Bear Trap Has Been Set; Now It's Time for Short Sellers to Enter

I'm sorry it has to be this way, folks, I really am. But it looks like the bears have set the trap. The bulls have wandered in. And now, there's only one thing left: for the bears to have their lunch, and for the bulls to meet their fate.

Fundamentally we know the story: unemployment and low retail sales are all the talk. And while the January effect coupled with inflationary stimulus packages may have helped the market engineer a bit of a rally, the economic woes are still clearly in place, and it looks as though the primary trends are preparing to resume themselves. For instance, at the time of this writing, S&P 500 futures are pointing to a fifth loss in a row.

Technically we see a nice potential trade lining up on SPY, particularly if SPY can break support at 85.43. The market is now trading below the 5, 10, 20, and 50 simple moving averages, all of which are converging -- another indication the bear market rally may be concluding. A break below 85.43 could pave the way for a retest of previous lows at 75.

Check the chart below:

A lower S&P 500 is also generally correlated to a stronger yen. We have seen the yen begin to rally again, as the USDJPY exchange rate has broken below 90. The chart below plots the USDJPY (blue and gray candles) against the SPY (red and green candles). In sum, a resumption of the bear trend in the S&P would be a bearish sign for USDJPY, which stock market traders can take advantage of via the FXY ETF.

Disclosure: Short USDJPY.

Comments

[KKR:]

Really so funny!.

One article by Great Trade today predicts a good entry point today for a short term bounce. He has also allocated 50% of his portfolio into equities based on this premise.

And here we have Simit Patel predicting that the bears have laid a trap !

Why does seekingalpha even bother to post articles that contradict each other on the same day !!!

Jan 13 10:59 AM

[John Lounsbury:]

KKR - - -

Seeking Alpha publishes the opinions of others and (presumably) does not have an opinion of its own. There are divergent opinions about market direction and they should all be published.

Simit - - -

I favor your opinion over the other one cited by KKR. One factor that few are discussing is the systematic decline in NYSE volume since late November. This occurred as the rally reached its (sofar) zenith last week and has continued as the market has declined since.

This indicates little sentiment to buy as the rally progressed and, so far, little sentiment to sell as the market declines. The eventual outcome of this indifference by investors is likely to be a dramatic price change with a huge surge in volume. There is a lot of cash on the sidelines to fuel a 10% to 30% rally in just a few days. There are a lot of earnings outlooks that seem poised for further downgrades, which could fuel a panic collapse as the indifferent become disillusioned.

Simit, that is why you have one opinion and others differ. My personal opinion is aligned with yours.

Jan 13 11:18 AM

[The Good Ne...:]

On the contrary my friend,

Although I really like your short term charts, the bear trap snapped back in early to mid-December and many leading indicators are now pointing positive. You are looking at lagging indicators. And the market is looking forward.
Here are the top ten "leading indicators":
1. Average manufacturing-worker workweek
2. Initial jobless claims (4 wk SA)
3. Manufacturers' new orders for consumer goods and materials
4. Vendor performance (from the Purchasing Managers' Index report)
5. Manufacturers' new orders for nondefense capital goods
6. Building permits (from the housing starts report)
7. The level of the S&P 500
8. The inflation-adjusted measure of the M2 money supply
9. The interest-rate spread between the 10-year Treasury note and the fed funds rate
10. The expectations portion of the University of Michigan's Consumer Sentiment Index

Back in November already 4 of 10 were positive. What's happening today is high-lighted here: mast-economy.blogspot.... . With several more flipping to the upside.

Several prominent perma-bears are now fleeing to the open meadow:
John Cassidy, The New Yorker
Bill Fleckenstein has closed his short fund.
Doug Kass, says he sees upside in the averages.
Richard Rainwater is buying oil stocks again.
Marc Faber of Barrons now owns US equities for the first time in thirty years

It is time to find our matador costumes.

Jan 13 11:18 AM

[Bryan Kautzman:]

I think the lows we saw in November were not only the result of a lot of panic, but they also took into account a lot of scenarios that are now playing out. The markets anticipated a vastly shrinking economy. They anticipated a vastly rising unemployment.

However, the market also anticipated that things weren't going to get any better any time soon. In fact, back in November, smart minds were saying that there was a strong likelihood that the markets would fluctuate between those November lows and the resistance that has seemed to form around the mid 900's over the months since for at least a year.

I don't see anything to contradict this, so my strategy has been simple. Buy long when the S&P drops below 800, go short when the S&P goes above 900. Anywhere in between is something of a "no-man's land".

Jan 13 11:30 AM

[ray b:]

the trend is still down

Jan 13 11:41 AM

[Maxe Paul:]

The S&P realy needs to hold at 850 for the current rally to continue IMO. Its a real line in the sand i believe. I personally think it will hold and we will see a rally into Obama being "crowned" president. If not, new lows are coming, maybe sooner than Febuary.

Jan 13 12:03 PM

[Rokjok777:]

brief Obama rally, nothing special, then watch out below. Cash, for now...

Jan 13 03:53 PM

[PROXIMO:]

The link you provide is to your website THE GOOD NEWS ECONOMIST. Liike the very name doesn't reveal an agenda. If four of the top ten leading indicators you site were positive in November, then by definition most weren't positive (or outright negative). The article you provide the link to is specious and widely open to interpretation. Also, Richard Rainwater dumped his oil holdings when oil hit $129 per barrel and now he is getting back in after less than a year. That hardly classifies him as a perma-bull. Further, the global equity markets are inextricably linked. Any cursory glance at a multi-year global equity chart will bear that out. NEWSFLASH: Global equity markets are heading down and negative economic data is coming out on a daily basis. The domestic bailouts are widely conceded to have failed and don't think for a minute that our elected representatives aren't chomping at the bit to wreck things worse than they already have. I think your investment strategy leaves much room for improvement but I admire your courage if you go long this market.


On Jan 13 11:18 AM Good News Economist wrote:

> On the contrary my friend,
>
> Although I really like your short term charts, the bear trap snapped
> back in early to mid-December and many leading indicators are now
> pointing positive. You are looking at lagging indicators. And the
> market is looking forward.
> Here are the top ten "leading indicators":
> 1. Average manufacturing-worker workweek
> 2. Initial jobless claims (4 wk SA)
> 3. Manufacturers' new orders for consumer goods and materials
> 4. Vendor performance (from the Purchasing Managers' Index report)
>
> 5. Manufacturers' new orders for nondefense capital goods
> 6. Building permits (from the housing starts report)
> 7. The level of the S&P 500
> 8. The inflation-adjusted measure of the M2 money supply
> 9. The interest-rate spread between the 10-year Treasury note and
> the fed funds rate
> 10. The expectations portion of the University of Michigan's Consumer
> Sentiment Index
>
> Back in November already 4 of 10 were positive. What's happening
> today is high-lighted here: mast-economy.blogspot....
> . With several more flipping to the upside.
>
> Several prominent perma-bears are now fleeing to the open meadow:
>
> John Cassidy, The New Yorker
> Bill Fleckenstein has closed his short fund.
> Doug Kass, says he sees upside in the averages.
> Richard Rainwater is buying oil stocks again.
> Marc Faber of Barrons now owns US equities for the first time in
> thirty years
>
> It is time to find our matador costumes.

Jan 13 04:01 PM

[investor88:]

I am aftraid Simit has hit the nail on the head when he says the bears have laid a trap. Good analysis of the charts of SPY and critical level of 85.4. It seems most readers think the 85.4 support may not hold Obama factor notwithstanding.

Jan 13 06:23 PM

[Augustus:]

There have to be both Buyers and Sellers.
Do you expect Seeking Alpha to know which is going to be correct 2 years out?


On Jan 13 10:59 AM KKR wrote:

> Really so funny!.
>
> One article by Great Trade today predicts a good entry point today
> for a short term bounce. He has also allocated 50% of his portfolio
> into equities based on this premise.
>
> And here we have Simit Patel predicting that the bears have laid
> a trap !
>
> Why does seekingalpha even bother to post articles that contradict
> each other on the same day !!!

Jan 14 01:28 PM

[johnbee:]

will someone tell me what good news bulls expect? the Obama stimulus plan has all but been written off and now even Democrats intend to oppose it. Every country in the world is in freefall on just about every chart and indicator and no-one is saving as there is no reward but no-one is buying as prices continue to fall. Bulls to me are like gamblers shoving money on red on every turn of the wheel hoping that one day the odds will turn in their favor. This market is not a game of odds.

Jan 14 02:13 PM

[Conan the B...:]

PROXIMO: GNE is not an investor. He wrote a long comment regarding his goals which are to promote the positives he sees to fight the Negative Media which abounds.

Faber advocates buying beaten down Basic Materials stocks instead of Gold shares because he believes the USD will remain strong and the BMs will be infratructure plays. He also believes that the US stock market will be very weak in the February-March time frame.

Kitco.com-Gold Precious Metals Has free commentary by a few Writers Adens,Faber,Ruff.

Its a nice place for seeing what writers like Faber are actually saying. IMHO

Jan 15 02:32 AM