratio hits 2, and we may well go below 1 this cycle.

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