by Teresa Lo
I remember when my daughter used to come home from kindergarten and play "backwards day". Yes would be no, while no would be yes. I guess there is also a market version of this when the trend reaches an extreme, and so I'll share these gems with you because they reflect the change in psychology in the sentiment cycle so beautifully.
January 29, 2004: Market Sentiment Near a Top
Self-proclaimed Market Guru:
Good Morning all. While it took the FED to get the markets to pullback, I was already looking for that same event to occur 1-2 weeks ago.I want you all to be ready to get nicely long on this expected pullback..we are setting up to buy and hold for position trades into April.
Forget all the noise out there, the gurus and wall street pundits arealways wrong at these times. We needed to "re set" the charts for the next best move up.
Rates will not go up for the foreseeable future and once the change of wording is digested lookout. There's a ton of sideline cash out there ready to buy stocks on sale...
My people will be in the right sectors and right stocks well ahead of the maddening crowd...
Be brave and relax...this is going to be real pretty.
February 21, 2003: Market Sentiment at the Low
Subscriber: Teresa I've been reading your newsletter now for several weeks. If you recall, we had a difference of opinion in Jan when you said there were no sellers and I said there were no buyers - the ensuing action proved that I was right about that, because demand collapsed and we got the natural test of 800 support. I managed to catch the whole move from Jan 13th to Feb 13th because I anticipated the mainstream was already long.
Teresa: Actually, I think we correctly identified that wedge at the end of December, and we certainly didn't tell people to buy or anything like that. Remember the Ralph Acampora spoof that I did?
Subscriber: So now, I think you're wrong about the next "pain trade" - everyone is still ALREADY long, there are very few unhedged shorts. Too many people think the market will blast higher on expectations of a quick victory in Iraq - all that does is set up disappointment. Everyone bought in early Dec and early Jan expecting the Oct lows to hold on a test. Everyone is counting on these lows as concrete
So the pain trade is that the October lows come out quickly, not that we go back to 954 SP. I expect it go lower in the next few weeks after this consolidation is over (by end of Feb?), because sentiment is still too bullish, fund redemptions are just starting, and fund managers have no cash reserves to meet the large redemptions they're going to get when the market breaks SP760. So it's going much lower IMHO, prob 700 won't hold even.
Teresa: The people I talk to are mostly bearish and the market is going down, so I think it's good to know the surprise direction. But I guess the point is that you think that down would be a surprise rather than up.
Subscriber: In any event, it would be useful for the reader to hear from you not the various what if? scenarios, but where the "uncle" or pivot points should be, to determine the direction of the next wave in advance, and to catch the meat of the move . So what I'd like to know on a daily basis what the "early warning" points would be in both directions, and I don't mean that we have to hold 805 or get above 905. Something closer to where we are now. Anyway, I still want to make the point that, it would be helpful to know in advance the pivot points for a change in trend.
Teresa: Yes, I'm always thinking diabolically, what will kill 'em all. I think the Conquer the Crash people are not going to do anything, they are BIG PICTURE Dow at 400 position traders...so they are going to go big or go home with nothing.
Subscriber: Those Prechter devotee people are fringe players, and by definition they are in the minority. they don't control much money, and can't affect the markets.
Teresa: Maybe so, but I think the market strategists for the big firms expect it to go down for the count too. Did you hear Glen tell us about Louise Yamada's analysis last week? Expects new lows - advising institutional clients to get out/short - and so does a number of the big hedge fund people, most notably that guy who was on Wall Street week that I wrote about a few weeks back...this is why I think it's going to be a very interesting turn, potentially, since on the monthly chart, it's a big test of swing low.
Subscriber: The other Major point is, as a bear market gets into the second half, people will naturally get more bearish as they get in gear with the trend. So you can't use them as contrary indicators anymore. Otherwise, how would we make the ultimate bear market bottom (which is when bears predominate and disbelieve the lows are in until well into the new bull)?
All these sell-side people who are appearing bearish are just closet bulls waiting for the next low, whereupon they will once again proclaim a new bull market in March. It never ends the way we have it now. The sucker move is that this appears on a bar chart to be a tested low of October - but it isn't. At real true bottoms institutions have at least 10-12% cash.Teresa: Well maybe I don't know anything...but I think that you would agree that the surprise move would be up.
Subscriber: I totally disagree. Every big fund and all retail investors are already positioned long. There are very very few naked shorts - the majority of NYSE shorts are offset by hybrid bond longs. most bearish hedge funds are 20-30% short here at best.
The only way to trap the majority is when the October lows come out - and they will. How can we make a true bottom when households own more stock now than they did even in 2000? It's impossible that we have seen the bear market lows yet - and since this is a minority view, the failures of support will keep coming until most investors finally give up. Which is why secular bears take so long to educate the masses. At the end of this bear it will be like every other - the public will have already sold (they haven't even started yet); the public will hate stocks and they prob. will prefer cash for an entire generation more. We're only 1/2 way into this bear market. The next swing low will come around 680-695 SP, probably in the next 4-6 weeks.
04.02.04 14:26 #