The following is a re-print of what I wrote for Seven Sentinels last Sunday. My own view is that it was highly relevant then in order to better understand what was/is developing, and that it is even more relevant after Friday's market action.... so I decided to recreate it as a post here. All charts in today's post have been updated through yesterday's close. Feel free to agree or disagree with my conclusions at will- nonetheless this is a brief summary of how I view markets in April 2014 based on four decades of observation and development of methodology. It is not intended to dictate how you day trade or even position trade when markets open Sunday night/Monday. It is what I see as a key overview of where we are in the big picture at a very critical moment of truth, upon which any interested traders can build their own strategies and individual trades- using their own trading methods. I hope you find it of value. At this critical juncture, I will also open this week's report (when it's published Sunday evening) to the public for any who may be interested, here.
Good trading, D
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Primary Trend: Bull Market
Intermediate Term: ~ Seven Sentinels ~Downtrend/3-24-13, SPX 1849, 0 of 7 on Uptrend (close)
Short Term ~Hourly Trend Trackers ~Downtrend/4 PM Close, 4-3-14 - 1889/0 of 8 on Uptrend (close)
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Denial is not just a river in Egypt. Nor is it a conscious or an intentional process. It is the process of subconscious rationalization that otherwise often highly intelligent and honest folks use as a means of trying to make sense of that with which they are confronted -- when that evidence contradicts what they believe or want to be true.
We all remember when markets were down sharply on the first day of 2014. The universal response was- "well this is just one day- and it's because of traders who have waited till now to take profits to move those profits into 2014. It's not a game changer- the first week of the year will tell us if the trend has really changed". When, after the first week, markets were down sharply for the entire week (a traditional predictor of a down year), the response became "well this just one week- which isn't a reliable harbinger- the change for the month will tell us if the trend has truly changed." Then at the end of the month, when markets were down sharply over the entire month (an indicator that has been 80% accurate a harbinger for the year's ultimate direction), the response became- "This is just one month. You will find some years that started out down but then ended up -- if you search hard enough. It's still a bull market."
We are reminded of that response to the January declines now as we watch this same response being given to the sudden sharp decline across the boards in ALL of the darlings of Wall Street- stocks like Amazon, Google, Netflix, Tesla, Priceline, Facebook, Twitter, Linkedin, 3D Systems, Biogen and the rest of the biotechs and other "darlings"- right down the line.
And what is that response? Silence. There is virtually no mention of this elephant in the room even though it is becoming universal- and the cumulative losses in market value are now, as in 2000, in the $100's of Billions. If there is any mention, it's rationalized into some form of "normal profit-taking", or "over-reaction" or "markets falling victim to their own success".
This response (or lack thereof) is highly reminiscent not just of the January 2014 response, but of, in fact, the April 2000 response when the then darlings of wall street, the dot.coms, staged a sudden and dramatic decline in late March. Below, for example, we note the decline in the NASDAQ COMPQ from 5100 to under 3700 in less than two weeks. At the same time RUT declined from 613 to 466. These declines represent more than a 25% drop in the entire value of the NASDAQ Composite (we'll leave it to others to compute how may $100's of Billions) - in just a couple of weeks!
April 4, 2000:
https://stockcharts.com/c-sc/sc?s=$SPX&p=D&st=2000-02-01&en=2000-04-04&i=p58201294630&a=345577576&r=1396717645768.png
And what was the response then, in April 2000? Silence. The vast majority of traders and investors either held, or worse- bought more, as markets marched down for three years, with COMPQ ultimately losing some 80%.
Some of the comments from April 4, 2000:
"Analysts, citing no fresh news behind the losses, blamed the selling on the Nasdaq's own success. "Between October and March, the Nasdaq has almost doubled in price," said Richard Cripps, chief market strategist at Legg Mason. "Even these companies that have been cut in half are still three or four times more than they were a year ago."
The day's action puts the closely watched indexes closer to parity then they've been in months. The Nasdaq is now up 1.9 percent this year while the Dow is off 2.8 percent."But Larry Wachtel, market strategist at Prudential Securities, attempted to put the losses in perspective. (471K WAV)) (471K AIFF).
Many like Wachtel, who spoke on CNNfn's market coverage, showed no signs of panic, pointing to expectations for strong corporate profits that come amid a U.S. economy now in its record 109th month of expansion.
With first-quarter earnings season poised to begin, Vince Farrell, chief investment officer at Spears, Benzak, Salomon & Farrell, sees good news ahead for stock investors.
"The bottom line is earnings will be good," Farrell told CNN's Street Sweep.
Technology companies in the S&P 500 are expected to increase profits by a cumulative 26.2 percent in the first quarter, outpacing the 18.4 percent gain for the overall index, according to First Call/Thomson Financial
And some tech names fully recovered by day's end. Intel�(INTC: Research, Estimates) gained 2-/18 to 132-3/4 and Cisco(CSCO: Research, Estimates) rose 3/16 to 73-1/8.
Investors found a few safe places to hide -- among them bonds. Prices of fixed-income securities surged, sending the yield on the 30-year bond to its lowest levels in nearly a year.
Sounding familiar? It should....we are hearing similar comments every day. Here, btw, are what bonds are doing since the first of the year:
https://stockcharts....04205&r=911.png
If you drop a frog in a pot of boiling water, it will of course frantically try to clamber out. But if you place it gently in a pot of tepid water and turn the heat on low, it will float there quite placidly. As the water gradually heats up, the frog will sink into a tranquil stupor, exactly like one of us in a hot bath, and before long, with a smile on its face, it will unresistingly allow itself to be boiled to death. So goes the story.
Whether it is true or not of the tailless amphibians, it is certainly true of the trading crowd. Few were warning of what was being ushered in back in April 2000, and few paid any attention to those who were warning. Fortunes were lost by the "frogs" who rationalized these developments and viewed them as benign, as these dollars moved into the hands of those who were able to recognize these changes and had clear vision as to their meaning. "Money itself isn't lost or made, it's simply transferred from one perception to another. Gordon Gekko:
The following charts show what NASDAQ and RUT did over the next three years:
https://stockcharts.com/c-sc/sc?s=$SPX&p=M&st=2000-02-01&en=2002-10-09&i=p17869148225&a=345577695&r=1396717793346.png
Let's just take a quick survey of Wall Street's absolute favorites and compare what they are doing now to what the favorites of the dot.com era were doing in the March 2000. Few would argue that if we were to list the brightest of today's superstars- that list would most certainly contain names like Amazon, Google, Tesla, Netflix, Priceline, Facebook, Twitter, Linkedin, 3D Systems, Biogen, among dozens of others. We are NOT singling out stocks that have been hit- these are the crème de la crème of the 2014 favorites - mostly widely held, traded and touted of the top tier growth stocks. Yet those stocks have lost, on average, more than 20% (update to 25% as of Friday) in just recent weeks as can be seen even by quick review of the following charts. Not as concentrated as the sudden declines off the secular bull market (40-year cycle) peak of 2000- but the principle is precisely the same now as then. How many $Billions have already been transferred from longs to shorts- and how may $hundreds of Billions are yet to make this journey in months ahead?
The message is unmistakable. But where are the warnings? And how many are listening? The frogs are being slowly boiled once again. And those who see what this all means, who once again stand to make fortunes, are seldom heard and even less often believed.
https://stockcharts....80147&r=660.png
https://stockcharts....96716176426.png
https://stockcharts....60154&r=191.png
https://stockcharts....60644&r=356.png
https://stockcharts....60602&r=562.png
https://stockcharts....60649&r=427.png
https://stockcharts....60454&r=649.png
https://stockcharts....96716598995.png
https://stockcharts....72010&r=710.png
https://stockcharts....60490&r=191.png
...and that same array of SPX, COMPQ, NDX and RUT 14 years to the very day later- on April 4, 2014?....
https://stockcharts.com/c-sc/sc?s=$SPX&p=D&yr=0&mn=2&dy=0&i=p82620808845&a=345588654&r=1396723159480.png
Make no mistake. There will be no sudden wake-up call- a point where traders realize "the balloon is deflating", like, for example, leadership downward by the Wall Street Darlings, NASDAQ leading downward for the first time in eight years, RUT leading downward for the first time in a year, IPO stocks dropping from offer price, SPX making new high on the same day that both NYMO and NAMO are negative and NYSI and NASI declining. There will be no sudden realization that something is different as COMPQ is near year lows as the DJIA makes year highs, TRIN and TRINQ showing steady heavy distribution, net new highs collapsing, BPI's and stocks over 50 and 20 day moving averages collapsing- showing vast majority of individual issues now in downtrend- major averages selling off to the low-of-day (LOD) in final hour rather than rallying to HOD at close, or as traders note that the CBOE Black Swan Index has reached the highest average level in it's 24 years for which we have data.
How do we know those developments won't serve as a wake-up call? Because these shifts have already occurred- and, like in 2000 at the top or 2007 at the top- nobody is taking notice. Or if they take notice- they find "logical" rationalizations to explain them as "meaningless". They will eventually recognize what has occurred, of course....but MUCH later, after the damage has been done ("the frog has been boiled") and the fortunes have been made by those who saw those developments for what they represented- in their early stages.
The game never changes- only the players.
Edited by IYB, 05 April 2014 - 02:21 PM.
