Stock Market Should Never Have Been Rallying in First Place

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Late last week, the stock market seemed to lose its footing, as the Dow slipped from a 13-month high of 10,437. Options expert, Jay Shartsis, believes that last week’s stumbling stock market is a sign of things to come.

Meanwhile, our colleagues over at The 5-Minute Forecast argue that the stock market should never have been rallying in the first place. The economy still stinks, they say, and it is showing no signs of recovering. In fact, a close look at the housing market tells you all you need to know about the economy…and the news is not good.

Jay Shartsis, the mind behind the Shartsis Option Alert in New York observes:

The always-intriguing “Stock Cycles Forecast” is looking for an important top right in here. This bearish outlook stems from a quirky collection of indicators called “time and price squareouts.” For example:

1) The big S & P low in October of 2002 was 769. If one adds 769 days to the grand top of Oct 11, 2007, it comes out to Nov 18, 2009.

2) Nov 18, 2009 is a “natural square” of the crash of 1929.

3) The Oct 2002 low of 769 on the S&P 500, converted to months is 25 and due west from 25 on the Gann Square of Nine points to an S&P target of 1,104. We are there.

4) We are 85 months from the low recorded on Oct 10, 2002 and due West from 85 on the Gann Square is 1,105, which coincides with the same S&P 500 target.

5) The low last March on the S&P 500 was 666. If we subtract that in days from the recent peak of 1,102, it equals 666 days, which would bring us back to the date of the Lehman bankruptcy – the event that started the crash.

I know all this sounds very wacky and mystical, but Jenkins (the editor of Stock Cycles) has had some very good calls with this methodology in the past.

S&P vs VIX

Another much less mystical indicator is the VIX Index of option volatilities – aka, the Fear Gauge. For starters, the VIX is currently sitting at its lowest levels since just before the stock market crash of one year ago. That’s a bearish indicator all by itself. But there’s more to the story. The January VIX futures contract is trading at a steep $4 premium to the spot VIX. Normally, a large premium in the near-term futures contracts relative to the spot VIX price would portend an imminent stock market selloff. The opposite is also true.

Thus, three weeks ago, as the S&P was hitting its recent low of 1,029, the VIX futures had a discount of $3 versus spot. Stocks promptly rallied. But today, we find the opposite configuration, which is quite bearish indeed.

A selloff is not guaranteed in here, but it is becoming an increasingly likely possibility.

Eric Fry
for The Daily Reckoning Australia

Eric J. Fry
Eric J. Fry has been a specialist in international equities since the early 1980s. He was a professional portfolio manager for more than 10 years, specializing in international investment strategies and short- selling. Mr. Fry launched the sometimes-abrasive, mostly entertaining and always insightful Rude Awakening.
Eric J. Fry

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Comments

  1. If you mean to say that this numerology mysticism is as good a way of stock market analysis as any other analytical system or otherwise, we might as well start praying again. Well here goes, “Apollo, are you there mate? Love your work!”

    Reply
  2. The reason some of this number theory works is not because it has anything to do with natural patterns – especially not for something like a stock market system, but that there are some crazy nuts with too much money who decide to do evil deeds on certain days. Many a self made man worships his maker – and much superstition is confirmed purely because the believers carry out their own prophecies themselves to make sure they happen.

    I’d put money on it if I knew the guy was a proper insider and knew when this or that giant company was going to pull the rug on this or that other giant company.

    Reply
  3. You make me laugh Dan. I get what you’re saying but can you really apply this numerology system ever? Your answer implies no. Basically you can follow the misbehaviour of financial giants with their current ludicrous system.

    Also, that’s what most of the people who got involved with Berny Madoff admitted to. They figured the only way he could make so much money was he was insider trading.

    The thing about patterns is anyone can identify them and people will like thinking the answer is within their capability. We’re primates designed to recognise the delicious red berries and to leave the green unripened ones. When it comes to extrapolating patterns from market forces there are countless patterns to be found and anyone can tell you what that patterns ‘means’. Unfortunately the meaning step is the point of fallacy.

    I’d put money on it too if i knew the guy was an insider but I can’t believe in something I do not understand. It’s not that the pattern is necessarily bad it’s that it’s existence has been found because it was looked for and the meaning is always intentionally applied. When it stops working (which it will because they all do) another will be introduced (or another 100).

    Patterns are like milk, they have expiry dates and when they go off everyone chokes on the sour taste and wishes they’d checked the label.

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  4. Drew, I’ve met people who have made staggering life decisions based on numbers – completely arbitrary numbers like 13 or 6 or 7 or whatever.

    Milk is interesting though, you can observe Brownian motion if you look at it under microscopy – an interesting example of probabilities and random. There’s a lot to be said about the study of milk.

    As for Madoff, people ought to be very conscious of the fact that he is but a single case of what is a systemic problem. There are people like him throughout the financial establishment, some of which are much better at it than he – it’s quite likely we’ll hear of scams bigger than his in the coming months.

    Reply
  5. People will make staggering decisions based on Neptune being in retrograde – but astrology doesn’t gain any credibility because someone can be convinced of it. There are lots of interesting things about milk such as that milk can contain anything the cow consumes reports of strontium-90 in milk have been made which is a nuclear (and radioative, although uncommon to find in milk) material. Also, there are large amounts of antibiotics (about 52) which transfer to milk along with other bacteria and viruses. Interesting to study but milk was not for humans to be consuming (and we can study human ineptitude when it comes investment and speculation on how the market works but we don’t have to buy into it fallacious thinking because it suits an intellectual imperative).

    “It’s not natural for humans to drink cow’s milk. Humans milk is for humans. Cow’s milk is for calves. You have no more need of cow’s milk than you do rats milk, horses milk or elephant’s milk. Cow’s milk is a high fat fluid exquisitely designed to turn a 65 lb baby calf into a 400 lb cow. That’s what cow’s milk is for!” –Dr Michael Klaper MD

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