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[Cem]

Tendo em conta as anteriores crónicas do Nichols, e tenho de concordar que têm uma linha de pensamento muito lógica e fluida, concorde-se ou não com os pontos de vista bearish, não deixa de ser surpreendente que agora ele venha alertar para a possibilidade do S&P subir aos 1200!
Outro ponto que curiosamente ainda não vi focado, que provavelmente vai surpreender muitos analistas, será a subida do VIX devido à provável aceleração ascendente provocada pela quebra da resistência dos 1015 pontos. Para quem tentava ligar a subida do VIX ao início da continuação do bear market...
De qualquer forma, muita atenção a estas fases de euforia porque a próxima correcção também poderá fazer doer muita gente do lado bull. Um olho no burro e outro no cigano nunca fizeram mal a ninguém!
Um abraço,
Cem

[Ulisses Pereira]

WEDNESDAY a.m.
September 3, 2003


"Escape Velocity"
by David Nichols

"Yesterday the S&P 500 finally managed to levitate to a new closing high for this rally, recapturing "new" lost ground from last year's July bear mauling. As I mentioned yesterday, Tuesday was the crucial day, and the outcome was decidedly bullish. Now it looks as if SPX 1040 is only a few manic sessions away from fulfillment.

So I have some specific instructions for those in the recommended half-size position in the Rydex Tempest Fund. If the SPX stays over 1024, we are going to take a loss on this position. No ifs, ands, or buts. (Even though there a bundle of those to list!) We've got to always have a hard stop in place, so no single trade will lose more than about 10% of your speculative capital (alhtough it's hard to be super precise on this with end-of-day funds). We're now pushing that stop. If the SPX moves over 1024 and doesn't sell off back below that number by the end of the first hour of trading, then buy the SPY intraday with the other half of your speculative capital -- the part that was never deployed. If the SPX stays over 1024 by decision time on the Rydex funds at 3:15 or so, then sell your Rydex position into the close and hang onto the SPY long position.

If the SPX is hovering near these levels at decision time late in the day, then just hold both the Tempest and the SPY, and we'll watch the action again tomorrow.

My particular brand of contrarianism based on the VIX, volatility, and anti-persistence is finally getting smacked around by the market. But it's been a heck of a run up to this point. It was "too easy" to make money playing the sentiment swings during the bear market up to this point, so the market had to teach us wise guys a lesson. But this is just an aberration, and soon the pendulum of sentiment will be swinging back hard against the vast bullish majority, which grows larger with every tick higher. And the higher the climb, the harder the fall.

You could also correctly argue that the "spark of fear" we needed to make this position work really never materialized, even though there were many chances. That's the way it goes sometimes. That's just position trading for you. It doesn't always work out. But with a hard stop in place, it's really not such a big deal. The nature of position trading involves getting stopped out occasionally. The key is to have a system that works, and to follow it.

And there is no better way to position trade then to take the opposite side of a large crowd, and then wait for the market to force them to surrender their positions. This time it was the contrarian's turn to get rocked back and play defense (although it's not quite over yet), but this is the first time this has happened in over 2 years.

So the next time the spark of fear actually does ignite -- and it could still come any day now -- then the conflagration to the downside can again be spectacular. The mistake now would be to change or try to "adapt". So we'll jump right back in on a spark of fear into both the Tempest Fund (RYTPX) and the Venture Fund (RYVYX).

Now, this next comment is going to surprise many people, considering my well-known view that the markets are decidedly overstretched, overvalued, and plagued by far too much bullishness. But in the interest of objectivity, a look at a price chart now reveals a structure that has the potential to go all the way towards SPX 1200. Yup. No kidding. It's conceivable that this bullish move is only half-way done.



Okay, it's possible, but only remotely. Trying to be as objective as possible, there is a fractal pattern that is potentially developing that would make these last 3 months of sideways action simply a mid-point correction in a much larger scale move up. We could see a move up from here that is equal in magnitude to the initial leg up. That would involve another 200+ point move up on the SPX from the recent corrective low at 965-ish, which roughly computes to an upside target somewhere around 1190-ish.

Now that's why we have a hard stop in place! There's nothing shameful about being wrong in the markets -- indeed, it's to be expected, and not feared-- as long as you've also got a risk management plan.

The chance of such an upside move to 1190 is remote, to say the least. But when the Federal Reserve, the Bank of Japan, and central banks the world over decide to flood the global economy with new paper currency, then assets are going to get inflated. And the assets that are most easily inflated are the most liquid ones: stocks, bonds, and mortgage markets. This "paper party" doesn't end well for stocks, as we saw in 2000, but it can certainly extend farther than any rational voice of reason can predict.

So if a new bubble is really and truly being fomented, it's best to stay out of the way on the short side. It could be an echo of 1998-1999, when the voices of reason were shouting that the market was a ridiculously over-valued bubble -- and they couldn't have been more right! -- but these sage voices got blown-out and completely discredited before even their most dire predictions came true. That's a lesson not to be taken lightly, as all the same bubble forces are still hard at work.

So we'll see how the market handles SPX 1040. A move up to there should blow out the remaining bears, and we'll have to see if more "fresh bear meat" comes in at those higher levels, giving that bigger upside scenario a chance to actually play out. At such a point, you can play "musical chairs" with long positions, hoping somebody comes in to take you out at higher levels, but that is a very tricky, stressful game. Personally I don't have much stomach for bubbles anymore, having learned some hard lessons from the last one.

Sentiment Dashboard
by Adam Oliensis



SENTIMENT TANK: Filled 3 points to 11% full of negative sentiment.

SHORT-TERM: Remains in an advance phase.

MID-TERM: Progressed 5 points in its decline phase to 28% but this, again, is merely measuring "the window of opportunity" and not the momentum of sentiment, since virtually none of that. Confidence remains at a bullish 1 (out of 7) and, unless the market suffers a severe selloff very shortly, will pull the gauge around into another advance phase.

LONG-TERM: Flipped to the bullish side of the gauge, rising 3 points to 94% as Confidence remained at a bullish 1. This gauge has tried for weeks to roll over into a bona-fide decline phase but has failed.

BOTTOM LINE: The tank FILLED on a day that the SPX broke out of its 3-month trading range. As we've discussed in the past that is the most bullish sort of development. It's nothing extreme at this point, but with Price breaking to new highs and Confidence slightly on the bullish side we have to treat the market's ability to advance on very little Negative Sentiment as bullish...unless/until the market tells us that this bullish regime is over. "