Mole To The Rescue

By -

Alright, I have seen enough. It's time for someone to step and set the things straight over here at the Slope. Although I can't blame Tim-ay for relenting to bearish exhaustion it's important that we fade emotions and look at all evidence at hand before we get married to the long side. Quite frankly, I almost feel pity for the bulltards – for they have no idea what they're dealing with.

2010-08-04_angry_mole

I said 'almost'…

2010-08-04_SPXA200R 

This chart is something my stainless steel rats are more familiar with. I'll try to explain it this way: What you are seeing is the difference between the 'average' (think moving average) and the 'median'. 

What I have labeled on this chart are instances of when the SPX was in the 1120 – 1130 trading range. Which was a lot more often than I care to recall – we seem to be trapped in this range and I am starting to feel like Bill Murray. Anyway, the yellow marks are periods we spent in this range and the green marks connect to the moving average of the percentage of stocks above the 200-day SMA during that time. So, back in December (yes, half a year ago – the horror!!) we were at roughly 75%. Three months later at number 2 we were at around 65%. In May at number 3 we are at roughly 60%. And now/today we are at – gulp! – 46%.

What does that mean? Do we care? Yes we do. What it means is that there is a distinct and rapid steepening of the lead curve. And by that I mean that there is a greater polarity between the number of stocks in the SPX which are pushing up sharply and the ones which are flat or dropping. That’s the difference between the average and the median.

Jeezzz Mole – what does that mean again?

The average (or mean) is the sum of the values of all the observations, divided by the number of observations. It is the average value. The median is the value at which 50% of the observations lie above, and 50% lie below. Alright, now your head is spinning – let me fix that. Here is an example:

Here is a series of numbers: 1, 2, 3, 4, 5000, 9000, 8700. The median is the one in the middle: 4. To get to the average add them all up and divide by 7 – which is 3244.

Aaaah – I’m sure a light bulb just went on in your head 😉

You can assume that the median for stocks is usually lower than the average close to market tops. In other words again (and now we finally get somewhere), the price on the SPX represents the average, as it is a free-float capitalization-weighted index (please don’t ask me what that means), and the median (sort of – it’s based on the 200-day SMA) is the SPXA200R (which I put an SMA on, just to confuse you further).

Moral of the story: On the median side we can see that an increasing amount of stocks are dropping below the 200-day SMA, despite price claiming that the ‘value’ of the SPX is the same.

And that, boys and girls, is the definition of 'distribution'.

2010-08-04_SPXA50R 

Here is a similar view, this time with a slightly higher 84-day SMA – we want to fade the noise. What I'm seeing is the exact same pattern we saw during the fall 2007 topping process. This actually confirms Karl Denninger's theory that we are going through a similar price fractal right now – maybe someone here can post the link, I can't find it.

2010-08-04_DJI 

Thus my outlook for the rest of the year is pretty clear. We are currently in a zigzag flat correction which may take us close to this year's high of 1219.80 on the SPX – and maybe we will even exceed it but that is by no means guaranteed. I also do not think that the Dow will exceed its high mark of 11,258.01. We may count a new high as an irregular top or we may slap another wave label on it to satisfy our never ending desire to make sense of this woodchipper of a market. Whatever floats your boat – but don't lose sight of the overall picture.

For the market internals are very clear – I have tons of charts in my repertoire (and which I present on a regular basis at my evil den of financial doom) which strongly suggest that this is nothing but a second wave correction in equities. After all – they are known to be brutal and leave most bears on the wayside. 

Remember – the bus always moves fastest when it's empty. 

Medium Term

2010-08-04_count 

Here are my short term musings on my SPX wave chart. That little overlap last week caused me to pull a very rare 'ending diagonal' card, but since it only happened on the SPX I may just choose to ignore it. The third option is to project new highs for the year – as this would mean that we are in a sub-dividing 3rd wave. And as Tim-ay pointed out – it may drive us a lot higher than any self respecting bear would care to imagine. 

2010-08-04_gold_silver 

My gold/silver ratio chart is already bouncing exactly where I suggested it would. Bear in mind that this supporting indicator can dance along that lower line for a while until equities finally relent and drop to the downside.

2010-08-04_copper 

Copper is still pointing to the upside and it's been spot on all year. Which means that we're not turning just yet – give it until mid August, which in my estimate will be the curtain call for Soylent Green (i.e. the green scenario on my SPX wave count chart).

Whatever you do – stay frosty and don't yield to emotion! 

Cheers,

Mole

Share this post: