Interesting Links

[Andrei]

Very good Marc Faber interview on markets, on gold, on bonds etc.

http://www.zerohedge.com/news/marc-f...ctively-resign

[Adriano]

Soros on Euro bonds, Germany, USA, China:
http://www.spiegel.de/international/...780189,00.html

[ilonaross]

After over a two-year run, the bull market for stocks appears to have ended. As
I wrote on June 13, 2011:

"The operative question remains whether this is a mere correction or whether the
market is forecasting a significant slowdown in the economy and we are seeing
the beginning of the end for the 2009-11 bull market. While it is still a bit
premature to say, the continued breakdown in the former leaders from late stage
bases, the lack of leadership in any market sectors, high levels of distribution
in the tape with the inability to stage even small rallies thus far, and the
historical context of financial panics and bull markets that ensue (more on this
in my next market commentary) lead me to conclude that a new bear market could
be in its very early stages of forming.

Markets generally do not go straight down, and history shows us that our biggest
up days occur during bear phases. Therefore, even if we are entering a new bear
market, there will be numerous countertrend rallies, and big up days to suck in
those eager to believe the correction is over. Whatever course the market takes
(correction or bear market), high levels of cash until the market
follows-through and bases rebuild remain the place to be."

* * * *

In July we were treated to one of those countertrend rallies I described above,
albeit on low volume. I noted in a comment that some leaders were attempting
breakouts from bases, but the rally quickly failed later that month, and proved
to be nothing more than "a last gasp for air" for the bull market.

Since that time, the market has treated us to historic levels of distribution.
The major indices have quickly dropped approximately twenty percent with the
market showing very little ability to stage any rallies on meaningful volume.
What little leadership remained during the past week has gone by the wayside
such as former leaders PCLN, AMZN, BIDU, LULU, CMG, WYNN, DECK, FOSL, GMCR, CRM
and SODA. Other former leaders that topped out weeks or months ago have
continued to see incessant distribution such as APKT, PNRA, NFLX, ISRG, RVBD,
TZOO, OPEN, and TIF.

Simply put, we are in a bear market for stocks. This means that maintaining
high levels of cash and preserving capital are key. A few important points:

1) The Biggest Rallies Occur During Bear Markets: These rallies merely serve to
relieve oversold conditions and to suck people back in the market. Keep this in
mind. Until the market follows-through and fresh bases and leadership set up,
all rallies should be treated as mere bear market rallies. Time will be needed
for the market to set up for a new bull, and we are likely to head lower before
this occurs.
2) Ignore the Pundits: The pundits and prognosticators in the media never
change their tone during bear markets. Whether it was the dot com bust and
eighty percent drop in the NASDAQ from 2000-02, or the financial panic in
2007-2008, we hear the same thing nonsense every bear market: "Stay Invested",
"Buy the Dip", "The Market is Oversold", "Stay the Course", "The selling is
overdone", "The market is overreacting", or "Stocks are Cheap". Heeding the
advice of these people will do nothing more than cause severe looses in your
portfolios. The simple fact is this: Nobody knows how far or how deep this
bear market can go. Until a new bull is born, stocks can go lower, stocks can
get cheaper, the market can get more oversold, and the selling can get more
overdone.

3) The Difference Between an Intermediate Correction and a Bear Market: The key
characteristic of a bear market is that almost all of the former leading stocks
will top out and break down, as opposed to intermediate corrections where many
leaders will stay above key longer-term moving averages such as the 150-day or
200-day moving averages. During last summer's intermediate correction for
example, many leaders stayed above these longer-term moving averages, such as
BIDU, AAPL, CRM, OPEN, RVBD, VMW, NFLX, FOSL, and CMG. Juxtapose today's market
environment where almost every former leader has broken these key moving
averages on heavy volume. Faced with this indisputable evidence, odds favor we
are in a new bear market for stocks

4) The Obvious Good News: Every major bear market has led to a new bull market.
Bear markets get rid of the excess, froth and speculation of the prior bull and
allow new leading stocks the time to base out and set up for their future runs.
As long as one preserves his capital and stays out of the way of mother market's
wrath, he will have the opportunity to make a king's random once the new bull
market begins. Unfortunately, the average investor is so devastated by the bear
market preceding that point, that he wants absolutely nothing to do with stocks
and misses the bountiful opportunities accompanying the new bull.

5) Exercise Patience During a Bear Market: This is something I constantly
remind myself of as it is the key to investment success. I wrote the following
in December 2008 and it is extremely relevant today:


A quick note on a topic I address now and again which I consider highly relevant
at this time. It is the virtue of patience and not overtrading. Throughout
this year, I have watched as many colleagues have tried to catch a market bottom
only to lose more money then they had to if they simply waited for a
follow-through day and waited for bases to build and breakouts to occur. It was
their lack of patience, not their lack of trading intelligence that caused these
losses. I know many extremely talented traders who are always in the market,
every single day, taking unnecessary risk because they somehow "feel" the need
to trade everyday. Without exception, this incessant need to always trade leads
to a lackluster performance and can be an extremely costly mistake that often
can be the undoing of a trader. Especially in a market as volatile as this, it
is of crucial importance to maintain discipline and not to overtrade and to be a
slave to every tick. All of the great traders I have studied, such as William
O'Neil, Nicholas Darvas, Bernard Baruch, and Jesse Livermore understood that a
large part of a successful trader's career is spent out of the market waiting
for the fat pitch, and not swinging at anything but "their" pitch. These
individuals, who all had decades of success in the market, understood this fact,
and it is what kept them consistently successful in their trading careers.

I challenge all of my readers to review their portfolios over the past year and
to ascertain how much money they could have saved by not overtrading and by
being more patient and waiting for the right opportunities. Such a portfolio
review, with an eye to eliminate needless trading, is an exercise I always find
very beneficial.

When a new bull is born, there will be new leaders that breakout and rally 250
percent or more very quickly. At a time like that, margin and aggressiveness
can reap big rewards. But, the prudent disciplined trader will await that time
and not expose capital to unnecessary risks trying to capture short term profits
on each tick.

I leave you with some words of wisdom on this topic. If you have any questions
or comments please email me. I will have a report later this week that
discusses the rally and any leadership that may develop in the coming days. For
now, I remain fully cash.


The best speculators search only for the very best opportunities. To be truly
successful, you must wait for the right opportunities to present themselves and
this often means doing nothing for long periods of time.

Nicholas Darvas

I have been in the speculative game ever since I was fourteen. It is all I have
ever done. I think I know what I am talking about. And the conclusion that I
have reached after nearly thirty years of constant trading, both on a shoestring
and with millions of dollars back of me, is this: A man may beat a stock or a
group at a certain time, but no man living can beat the stock market .... A man
may make money out of individual deals in cotton or grain, but no man can beat
the cotton market or the grain market .... "If I knew how to make these
statements stronger or more emphatic I certainly would. It does not make any
difference what anybody says to the contrary. I know I am right in saying these
are incontrovertible statements.

Jesse Livermore


The virtue of patience in trading is often overlooked as a key success factor.
Without patience, a trader may have the tendency to trade when he or she
shouldn't. Instead of waiting for the best trading set-ups, the trader would
take extra unnecessary risk by trading when not all the factors are in their
favor. Worse, this bad habit is compounded by the uncertain nature of the
markets. Some of these hastily taken trades sometimes do make profits, and do
make profits big. This reinforces the belief of the trader that he or she has
done the right thing. On those trades that lose, the trader can deceive himself
that, "It's ok, losing is part of the game. I'll win more than I lose.

Author Unknown

[ilonaross]

In my August 18, 2011 market commentary, I wrote the following:

"The major indices have quickly dropped approximately twenty percent with the
market showing very little ability to stage any rallies on meaningful volume.
What little leadership remained during the past week has gone by the wayside
such as former leaders PCLN, AMZN, BIDU, LULU, CMG, WYNN, DECK, FOSL, GMCR, CRM
and SODA. Other former leaders that topped out weeks or months ago have
continued to see incessant distribution such as APKT, PNRA, NFLX, ISRG, RVBD,
TZOO, OPEN, and TIF.

Simply put, we are in a bear market for stocks. This means that maintaining
high levels of cash and preserving capital are key. "

* * *

During the past two weeks, the market staged a classic "jam" rally off the lows,
with little leadership to speak of. Such a rally was not surprising given that
the major indices had seen historic selling off their highs. Indeed, the Nasdaq
Composite managed to rally into the 2600 level, which had marked key support for
the index in March and June of this year. Unfortunately, that support level has
now become key resistance, and that index failed its first test of that level
miserably.

The "jam" rally had little, if any, characteristics of a sustained uptrend,
other than a suspect follow-through day on August 23. That follow-through day
lacked clear and unequivocal volume to indicate that institutions were putting
money back to work in the market. In addition, in the days after the
follow-through day the major indices rallied on below-average volume, somewhat
reminiscent of the "jam" rally we saw in late June through July before the sell
off began. Third and most importantly, was the clear lack of leadership and
strong basing patterns in the market.

The few stocks that managed to make new highs recently were mostly illiquid or
defensive-related names, and not the high-quality liquid growth names that are
associated with new market uptrends.

Stocks such as PMST, MAKO, and ARCO are not exactly the type of liquid growth
names that would lead the markets by themselves out of a bear market. While
these stocks could be future leaders down the road -- without other liquid
names showing strength at this time -- they are merely illustrative of the
smaller, illiquid stocks that may buck the trend during a countertrend rally.
This reminds me somewhat of the August 2008 countertrend rally before the
historic market debacle in 2008. As my personal journal entry from August 28,
2008 reads:

"The only stocks I see breaking out or leading now are smaller illiquid names
that do not give me confidence the big money crowd is putting money back to
work. While it is nice to see a name like AVAV or AFAM buck the trend, those
stocks appear to be the exception to the bear market, and not stocks that would
lead us out of this nasty market environment. For this reason, I fear this
rally does not have a long way to go."

* * *

Although I wrote that journal entry three years ago, the fact that I could
simply substitute PSMT, MAKO, or ARCO for AFAM or AVAV, is anything but
inspiring. Again, perhaps these stocks are future leaders, but without other
liquid names making new highs and leading, the rally we saw does not correlate
well with a new sustained market uptrend at this time.

Similar to today, the often-defensive medical space in August 2008 was showing
good relative strength. At that time names like CELG and AMGN were going into
new highs only to eventually get crushed during the great crash in the fall of
2008. Similarly, during the "jam" rally, medical stocks like ATHN, MAKO, and
CERN have shown superior relative strength. Without other groups leading the
charge however, precedent tells us that rotation into the medical area can often
be a sign of a "risk-off" or defensive mindframe for the big money crowd.

Faced with suspect illiquid leadership, rallies led by defensive stocks, and
virtually nonexistent superior basing patterns in growth stocks, the "jam" rally
appeared somewhat suspect from the start. And, late last week, the indices may
have begun to tip their hands, as they turned rather swiftly to the downside
after running into logical resistance.

While our markets were closed for Labor Day, the European markets continued
their sell-offs yesterday, with the major European bourses down anywhere from
3.5-5%, and the major European banks trading to 29-month lows. This certainly
does not bode well for our markets, and coupled with last week's sell-off
certainly leads one to conclude that "jam" rally appears to have ended.

Certainly a retest of the August 8 lows, and another leg down in this bear
market appears likely at this time. For now, the only small positive is that
some of the higher quality liquid names have shown a bit of "stubbornness"
during last week's selling, as stocks like AMZN, PCLN, ISRG, MA, AAPL, BIDU,
and CMG continue to show exceptional relative strength. These "sexy seven"
should be watched carefully as they will offer an important clue as to the
duration and severity of this bear market. Should they come under heavy
distribution and break lows from last month, the odds of a further sell-off
would be increasingly likely.


In summation, faced with the negative environment described above, high levels
of cash and capital preservation remain of high import. Other than gold and
gold miners, being long in this market continues to be a recipe for disaster.
And only the fool will make useless predictions of how long this bear lasts, or
attempt to trade every wiggle and tick on the tape, shorting and going long
almost at random while masking his or her incessant need to always trade.

Just as the best poker players play only a strong hand and know to throw away
weak ones, the skilled speculators understand to only play their strong hands in
the market. And the beauty of investing, is that we never have to ante until we
see the opponent's cards -- in this case -- the cards of mother market.

Remain patient and defensive for it is an absolute certainty that sooner or
later a new bull market will be born. And like every new bull market, most will
miss it as they will be too busy shorting it or refusing to commit capital once
it begins.

[ernsttanaka]

Tom Preston on of the smartest minds in the option business - I believe double PhD's and a successful pit trader for decades wrote I think a great article on the VIX.

http://www.thinkmoney-digital.com/th...inter2012#pg12


Enjoy the weekend,

Ernst

[adam ali]

For members in the NYC area, this event is coming up:

http://www.moneyshow.com/tradeshow/n.../traders_expo/

[Billy]

http://etfprophet.com/the-future-is/

[ilonaross]

http://www.nytimes.com/2012/09/16/ny...pagewanted=all

[Pascal]

Below is an eye opening figure regarding the evolution of corporate profits. This is a long-term view. Note that the left and right axes are inverted, which means that there is a strong inversed correlation between corporate profits as a share of GDP and the next 4 years average profit earnings growth.

This tells us that even though the market might go up some more, on a longer-term period, it will go down.

This Figure and the text comes from Hussman's weekly analysis.

http://www.hussman.net/wmc/wmc130114.htm




hussman writes:

On the outlook for corporate profits

Presently, corporate profits as a share of GDP remain about 60-80% above their historical norm, depending on the measure one uses. Meanwhile, Wall Street is enthusiastic not only to take current price/earnings multiples at face value, but to extrapolate strong future rates of earnings growth. As a reminder of the reality that will predictably follow this mistake, the chart below shows the ratio of corporate profits to nominal GDP (left scale), along with the subsequent annual growth rate of corporate profits over the following 4-year period (right scale, inverted). Note that the inverted right scale means that higher values represent slower profit growth.

At present, current profit margins are consistent with earnings contraction over the coming 4-year period at something close to a -10% annual rate, implying a drop in corporate profits by more than one-third in the coming years (even assuming intervening growth in GDP). That sort of decline would be consistent with a normalization of profit margins, without taking them below their historical average. Investors who believe that stocks are “fairly priced” on the basis of “forward operating earnings” seem to have no appreciation of the extent to which depressed savings rates and massive government deficits have temporarily boosted corporate profits over the past few years

[Billy]

A very pertinent interpretation of SPY outlook based on weekly volume spikes analysis.

http://www.etfdigest.com/commentary/....html#comments

Billy