Those who fail to learn from history’s mistakes are bound to repeat them. Its an age old saying, yet every new mania in the markets screams how this time its different. Financial markets are actually very boring from a historical perspective. The same thing happens over and over again. So here we are, at the end of Quarter One 2013 pressing on new highs, yet it seems the market has forgotten all about what happened a long long long time ago. And by that I mean, exactly one year ago.
I’ve beaten my January Effect analog to death, however it needs to be examined one last time. And this time, the analog has an Easter basket full of goodies for the bears. Call it the re-birth of shorting, call it reversion to the mean, call it what you want. Again, I present charts with numbers to explain exactly what I mean. And again, the numbers are markers, not waves.
January Effect 2012
I’ve rehashed point’s 1-3 many times in prior posts. 1: Beginning of a massive grinding uptrend, 2: classic pullback to prior high, 3: break to new highs. However, 4-7 is where we are now. And this is important. I call this pattern simply “chop at the top.” A series of quick drops and quick rallies shows a few things. First, its classic distribution. Second, the bears actually are starting to work past prior day’s lows instead of every dip being bought. Third, each drop starts to erode the bull’s sense of infallibility. Point 8 is the hard drop to the prior pullback level. Point 9 is the textbook perfect reflex rally that makes A LOWER HIGH. Point 10, well, point 10 is where the bears get to bang the hell out of the market at will. Also, please note that in 3-7, each new high is met with a LOWER reading on the RSI. Momentum is rolling over…distribution.
January Effect 2013
Again, 1-3 has perfectly mirrored 2012. Even the pullback was virtually identical in percentage terms. We currently are now seeing 4-7 play out incredibly rapidly as the market has additional speed because of the drama in Cyprus. Note though, that each high is now lower, instead of higher as in 2012. Prior I mentioned that 2013’s January Effect was overall WEAKER than 2012, and 4-7 is yet another sign of the phenomenon. Points 8-10 simply are projections of market direction based on 2012’s pattern. Again, note how much weaker the RSI is on every bounce.
Bottom line, I could honestly care less what happens in Cyprus. The market is going to do what it wants to do. And the psychology for a coming dump is setting up perfectly. First, any type of hard drop is going to cause funds to book their Q1 profits. Secondly, treasuries are on the cusp of blasting through a major descending trendline. Third, the Fed has shown their cards until May 1st. Lastly, the second dip buyers get absolutely torched they will stop becoming, well, dip buyers. All the cards are set for a very quick and hard drop. Again, this isn’t wild conjecture. Its simply history. And history has a nasty little habit of repeating itself. Happy hunting bears, its time to watch the bulls march straight into the slaughterhouse.