Monday, August 29, 2011

THE BEAR MARKET RALLY HAS BEGUN

I've been warning bears for a couple of weeks that the market was due for an aggressive bear market rally. That rally has clearly begun.

I have often referenced the Rubber Band theory in my nightly reports. For those not in the know, the rubber band theory is nothing more than the tendency for any market to regress to the mean. And the further a market is stretched away from the mean the more violent the snap back tends to be once the pressure is released.


In the case of a rubber band, the further you stretch it in one direction, the harder it snaps forward once you release it. Simple action and reaction.


Markets are really no different than a rubber band. The further you stretch the stock market the more violent and persistent the snap back tends to be once the turn occurs. At the recent yearly cycle low on August 9 the stock market had stretched to ridiculous levels, both sentiment wise and technically. This should generate an extremely convincing bear market rally.


A normal bear market rally will typically last from 4 to 10 weeks. (They have to last long enough to reverse extreme sentiment levels.) Generally speaking that takes a minimum of 4 weeks, and 6-8 weeks is about average.

A bear market rally out of a yearly cycle low (other than a four year cycle low, the move into a yearly cycle low tends to be the most damaging decline in the stock market. This year was certainly no exception) will quite often tag, and occasionally penetrate the declining 200 day moving average. I tend to think that will be the case this time also. My best guess is the market will rally up to the 200 day moving average, then dip slightly into the next daily cycle low around the end of September. That should be followed by an extreme left translated daily cycle that tops slightly above the 200 day moving average (I guessed at about 1300 on the chart below) and then moves down into the next intermediate bottom due in late November or very early December. At which point the market will make a lower low, confirming a new cyclical bear market.


Actually the market has already met all three confirmations that a new cyclical bear market has begun.


1. Dow Theory sell signal.
When the industrials and the transports both broke below the March low a Dow Theory sell signal was triggered.

2. A move below a previous intermediate bottom.

When the S&P broke below the March low it triggered a new pattern of lower intermediate lows.


3. The 50 day moving average dropping below the 200 day moving average, and the 200 day moving average turning down.


Investors need to be prepared. This is going to be a very, very convincing rally. The tendency is going to be to buy into the media hype, that this was nothing more than a severe correction in an ongoing bull market.

This was not a correction. This was the first leg down in a new cyclical bear market. And like all bear markets it will be subject to violent countertrend rallies that toy with trader's emotions, and ultimately cause investors to ride the bear all the way to the bottom.

20 comments:

  1. Good analysis, Gary.

    I couldn't agree with you more.

    The nice thing about these severe moves, is it creates extreme opportunities to make a ton of money on the upside AND on the downside.

    I for one am enjoying this counter-trend rally, and am just waiting for the next shoe to drop to switch my positions.

    Good luck to you!

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  2. Gary you are on fire. I have to admit, this rally looks like all the rest from the past year. Low volume, shallow pullbacks, and then a move higher.

    I am hearing talk of more QE. I think Goldman is begging, er I mean, nah I do mean begging for more!
    Really, truly, verily pray for no more, as all it means is higher gas prices and other non discretionary product price increases.

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  3. Right on.Counter trend rally started at august 23 double bottom.Do not care to peer too far ahead about the duration of rally. One day at a time will do. Forecasts are seldom reliable.

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  4. I always like the annotated charts you show. My only criticism would be to add oscillator type indocators like MACD and stochastics, especially in this case.

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  5. Thanks for sharing this, excellent as always.

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  6. Hi!
    Help a confused man.
    If I subscribe to the Premium nl who is writing this newsletter?
    Gary or Toby? Is Gary alias/ akaToby or both and non?

    George

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  7. Toby is the pen name that John Townsend and myself use to author the gold scents blog.

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  8. Toby, loving the blog. Do feel your 1300 target on SPX is ambitious though without some sort of major intervention by the Fed or PBOC. The technicals alone are not bulletproof for such a strong rally. I could make an argument that we have already seen a 38% retracement and it could be over now, especially with September seasonality, a floor on the DXU at 73.5, etc.

    I have added you to my must-read.

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  9. I am sure you all know I meant 50%, not 38% retracement at 1230...

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  10. Sorry for posting this - can't find an obvious "contact us" link. Considering subscription. Can someone please send me a sample of previous weeks of daily and weekend reports. Not asking for a freebie, the info can be old. Maybe a PDF Zip of a few weeks from the premium site. Want to see what it's like.

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  11. Unfortunately all past reports are archived in the premium website. I usually just suggest buying a one-month membership. If you don't like it you can cancel at any time and all you'll be out is $25 and your subscription will remain active for a full month.

    If you do like the newsletter you can cancel the monthly and convert to a more cost-effective biannual or yearly subscription at any time.

    Just follow the directions for canceling or converting memberships on the homepage of the premium website.

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  12. Gary, you will be proven correct even though the fundamentals appear to be unbeaably bearish. The sentiment, including insider buying and hedge funds negativity, points to a mammoth short squeeqze.

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  13. 10 days ago, when SPX was at 1200 you've announced that bear market rally has begun.
    Now, then days later, SPX is at 1150.
    Oh well,i just hope nobody sold their gold position to join that bear market "rally".

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  14. Perhaps it's time to reconsider.

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  15. Be careful.Markets about to crater.

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  16. Stops are right below the half cycle low at 1140. We don't have much risk.

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  17. SPX swoon to 1020, may be. Who knows?

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  18. Gary, I would appreciate your comments on Ed Steer's allegation that COMEX gold and silver are manipulated.

    Please focus your comments on manipulation MECHANICS (that Ed is referring to below, and not motivation which can be discussed endlessly.

    Here's what Ed had to say last Friday...

    From Ed Steer’s Gold & Silver Daily, 100811

    Yesterday's Commitment of Traders Report was a big surprise in both metals. The big surprise in silver was that there was another huge drop in the Commercial net short position. This time it was a chunky 5,339 contracts, or 26.7 million ounces. The Commercial net short position is now down to 94.6 million ounces of silver. I don't remember the last time that this number was below 100 million ounces...but I'm sure it's pushing ten years ago.

    As of the cut-off on Tuesday, the '4 or less' Commercial traders are now short 150.1 million ounces of silver...and the '5 through 8' are short 45.0 million ounces. The total short position of the '8 or less' adds up to 195.1 million ounces, or 39,020 contracts.

    To show you how extreme this Commitment of Traders report is this week, the total Commercial short position in silver sits at 58,500 contracts...and the above 39,020 contracts held short by the '8 or less' traders represents 66.7% of that total Commercial short position in the Comex futures market. If that isn't a concentrated short position, I don't know what is...and the SEC and CFTC say nothing...and do nothing.

    In total, there are 39 traders that hold short contracts in the Commercial category. The '8 or less' hold 66.7% of that short position...and the remaining 33.3% [19,480 contracts] is held by the other 31 traders...Ted Butler's raptors. On average, this translates into 628 contracts held short by each of these traders.
    I would bet a fair amount of money that virtually all the remaining 19,480 short contracts are the short side of a spread trade within the Commercial category. The '8 or less' Commercial traders are the Commercial category!!!

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  19. I neglected to include Ed Steer's discussion of the monthly reported Bank Participation Report. Here's it is...

    A derivative of the data used for yesterday's COT report is the Bank Participation Report. It shows the long and short position of U.S. and foreign banks in all commodities that trade on the Comex.

    This BPR is generated once a month from COT data from the first Tuesday of the month. The COT report appears from this data on Friday, as does the BPR. So, once a month, we can compare apples to apples.

    In the September report, two U.S bullion banks were short about 23,900 Comex silver contracts. In the October report [from last Tuesday's COT data] the two U.S. bullion banks had reduced their Comex short position down to 14,400 contracts...an absolutely stunning one month reduction of 9,500 Comex contracts! That's a reduction of their Comex short position by 40% in just one month!

    The 12 non-U.S. banks that hold silver positions on the Comex have held a tiny net long position of about 300 contracts for the last couple of months. Their small net long position was virtually unchanged from the September report to the October report.

    So let's put this in perspective. As of the Tuesday cut-off of Comex trading, two U.S. banks held a net short position of 14,400 Comex contracts...and twelve foreign banks held 315 contracts net long between them, which works out to just under 26 Comex long contracts per foreign bank. Any questions so far?

    Returning to the COT report...and comparing apples to apples...the Commercial net short position was reported as 94.6 million ounces. The 14,400 contracts that the two U.S. bullion banks hold converts into 72.0 million ounces. Using Grade 3 arithmetic, these two U.S. bullion banks are short 76% of the entire Comex net short position all by themselves. At a minimum, 90% of that short position is held by JPMorgan...and the balance would be held by HSBC USA.

    This is not rocket science, dear reader.

    In gold, 4 U.S. bullion banks were net short 7.44 million ounces as of the Tuesday cut-off for the October BPR The September BPR showed that their Comex short position was 8.44 million ounces. So, despite the huge drop in the gold price, these four U.S. banks only managed to shave one million ounces off their short position on the Comex over the past reporting month.

    The big change came in the 18 non-U.S. banks. Their September short position on the Comex was 3.83 million ounces...but the October BPR from yesterday showed that their short position on the Comex was down to 2.12 million ounces. That's just about a 45% decline in one month.

    But, despite these changes in the Comex short positions in gold by all banks, both domestic and foreign, the fact of the matter is this. Four U.S. banks, on average, are short about 1.86 million ounces of gold apiece...while the 18 non-U.S. banks are short [on average] 117,800 ounces of gold each.

    Visiting the COT report one last time, the Commercial net short position in gold as of the Tuesday cut-off stood at 16.5 million ounces. The four U.S. bullion banks are short 45% of that amount. So you can see that even though the four U.S. bullion banks' short positions in gold are the tallest hogs at the trough in the Comex futures market, they are almost of no consequence compared to the to the two U.S. bullion banks that hold 76% of the Commercial net short position in the Comex futures market in silver, of which over 90% is held by JPMorgan.

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