Was August 6 the Stock Market Top for 2009?

A look at the 2-year chart of the S&P 500 shows that the market is headed toward a triple influx of resistance, which could provide major supply in volume entering this highly illiquid market:

1. Trendline resistance from the primary bear market’s trendline and secondary Aug 07-Oct 08 market support-turned-resistance (orange line).
2. Trendline resistance from the upper-bound trendline for the bear market rally, as defined by a rising wedge.
3. Horizontal price resistance around 1010 (which is also the 38.2% Fibonacci retracement level from Oct 07 highs to Mar 09 lows, to add confluence).

Zooming in to a 30-day timeframe shows where these important trendlines all connect: Thursday, August 6, around 3PM. Now of course using long-term trendlines on such short-term timeframes is insanity, but it gives a good idea for at least why not to go long this market and at the very least why to take profits. Such as by selling those IRAs and 401Ks, preventing exposure from the next crash, etc etc. For what it’s worth, I went net-short this market yesterday (Wednesday) and plan to get heavily short if we start trending down/reversing.

So I’m calling it now, for novelty’s sake, I’m calling the top of this stock market at S&P 1010 on August 6. I called July 4 as oil’s top last year and May 20 for the S&P’s top after it failed to hold its 200DMA last year. I was only off by a few days and a few dollars. Let’s see how right (or horribly wrong) this call ends up being.

The S&P 500 ETF (SPY) traded a whopping (new 2009 low) 117M shares today, while AIG (AIG) traded a record 134.7M shares on its way to an over 50% gain, in the face of imminent bankruptcy (CIT Group (CIT) had similar luck), on no news at all. If this market isn’t being gunned, then I really must quit trading for good. And as should everyone else who called last year’s crash.

The Treasury is issuing $75B more in securities this month, bringing the total to over $300B just in July and August alone. If it wants a bid for the Tsys without bringing mortgage rates to 10% on supply offered in reaction to more Fed monetization (remember the last QE attempt?), its gonna need big, organic bond demand, and that money has to come from somewhere and for some reason.

Money market funds have declined about $400B since March lows, on risk appetite. However, this does not even come close to the $2.7T added in equities’ market capitalizations during the rally. Of course, Fed-originating fractional reserve-leveraged QE and liquidity swap subsidies to banks made up the difference. Throw in some dark pool-originating IOI-gunning flash order from HFTs to execute the engineered rally, stealing liquidity from the market and getting paid to do it. And what you end up with is a recipe for a market crash (ask 1990s Nikkei Index for precedence).

But also recipe for organic inflows into bonds, as well, as risk aversion commences, bringing home the rate-suppression brigade and finalizing the bagholder hot potato game of passing asset depreciation from the balance sheet of a bank/insurer/REIT/finance arm to the taxpayer through equity depreciation, executed through equity and debt issuances (record secondaries Q2 2009).

As the Joker said, “it’s all part of the plan.”

Speaking of derisking, however, CDS have been tightening in every market subset, to the tune of over $550B net derisking. Whoever is selling this protection should meet their demise a la AIG during the next crunch of liquidity, coming to a 401k near you this fall.

The percentage of stocks 2 or more sigmas over their 200DMAs reached a record today. Even in a 1990s debt-financed ZIRP bull market, a 130x+ P/E in unison with this type of holistic strength against moving averages has to be considered ridiculously overbought. But in the credit crunch of all credit crunches? Factor in another $2.5T+ of bank writedowns to go, a soaring unemployment rate, record delinquencies, an imminent implosion in commercial real estate, a sovereign default or two likely in the next few months, and Peter Pan-esque deluded Q1 and Q2 earnings that will eventually catch up with reality once writedowns occur (Enron anyone?) and you got yourself signs of a bubble ready for bursting. We are now leaving Neverland, home of green shoots and birthplace of CNBC reporters selling toxic and fatal doses of Obama’s optimism (the H middle initial is actually for Hope, according to recently recovered birth records).

I’d offer a 50/50 probability on the market crashing while Jay-Z’s finale is released this September 11. (Poll question of the day: this 9/11 will more Americans be talking about planes crashing into WTC or the market crashing into the debt-financed ground?)

Disclaimer: short SPY

Comments

[Roger Knights:]

I second your "motion." You've expressed matters very well.

(PS: What's "Jay-Z’s finale"?)

Aug 06 04:49 PM

[Roger Knights:]

I second your "motion." You've expressed matters very well.

(PS: What's "Jay-Z’s finale"?)

Aug 06 04:49 PM

[John Galt:]

Top for the stock market? Who knows

Was August 6th the top for the Washington Nationals winning streak at 5 games? Probably. The team that looks like the Cleveland Indians in the movie "Major League" spent all their energy.

Aug 06 05:46 PM

[DaveW:]

I stopped out of the last of my high-end retailer and junk reit shorts yesterday, so yes, absolutely, it would make PERFECT sense that today is the '09 top. My cerebellum is intellectually suggesting 'sell, for there are many fundamental and technical reasons to'. But lo, this rally has been of the brain-stem and mine is braying, 'Buy, BuY, BUY!!'

This rally has made some very smart people quite early on top calling, it will be interesting to see how yours turns out...

Aug 06 06:34 PM

[j-dub:]

Thoughts on Cetin

It uses your blog to spam and then offers nothing to contribute.
What a parasite.................
Kind of like a mosquito which feeds on your blood and then leaves an itchy mark

Cetin = the mosquito of Seeking Alpha

Aug 06 07:02 PM

[jay brebner:]

Dave,
its your cerebral cortex that is telling to sell. your celebellum is helping you type accurately.

GS Oct 140 and 130 puts up 20 and 15% respectively. Probably all by Goldman itself.

Aug 06 07:12 PM

[whidbey:]

No, not the top but within one more wave up.

The other side of the W is there, but it will come only as the euphoria wears out and reality comes to the fore.

The bubble mania is still here and we can see and feel it every day, but it takes time to recognize.

Great question.

Aug 06 07:41 PM

[FloridaBoy2:]

Thanks for the article, However, I agree with whidbey..there is a little more wind left in the markets sail.

Aug 06 08:09 PM

[Niner:]

July to Aug 6 has been really good to me. As for Aug 6 being the top, I'm going to be a big chicken and wait for the unemployment data Aug 7 before I call anything. But, as for Aug 6 being the high for the year, I think it is possible but not probable. A pullback to 97.5 or even 95 wouldn't surprise me though.

If we get good (ie less bad) unemployment data today, we could break out of this sideways action at +/-100.

Aug 07 07:47 AM

[RSAAKKS:]

wait another 10 hours or so, with the positive employment report, you shorts may prove costly.

Aug 07 09:29 AM

[Stephen Ros...:]

Your last 10 articles have been completely off the mark. In March, you counseled shorting GS. In May, you suggested shorting JPM, BAC, WFC, MS. You've been bullish on GLD for seven months which has done nothing. You inveighed against buying the market in March, May, June. You've lost your readers tremendous profits. Some of the stocks you've shorted have doubled. It's time to rethink your strategy.

Aug 07 02:39 PM

[Kimball Corson:]

Clearly not. On Aug 7, the DOW went up 114 points and the NASDAQ and S&P did well too. Indeed, you made some money as well.

Aug 07 05:48 PM

[FloridaBoy2:]

19 years old with a big ego......entertainment... advice.

Aug 07 07:17 PM

[datadave:]

ya being saying the same thing all year and it ain't following your commands. FloridaBoy2! You nailed it!!

Aug 07 09:30 PM

[User 325080:]

I am in my fifties and think the author has a good handle on the fundamentals. As for timing, that it hard to predict with charts and figures, since we are in the eye of a political/economic storm without precident in our time.
So if you are not wary of what lies ahead, I would still hope you have placed some trailing stops in case someone yells fire in what is becoming an overcrowded theater.


On Aug 07 07:17 PM FloridaBoy2 wrote:

> 19 years old with a big ego......entertainment... advice.

Aug 07 11:43 PM

[Andrew Butter:]

Take a look at your track record.

I would day that on average a very good guide is when you say "up" it goes "down" , in that regard your analysis is very reliable.

Aug 08 09:59 AM

[FloridaBoy2:]

I'm 57 and understand that the market will do what it does regardless of what I think. There is a lot of window dressing taking place now. I'm cautious but not able to predict short term trends. :-)

Aug 08 10:21 AM

[E Nuff Sed:]

I agree the market is technically over-bought but still close to fair value fundamentally. The market is currently trading at a TTM P/E ratio = 161.2 (Aug 3rd close) and a P/E10 ratio = 18.1. This is about the level it was in the early 90's.

dshort.com/charts/SP-a...

Aug 08 02:13 PM