Bizarro Market

• Posted by Derek
• on December 10th, 2010

My list of 21 day highs includes banks of all shapes and sizes, while 21 day lows includes BRIC faves like $BBD, $MBT, $IBN, even $FXI?  This has become the bizarro tape of Seinfeld lore.

We have Chinese IPOs like $YOKU and $DANG exploding left and right, sentiment surveys and put/call ratios flashing danger signals, and complete abandonment of the “risk off” trade led by $TLT.

But it’s December, so a correction is impossible, right?  But wasn’t a September rally impossible as well?  The trend looks flawless on any timeframe through weekly, but as Bernie Schaeffer noted as his reason for studying sentiment “the chart of an uptrending stock looks no different than that of a peaking stock.”

What’s weird is that U.S. stocks have raced ahead while other measures have floundered.  Risk proxies such as $FXY, $FXA, $EFA, $EEM, $EWH, $EWZ, and $IYR have failed to eclipse the November 5 global highs seen after the U.S. elections and Fed meeting.  Only the U.S. and Japan($EWJ) have moved through those highs, so either we’re re-emerging as leaders or these 2 countries represent the “denial” trade.

What I know by considering these factors is that right now they haven’t mean squat.  Healthy patterns continue to get rewarded, and unhealthy patterns reversed.  Look at $50 billion market cap $TEVA as the latest example, it goes from 4 month low to 1 month high in 2 days: (note, original post said 4 mth high b/c I saw a $56 fake pre-mkt quote)

As long as shorts can’t make money, the onus is on the bears to prove their strength.  In the global markets listed above, the bears have made their stand and shown the ability to withstand the bull tide.  In the U.S. market, however, they’ve been stampeded and are now under attack even in formerly weak sectors like $XLF and $XHB.

Until this week, I’ve had no evidence to consider the bear position.  My favorite measure of strength has ebbed on occasion, but shown no signs of an exhaustive top that would demonstrate the strength of the bear case.  That measure has finally gone to the bears as the following graphic shows 33% of my universe facing a 12/7 pivot high:

This indicates a peak in momentum and correlation, not a peak in prices.  It tells me I can now consider beta-driven shorts, as opposed to isolated ones.  At each potential inflection since the 8/25 breadth trough, stocks have within days removed the overhanging pivot as a concern…this time looks shockingly different.  I’m leery of following it, as I just don’t have the short candidates…the broader “market of stocks” is still showing me a dominant 66% in intermediate-term uptrends vs. 17% in ranges vs. 17% in downtrends.

What we have, then, is a healthy and broad uptrend showing a lessened ability to expand leadership…it’s become a little rotational and “hot potato”-ish.  Combined with frothy sentiment readings, this is a major red flag.  My gut is that we can persist with this condition until an event comes along to rectify things.  I have no way of knowing the event, I can only scale back my size until a “December Surprise” appears.

The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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