Keeping On The Right Side Of The Market

Includes: SPXL, SPXS, SPY
by: George Simone

"I don't know and I don't care" are the words coined by a successful hedge fund operator at a recent seminar for market strategists. He called it his mantra, and the reason for his success in the market. His advice to the audience was that since they can't possibly know more than the indexes do, they might as well sit back, relax and select a trend following method that they can be comfortable with and follow the signals of the market.

Of course, there are only very few analysts out there who would agree with this guy, but his phrase does capture a lot of market savvy. Saying I don't know means understanding that the market already knows and that I possibly can't know more than the market, and neither does anyone else. So I don't need to care about the conflicting and thereby market making and often profound prognostications by a bull or bear advisory. Of course, one needs to note what they have to say, and add it to the overall mosaic of market information. But the market will have it all sorted out already, so just trust the market.

A case in point is to compare the state of the market in October and December of last year with the rally so far this year. Because of the debt fiascoes by Greece and other eurozone rim countries, a crisis was spreading throughout Europe's financial system. The gloom and doom Sayers were out in force, arguing that the ripple effect of this crisis would adversely affect the global banking operations and cause the stock market to perform the mother of all nosedives. Adding to the financial gloom were signs that the world's economies were slowing down, especially in Europe and the U.S.

Check the bull trend BGU, the bear trend BGZ and the S&P 500 index Troika charts below, and note that during October and December of last year the bear trend was at the top, and the bull trend at the bottom with the S&P 500 index following the bull into a deep hole. This was the market's way of saying that the economy was not going to improve any, and that therefore the market would continue its sell off.

But also note that in October already-- and especially in November-- the green, red and yellow Advance-Decline lines turned into a negative configuration for the bear trend, and into a positive configuration for the bull trend and S&P 500 as well. With this the market was signaling that financially and in the economy things were about to get better, and that the market itself was getting set to rally. Trying to explain that in those days earned you nothing but strange and doubtful looks.

Now the doom and gloom sayers are back with the prognostication that the market is setting up for a major correction, which will take the S&P 500 index down forty percent by year's end. As these bears have it, there is already growing skepticism about the market's ability to keep on climbing without first pulling back and consolidating recent gains. This is why so far this year's volume and participation rate in the market is already below last year's, and that could signal the first step to the downside.

But what the bears so convincingly argue is that the ongoing spike in the price of oil will bring the global economy to its knees, and consequently the market. So check out the oil chart above, and note that this Spot Price Index is indeed bullish for oil, except the runaway spike-- which can be justified only if Israel actually takes out Iran's nuclear facilities, and all the consequences that implies, which renders this possibility very unlikely.

This is why some oil executives claim that any price over $90 per barrel oil is nothing more but Iran fear premium, which can melt away real quick. Maybe this is why energy ETFs which did rally strongly have suddenly come to a dead stop, and appear to be hesitant to rally further.

Most importantly, keep in mind that anytime you ride a spike like this price of crude, you are holding a bear by the ears. Meanwhile, trust the Troika and see what the market has in store.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.