Sunday, July 25, 2010


couple of weeks ago I posted the possibility that the market might be forming a head and shoulders bottom instead of the top everyone was so focused on. I knew at the time that the intermediate cycle was in the timing band for a major low and sentiment had moved to bearish levels even more extreme than what we saw at the March `09 bottom.

Calls for a market crash were flying left and right. I'll let you in on a secret, we always hear that the market is going to crash at intermediate cycle bottoms. The reality is we've had three real market crashes in the last 100 years. The odds of a fourth following right on the heels of the third are pretty darn slim.

The first and the third crash were caused by credit bubble implosions and the second was caused by severe overvaluation in the fifth year of a secular bull market. These fifth year corrections are fairly common in long term bull markets as it seems like it takes about five years for sentiment to swing to the extreme bullish side. Then the fifth year correction serves to wipe out that bullish sentiment so the secular fundamentals can continue to drive the bull higher.

Not withstanding the very low odds of a market crash, I knew that we were way too late in the intermediate cycle, and sentiment was way too bearish for there to be much chance of the head and shoulders top succeeding (actually head and shoulders patterns only succeed and reach their target about 27% of the time). Not to mention everyone saw it which gave it even less odds of actually playing out like everyone was expecting.

At that point it became much more likely that the market wasn't forming a head and shoulders top, it was in fact probably going to form a head and shoulders bottom with the half cycle low forming the right shoulder.

No one else at the time was calling for any such outcome, as a matter of fact I took an amazing amount of abuse for my temerity to even consider such a ridiculous idea.

As of yesterday the Dow has now completed the inverse head and shoulders pattern by breaking the neckline just like I thought it would. Now will it reach it's target (11,200)? The odds say no. But it's anybodies guess at this point.

What we do know is that virtually all indexes have rallied out of the half cycle low to new highs thus breaking the pattern of lower lows and lower highs. Higher highs and higher lows is the definition of an uptrend.

This was why I'm not ready to call a bear market yet. I was confident this rally was coming and we need to see were it goes before we can say with any confidence that we are back in the secular bear trend.

We now have two clear lines in the sand. If the market breaks out to new highs then the perma-bear/deflationists were too early and the cyclical bull still has some kick left.

If the market (both Dow and transports) break below the July 1st low then yes the bear is back.

As long as the market holds between those two lines we will remain in no-mans land.

Right now the market is in rally mode just like I warned would happen. We just have to wait and see whether it turns out to be a bear market rally or another leg up in the cyclical bull market.

I for one, have no intentions of trying to guess which it is until one of those lines gets broken.


  1. Awesome work. Dont let the the grizzlys paw you down... I am not a bull, I try to not take sides, and look at what the market tells us -- thats why I dig your work. Objective and disciplined.

  2. PS Why is it some people hate you when you suggest stocks might go higher, or bonds might go higher, or gold lower. Its like a fundamentalist religion. why fight the market when youre trying to make money?

  3. PPS well I wont try to convince otherwise -- but I will take their money... :-D

  4. I never understood that either and it's almost always bears that are especially vindictive.

    I'm not sure why perma-bears are so emotional. Maybe even more so than gold bugs.

  5. well sooner or later we will have a bear market, and the Emo-Bears will like your analysis. I have confidence that when you see it, you will call it, not hold to some personal convictions, book--talking, or wishful thinking...

  6. I will have no problem calling the bear when all the signs line up for it. I called the last bear in November of 07. I missed the top by about three weeks but still not too bad.

    I was a bit late calling the cycical bull as I thought last July would be a bear market rally.

    We were in a failed and left translate 4 year cycle so I had strong precedent to expect the bear to continue. But Ben's printing presses pulled off something that had never been accomplished in history. Namely he printed enough liqudity to abort a left translated 4 year cycle.

    If he can do that then I'm sorry to say the deflationists just don't have a leg to stand on.

    In a purely fiat system the governement can stop deflation anytime they want as long as they are willing to destory the currency.

    All they have to do is exactly what Ben said, drop money from helicopters.

    Actually they will call it a tax rebate and mail money directly to the population. The last two times it happened they kept the amounts small around $300-$600 each.

    But the only thing preventing them from sending out checks for $10,000 or $100,000 each is the repercussions to the currency.

  7. Looks like a no brainer for gold, but why gold is not keeping up with equities now?

  8. The summer months are the low demand period for gold. Plus gold is trying or may have already put in the intermediate cycle low.

    But I think gold bugs have to except the fact that gold doesn't behave like stocks. When stocks put in an intermediate cycle low they tend to explode out of that bottom. The top when it comes tends to be a long drawn out process that can take several weeks if not a month or more before it's obvious the rally is over.

    Gold on the other hand tends to just grind higher out of an intermediate cycle low as very few will believe in the rally for a long time.

    Eventually that gives way to a parabolic move as everyone finally gets on board the move. That's how gold tops with a huge move up followed by a crash back down to the mean.

    So gold bugs should be prepared for a dull grinding period until we get into the fall months. However even a dull grind can gain many percentage points more than what the stock market can do.

  9. I also do not understand why those who think someone else's analysis is wrong bother to even get into arguments. Don't they have anything better to do?

    I mean if one thinks one is right and this or that analyst is wrong, one should just move the hell on and go make money

    heated arguments and name calling is the very trait of those trapped in the wrong position and seeking solace in confirmation of others

  10. I agree with you about those H&S. Here is my view, the post is old but you get the idea.

  11. What happened to all the bears calling for the sky to fall?

    Looks like TC was dead on with his call for a bottom.


    Now if I had just listened to you and bought (argh)

  12. I'm sorry for abusing you. It's just part of the blogging charm we crave. Buy gold today. That's my McMarket advice.

  13. Toby, I read a few of your posts on Miniyanville and really like them. Great work on being objective, informative, and to the point! I will now bookmark your blog.


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