Stocks oversold, but does it matter?

Here are the last 20 trading days of the Dow in a 60-min chart.


Note the upward divergence in the bottom RSI, indicating that each downward movement since the 22nd has been weaker than the last. This can be an indication that the urgency to sell is waning. Perhaps it is all part of a corrective pattern within a downtrend that has set us up for another fast plunge, but it would also be expected if were about to rally strongly and correct the whole drop from 10,700.

At any rate, as of Friday’s close we were oversold and due for at least a minor rally. I had loosened my hedges earlier Friday, but I tightened them after the close and more on Sunday evening.

Here is the VIX, in a 60-day, 60-min chart. I think last week’s oscillation pattern could be somewhat troubling for the bulls, as it looks corrective:


It reminds me that during the breakdown in spring 1930 there were no major countertrend rallies until the Dow had taken a swan dive, culminating in large gap-down day. Maybe this week brings such a move to thoroughly shatter the bulls’ complacency about this being a mere speedbump on the way to the 2007 highs.

Here’s summer ’29 to summer ’30:


Here’s an update on copper, last trading at $3.05, off 50 cents from its highs. It has no business being anywhere near the 2007-2008 levels in this economy, as those levels were never sustainable anyway:


It is still not oversold after this plunge, and I suspect that the retracement back towards the $1.50 area will be blindingly quick. I could put up a bunch more base metal charts that look just like this.

The best performing commodity of the past 12 months is probably sugar, which clocked a new 30-year high last week:


I’m short, and I like the negative divergence in daily RSI, as well as the fairly clear wave count (5 of ‘em, with a contracting triangle 4th wave this autumn indicating that this spike should mark the end).

Cocoa also set a 25 or 30 year high recently, and it’s historical pattern is similar to sugar’s. It’s another pet short of mine, and I like that the latest attempt at a new high has failed and that the uptrend is now broken:


Old times

I’m away from my computer today, but here’s a film I really enjoy. Market Street, San Francisco, 1905:

No Fed, an “inflexible” currency, no Homeland Security, no Consumer Products Safety Commission, no Department of Education, no Social Security… heck, no traffic laws! How on earth did these people survive? How are they all dressed so well?

You know, our great cities were built under what we today would consider de-facto anarchy.

Day by day, the case for a top grows stronger

A market that ignores buy signals is a weak market. We continue down where we would have rallied during the past 6 months. The swiftness, uniformity and persistence of this decline hint that it is the start of a big one.

At the moment, I’m fairly neutral on stocks, since I don’t feel I have an edge either way. I would love a rally to lever up short again, but of course the market doesn’t owe us good entries. It often makes a point of leaving the bears in the dust at major turns.

Here’s the decline so far:


RSI is not offering the bulls much hope. This is a grinding decline – each rally just goes far enough to reset things for a new low. Bearishness is nowhere near an extreme, so there is no support there either. As I have been thinking for some time, this decline shouldn’t find a rally of more than a few days until it has shaved 10% off the Dow, which would mean another 400 points down.

Commodities are coming undone also, with precious metals, base metals, energy, oil, softs and grains all weak. The dollar of course is strong, to the surprise of the vast majority of traders, as indicated by surveys taken this fall.

Looking at indexes from other world markets, I see lots of big, rounded tops forming. Things are just slowly rolling over, setting up for another crash some months from now.

This swift drop from a smooth, low vol rally reminds me of two cases from Dow history (I’m sure there are many more): February 2007 and April 1930:



There is no question that the current climate is closer to that of 1930 than 2007.


Probably no posts tomorrow. I’ll be riding the rails.

Options sentiment update

The 5-day average equity put:call ratio is now right at the mean:



You can see that the 20-day average still has a long ways to go, which means that the 5-day is likely to spike well over the mean in the next wave (a 3rd wave?) down. I’m looking for summer 2007 conditions to counter the extreme complacency that we’ve had since August, which suggests that we have another 5-10% on the downside in this move after any countertrend bounce from here exhausts.


As far as that anticipated bounce goes, the VIX also threw its hat in the ring, offering a buy signal by closing back within two standard deviations of its 20-day average.


Rally mode?

We got our new low this morning, tested it at Fed time, then reversed strongly upwards. This could be the start of the much-anticipated countertrend rally.


I’m all hedged up, maybe even a tad long stocks, but I’ll start to reload on shorts if we push a couple hundred points higher. If we break hard lower, the hedges come off.

Dow update

This pattern played out nicely this afternoon (highlighting is the possible wave 4 as I saw it then). We’ll see if there’s any follow through tomorrow. Would be nice to see a clean final wave down on diverging RSI to set us up for a rally.


I think a lot of bears are waiting for a push to the 10,500 – 10,600 area. To be precise, I’d keep an eye on 10,480 – 10,575, since the market sliced right through it on the way down. The market doesn’t owe us a good retracement though — in April 1930 the first two weeks of decline were left in the dust. It was just get short or get left out. Same goes for late May, 2008 as minor wave 2 of primary 1 rolled over. The nature of third waves is not to give you an opportunity to get on board.

Rap battle: Keynes vs. Hayek

Watch for Tim and Ben as the bartenders.


Hit tip to Kevin Duffy.

Lyrics (from

We’ve been going back and forth for a century
[Keynes] I want to steer markets,
[Hayek] I want them set free
There’s a boom and bust cycle and good reason to fear it
[Hayek] Blame low interest rates.
[Keynes] No… it’s the animal spirits

[Keynes Sings:]

John Maynard Keynes, wrote the book on modern macro
The man you need when the economy’s off track, [whoa]
Depression, recession now your question’s in session
Have a seat and I’ll school you in one simple lesson

BOOM, 1929 the big crash
We didn’t bounce back—economy’s in the trash
Persistent unemployment, the result of sticky wages
Waiting for recovery? Seriously? That’s outrageous!

I had a real plan any fool can understand
The advice, real simple—boost aggregate demand!
C, I, G, all together gets to Y
Make sure the total’s growing, watch the economy fly

We’ve been going back and forth for a century
[Keynes] I want to steer markets,
[Hayek] I want them set free
There’s a boom and bust cycle and good reason to fear it
[Hayek] Blame low interest rates.
[Keynes] No… it’s the animal spirits

You see it’s all about spending, hear the register cha-ching
Circular flow, the dough is everything
So if that flow is getting low, doesn’t matter the reason
We need more government spending, now it’s stimulus season

So forget about saving, get it straight out of your head
Like I said, in the long run—we’re all dead
Savings is destruction, that’s the paradox of thrift
Don’t keep money in your pocket, or that growth will never lift…


Business is driven by the animal spirits
The bull and the bear, and there’s reason to fear its
Effects on capital investment, income and growth
That’s why the state should fill the gap with stimulus both…

The monetary and the fiscal, they’re equally correct
Public works, digging ditches, war has the same effect
Even a broken window helps the glass man have some wealth
The multiplier driving higher the economy’s health

And if the Central Bank’s interest rate policy tanks
A liquidity trap, that new money’s stuck in the banks!
Deficits could be the cure, you been looking for
Let the spending soar, now that you know the score

My General Theory’s made quite an impression
[a revolution] I transformed the econ profession
You know me, modesty, still I’m taking a bow
Say it loud, say it proud, we’re all Keynesians now

We’ve been goin’ back n forth for a century
[Keynes] I want to steer markets,
[Hayek] I want them set free
There’s a boom and bust cycle and good reason to fear it
[Keynes] I made my case, Freddie H
Listen up , Can you hear it?

Hayek sings:

I’ll begin in broad strokes, just like my friend Keynes
His theory conceals the mechanics of change,
That simple equation, too much aggregation
Ignores human action and motivation

And yet it continues as a justification
For bailouts and payoffs by pols with machinations
You provide them with cover to sell us a free lunch
Then all that we’re left with is debt, and a bunch

If you’re living high on that cheap credit hog
Don’t look for cure from the hair of the dog
Real savings come first if you want to invest
The market coordinates time with interest

Your focus on spending is pushing on thread
In the long run, my friend, it’s your theory that’s dead
So sorry there, buddy, if that sounds like invective
Prepared to get schooled in my Austrian perspective

We’ve been going back and forth for a century
[Keynes] I want to steer markets,
[Hayek] I want them set free
There’s a boom and bust cycle and good reason to fear it
[Hayek] Blame low interest rates.
[Keynes] No… it’s the animal spirits

The place you should study isn’t the bust
It’s the boom that should make you feel leery, that’s the thrust
Of my theory, the capital structure is key.
Malinvestments wreck the economy

The boom gets started with an expansion of credit
The Fed sets rates low, are you starting to get it?
That new money is confused for real loanable funds
But it’s just inflation that’s driving the ones

Who invest in new projects like housing construction
The boom plants the seeds for its future destruction
The savings aren’t real, consumption’s up too
And the grasping for resources reveals there’s too few

So the boom turns to bust as the interest rates rise
With the costs of production, price signals were lies
The boom was a binge that’s a matter of fact
Now its devalued capital that makes up the slack.

Whether it’s the late twenties or two thousand and five
Booming bad investments, seems like they’d thrive
You must save to invest, don’t use the printing press
Or a bust will surely follow, an economy depressed

Your so-called “stimulus” will make things even worse
It’s just more of the same, more incentives perversed
And that credit crunch ain’t a liquidity trap
Just a broke banking system, I’m done, that’s a wrap.

We’ve been goin’ back n forth for a century
[Keynes] I want to steer markets,
[Hayek] I want them set free
There’s a boom and bust cycle and good reason to fear it
[Hayek] Blame low interest rates.
[Keynes] No it’s the animal spirits