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A Bubble Market?

Last Friday's November 7 jobs report did little for either the bulls or the bears in this game. Some market strategists figure that the market needs a break and some sideways consolidation in order to digest the rallies of the past few weeks. The sharp selloffs that gripped the markets last month seem to be nothing more but distant bad dreams for today's bulls.

Noting a latest investors' sentiment survey, optimism among investors is unusually high and pessimism is unusually low.

Shades of irrational exuberance?

Wall Street is at the midst of a secular bull market that may have years left to run. But meanwhile, the SPX large-cap index is spiking in an extreme fashion that suggests the market has blown a big, fat bubble, and investors know all to well what these things end up doing.

So the question is not will this current bubble deflate and take the market down with - it will, but the question is how. Will it be a big splash after which investors can pick up the pieces, or a leak in the bubble that will allow the market to settle on the downside gently? Either way, this market is poised to come down.

Note that the Moving-Average configuration of SPX index is still bearish [green line above the red line] despite the sharp V-shaped spike to the upside. This shows that the internals of this market remain quite bearish. But that at the same time the MACD momentum signal bars remain strongly above the demarcation line indicates that this market has the stuff to continue this rally, once the bubble has been deflated.

Meanwhile, the RSI strength indicator sits at the top of its trading range, which means that there is plenty of investors' enthusiasm to keep blowing hot air into this bubble.

When this contrarian X:X index rallies, it's bearish for the market, and when it declines, it's bullish. So, according to this weekly X:X chart this market is bearish despite it's soaring to the upside. Although the X:X index declined sharply at the beginning of October, which triggered a sharp rally in the major indexes, the MACD momentum signal bars remained strongly above the demarcation line, which has bearish implications for the market. On top of that, the MA lines configuration remains bullish [green line below the red] which, this being a contrarian indicator means bearish for the market.

The RSI strength indicator had come down from the top of its trading range [bullish for the bulls] but now it is ticking up again and that is bullish for the bears.

Confused yet?

The sharp V-spike in the weekly 200 percent-index shows the dramatic snap-back of the blue-chips after they had gone into a steep nosedive. Now, this is seemingly strongly bullish except that the MA lines configuration of this index remained sharply bearish [green line above the red.] Not only that, but the MACD momentum index is still in bearish territory below the signal line along with the momentum bars, indicating that this sharp up-surge by the bulls is quickly running out of steam.

Check the Troika and note that the two bull components [RSP] and [SPXL] are both in V-shape bubble territory, and that is a plus for the bears. Also favoring the bears is the weak MA lines configuration [green line above the red.]

But note that both the MACD momentum indexes and their respective signal bars are way above their demarcation lines, which means that the bulls still have a pretty strong tail-wind at their backs and are not about to give up.

The bear-component of this Troika [SPXS] shows that after a valiant try to gain the upper hand in this market last October, the bear has given up and is back hibernating in a deep hole at the bottom of a deep pit. The MA lines configuration [green line below the red] is still bullish for the bears, but not by much.

The MACD momentum index along with its signal bars are way down below the demarcation line, which means that the bear has now tail-wind momentum to get out of this hole. Not only that, but with the RSI strength indicator down at the bottom of its trading channel is an indication that the bear is totally exhausted for now.

So what this Troika shows is that the only way for this market to kick into a strong and sustainable rally again is for this V-shape bubble to deflate and bring the market down to where it can find renewed traction to the upside.

The NASDAQ market [NDX] also finds itself in a bubble situation. This index shot up in V-fashion way too fast and too high, and is now in the process of keeling over at the top. Although the MA lines configuration [green line above the red] is still bearish, the strongly bullish position of the MACD momentum index along with its signal bars above the demarcation line is a sign that this market still has a pretty stiff upside breeze at its tail. That the RSI strength indicator sits at the top of its trading channel also helps the bullish cause.

The longevity of this stock market rally has to be questioned as the commodity side of this game couldn't't hang on to its strong rally during the first half of this year.

Note that this weekly RSI strength indicator has totally dissipated, the MA lines configuration has turned bearish [green line above the red] and the MACD momentum index also remains bearish as it has since last July. That is not the kinds of stuff sustainable rallies are made of.

For any rally to be genuine it needs the participation for the small-caps [SMLV] and they certainly did just that last month. Now the Small-Caps are way overbought to the point where the RSI strength indicator is blowing a fat bubble on top of its trading channel. The MA lines configuration has turned bullish [green line below the red] and the MACD momentum index along with its signal bars keep pushing higher into bullish territory.

With all this bullishness surrounding the small-caps it will be interesting to see what happens when the RSI bubble deflates.

This market forecasting junk-bond canary [JNK] did also get caught up with last month's volatile swings and is now consolidating in a bearish mode. Its MA lines configuration remains bearish [green line above the red] and the MACD momentum signal bars are fading fast. So it appears that this little bird is forecasting some lousy market action ahead.

The yellow metal [GOLD] had a pretty nice bounce out of the deep hole it was in. But so far that's all there is, just a bounce. As the downsides RSI bubble shows, gold was extremely oversold and still has a long way to go before a solid uptrend kicks into gear.

Its MA lines configuration is still bearish [green line above the red] and the MACD momentum signal bars keep hanging from the demarcation line deep into bearish territory.

With oil [WTIC] it's still the same. A basket case from one side of the chart to the other.

When getting the urge to chase this rally, it is well to remember that if the right-hand upside of this V is valid, then there was no reason for the left-hand downside of this V to come down so hard. This is why any V-shaped rally is suspect.

In case the market comes your way, here are some favored ETFs to consider.

Among ETF sectors only one sticks out, Utilities. That's interesting, considering that this is a bull-run market.

Leveraged Bull ETFs:

Jr. Gold-Miners 3x (NYSEARCA:JNUG), NASDAQ 2x (NYSEARCA:QLD), DOW 30, 2x (NYSEARCA:DDM), Developed Markets 3x (NYSEARCA:DZK), S&P 500, 3x (NYSEARCA:UPRO), DOW 30, 3x (NYSEARCA:UDOW), NASDAQ 3x (NASDAQ:TQQQ), S&P 500, 2x (NYSEARCA:SSO), Financials 3x (NYSEARCA:FAS), Biotech 2x (NASDAQ:BIB), Russell 2000, 3x (NYSEARCA:URTY), Semis 3x (NYSEARCA:SOXL), India 3x (NYSEARCA:INDL), Retail 3x (NYSEARCA:RETL), Industrials 2x (NYSEARCA:UXI), Health-Care 2x (NYSEARCA:RXL).

Non-Lev Long ETFs:

Mid-Caps (NYSEARCA:IWP), NASDAQ (NASDAQ:QQQ), Biotech (NYSEARCA:BBH), Discretionary (NYSEARCA:VCR), Technology (NYSEARCA:XLK), Semis (NASDAQ:SOXX), Financials (NYSEARCA:IYF), Russell 2000 (NYSEARCA:IWN), Transports (NYSEARCA:XTN), S&P 500 (NYSEARCA:IVW).

Leveraged Bear:

Russell 2000 2x (NYSEARCA:SKK), Mid-Caps 3x (NYSE:MYY), Semis 3x (NYSEARCA:SOXS), Oil 2x (NYSEARCA:SCO), Technology 3x (NYSEARCA:TECS), Small-Caps 3x (NYSEARCA:TZA), Energy2x (NYSEARCA:DUG), Financials 3x (NYSEARCA:FAZ), NASDAQ 2x (QID), Gold Miners 2x (NYSEARCA:DUST), Materials 2x (SMN) NASDAQ 3x (NASDAQ:SQQQ), DOW 30, 2x (NYSE:DXD), Biotech 2x (NASDAQ:BIS) Emerging Markets 2x (NYSE:EEV).

Non-Lev Shorts:

Mid-Caps (MYY), Materials (NYSEARCA:SBM), Financials (SEF), Russell 2000 (NYSEARCA:RWM), DOW 30 (NYSE:DOG), Oil (NYSEARCA:SZO), S&P 500(NYSEARCA:SH), Small-Caps (NYSEARCA:SBB), Equity Bear (NYSEARCA:HDGE), EAFE (NYSEARCA:EFU).