It just amazes us how many heroes their are out there trying so hard not to pull away from the punch bowl. We weren't surprised by the fact that the Bearish sentiment in US Equities is below 20% again. Just as in most charts, that 20% level is rendered the oversold level. Under that 20% level is even more oversold.
Every time the markets have fallen below this 20% level we have seen big corrections not far after. It didn't matter how well any economies around the world were doing. The markets were ahead of themselves with optimism and in need of a correction of that pattern.
Cyprus is only one piece in the puzzle of signs that the their are kinks in the armor of this world wide recovery. Germany is slowing which means that the Eurozone GDP driver is stumbling. Germany was really the only thing holding the growth story of the EU hopeful.
Some of the major manufacturers in Europe are starting to say that things are tuff, and maybe getting a little worse. China is trying to cool inflation. The US has seen a drastic rise in gasoline prices in the past 6 weeks, a payroll tax increase of over 2% of paycheck & not to mention the sequestration/Budget debacle.
As a trader you want to follow the Moving Average Divergences to understand the current trends. The major ETF MACD readings have been showing some weakness for a couple of weeks now, and we at the time have been seeing more selling volume enter the markets on the rally's. This is a major sign that the momentum is starting to shift in the bears favor. That doesn't mean that the markets can't try and shoot up a little higher, but the risk reward is currently siding with a downside correction for the first time since the November selloff.
When markets or stocks start to shoot higher with daily breakouts, only to have them reversed an close lower, it is definitely time to look for a pull back.
The bounce in the EuroDollar is not a reason to try and rally markets. The outlook for the Eurozone has been soft for a few years now, and will get a little weaker before growing again. It is a technically driven bounce off of a major support level. You can compare it to AAPL trying to hold the $500 level late last year. It will eventually break to the downside along with the market sentiment.
A healthy market is not indicative of an overly bullish stance with bearish sentiment around extreme lows. For the past few days the markets have also been selling off on good economic news, which is a dead give away that its time to sell the news. We have all seen this happen before to markets and stocks, the old adage is to buy the rumor(hype, or expectations) and sell the news(news was already priced in).
Remember to keep all of your investments hedged, even if you do not agree with our insights. The market is at levels that have preceded major sell offs that came on fast and strong with little time to act. Along with all these signs, the margin levels on the NYSE are pretty lofty as well.
The cook is almost done preparing the ingredients. The real question that every investor wants to know is when is he going to start cooking? That is the trillion dollar question that every investor would love to have the answer to. It's coming very soon. Maybe even today. The SPY looks like it is ready for a break down. The QQQ's and all of tech are already breaking down, and the Financials are starting to break lower as well. The markets can not sustain a move higher without these 2 sectors.
Good Luck to all!!
Disclosure: I am long TZA.
Additional disclosure: Long AAPL, BIDU also, overall short the markets.