Brian Kyser's  Instablog

Despite a week which saw a healthy rally in the U.S. Dollar, gold continued to show impressive strength, and in fact, yesterday broke significantly higher despite the higher greenback. The wish-washy correlation between the U.S. dollar and gold should be no surprise at this point, however. As we have pointed out numerous times, gold appears to be wearing "Everyman's Hat" - and its inexplicable bullishness apparently the result of its own secular uptrend.

For now, the game remains buying pullbacks and break-out levels (we were provided two most recently, with the pullback to 100, and the resistance break above 104.5).  Further short-term pullbacks to the 104.50 level may give traders and investors second chance buying opportunities.  And the recent price action perhaps allows us to be a little bit less nervous about every gyration in the currency markets, at least for the time being:


Disclaimer:  author's clients maintain positions in the GLD.

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Finally seeing meaningful distribution across the indices today. And while we may see some short-term snapback in the coming days/weeks, I would wager they would be prime opportunities to get out of anything you failed to trim back on, and/or initiate some short positions at more favorable prices. Take a look at the Nasdaq, a former leading index:


When leaders accelerate the downside, you are being given a warning flag. Recall last week we mentioned the sudden sell-off in the EWZ as a harbinger of future woe. Take a look at today's action:



We have now see four straight days of above-average selling in the SPY (S&P 500 ETF).



And while this suggests we may be oversold in the short-term, it certainly implies more selling ahead, as recent buyers get spooked. Buyers in October will soon see their newly minted "bull market" positions put to the test.

Further evidence of this theory can be seen in individual stock names. A lot can be learned from observing a list of "I wish I had bought those" stocks. Everyone has a list of such names, stocks you wish you had held or bought at the bottom.  Stocks that have rarely let up or given investors a chance to hop aboard. Well, I look at my list and I see tons of breakdowns I would NOT buy. Gap-downs, breaches of trendlines, ugly volume. This tells me that stocks that people would ordinarily want to catch or buy "on the dip" will continue to trap investors or scare away smart money buyers, who come to realize the ride is over.

A perfect example of this kind of price action in formally "hot stocks" can be seen in the Russell 2000. Small-caps lead the rally, now have already breached recent support:



Be forewarned.  Analysts and pundits have been telling average investors to buy every dip since July (the midpoint of the rally in terms of time). However, not all pullbacks are to be bought. Watch, and be wary.

After months of transition, of watching bear flip to bull, and bulls snorting increasingly confident that we have entered a "new bull market," it would seem the time is ripe to see if they are right. As we have pointed out since the rally turned 1000 on the S&P, the market move has been defined by divergent breadth and decreasing volume. Now, as we vacillate within the range of what could be called the "expected retracement zone," we are seeing increased volume distribution, and some sure-fire warning signals.

We are also getting the timely reinforcement from sober market forecasters such as Jeremy Grantham of GMO, and specific market technicians who simply no longer like the risk/reward of the markets, even if they were bullish on a rally in March (or on Emerging Markets in general). Technically speaking, given the parameters of our old expanding range model, the market has downside to 840-850, whereas few place the upside at more than 1200 on the S&P 500.

Investors should have heeded warnings and turned cautious on the rally at the 50% retracement zone. It seems all too many are eager to forget last year. There are clearly longstanding economic issues facing us that many would prefer to simply turn a blind eye too. Technical damage (if one would call it that) has finally ruptured trends that dated back to the 1980's, and are not going to simply be erased.

For the time being however, if the market is turned back here and bearish sentiment is allowed to return -- perhaps corresponding with a dollar rally, the return of deflationary fears, the rationalization that corporate profits are going to be pinched by a reticent consumer on one hand and rising input costs (raw materials) on the other -- investor sentiment could swing back to an ambivalent level. Assuming an important top is set here, a new range on the S&P 500 could be established between 666 and 1100 (with 850-950 as fair value).

Shrewd investors would continue to execute a plan of taking profits and defending open long positions. This most recent high in the S&P 500 has occurred (once again) on divergent breadth, and mixed fundamentals. Good companies beating lowered earnings estimates notwithstanding, it is hard to imagine, with the Dow about 10,000, that the easy money hasn't already been made on this rally. The question now remains, is the party over - or will the market continue to make liars and fools of the cautious and the wary?

From the daily "take this as a warning sign" file, the EWZ (Brazilian ETF) is showing a very large one-day distribution after setting a new high on lower volume. Given the leadership status Brazilian stocks (and other emerging markets) have provided during the Mar-Oct rally, a slide in the EWZ would be a foreboding sign, as emerging markets have largely foreshadowed the action:


Also keep an eye on the dollar. One day price moves mean little (perhaps), but I am getting "mom and pop" phone calls wanting to buy gold, which means a serious counter-trend move in the dollar could be the surprise that no one expects.


In short, this is an opportunity to take risk off the table and to watch the market, not get greedy and bask too blindly in the "Dow 10,000" headlines. As if we weren't 4,000 points higher just two years ago.... oops.

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