Actually, 'Lazy Mole Hibernates' would have been a more apt title but that's no way to make an entrance. Anyway, I'll get right into the meat of things which is the reason I haven't been touching equities with a ten foot pole for the past two months now:
Yes, that dreaded zero indicator again. The daily version of my evil creation has kept me and my crew out of doing anything silly for the past nine weeks or so. The smoothed panel provided very important clues by exhibiting a complete lack of bearish divergences. What do I mean by 'bearish divergences'?
For an example look no further than the middle pane during late spring of this year. Despite equities pushing higher the signal started to show some clear disturbances as it kept dipping below the the zero mark. It was clear that volatility was increasing and that the up trend was falling apart. This portended an impending correction, which is of course exactly what we got.
What's even more important is how the zero flagged the tape when every bear and their mother expected a slide into the abyss: Just look at the time period between June and August as the signal kept gyrating higher and eventually lifted above the zero mark. It was clear to us then that more upside was in the works (or at least no major drop was pending) and that the bears had lost the battle for 2010.
In case you wonder why I have not been going long: Well, that's my personal trading style – I only go long when I see a convincing signal accompanying it. Although the recent ride up looks like a great opportunity for the longs in hindsight it hides the fact that the systemic risk in this tape is considerable, which is why I cannot justify taking long positions for more than a few days.
On a long term basis the slowly unfolding divergence (i.e. the slowly sloping line I painted in the middle pane) will at some point either be broken or will lead to a fast correction. I cannot predict when that will happen, especially going into the looming Santa Rally season. I prefer to take long or short trades when I see the odds clearly on my side. As of right now – the odds neither favor the longs nor do they greatly favor the shorts. Which means I continue to watch and wait.
The good news? At least I haven't tried to short this rally 😉
Anyway, if you want to give the Zero a test ride – well, you know where to find me.