Sunday, August 2, 2009

Hard being a bear

It is hard being a bear these days. The S&P has bounced to a new YTD high. Commodities and corporate bonds continue to improve. The overwhelming consensus is that the worst is over, even by some of the big bears who saw this coming, such as Nouriel Roubini. ECRI continues to talk about an imminent recovery and actually removing stimulus. The central bankers and politicians are all patting each other on the back about moving the economy away from another Great Depression (ironically after downplaying even a garden variety recession for much of 2008). Despite the fact that there a few real signs of green shoots, the bulls are optimistic and talk as if the recovery was already well under way.


Magazine covers (Newsweek) and many of the "man on the street" are all talking about how the recession is history (the Bank of Canada said so!). I am getting a lot of grief from people about "see Canadian housing prices have hardly dropped. In Montreal, they didn't even drop!". I am surprised by how much confidence there is right now and by the complacency.

I may be completely wrong about all of this (continued recession for 2009 & a breaking of the March lows this year) or all this optimism about an imminent and powerful recovery is the natural contrarian setup for that downturn.

The short positions that I reapplied between S&P 930-950 or about 5% ago (after thankfully covering for small gains around 890-900) have now been mostly covered for losses when the S&P broke through 985 last week, as a belated show of discipline over conviction.

We are now entering what I believe to be the critical month of August. I have long ago flagged this as a natural beginning to the next downleg. That window is now open and some of the research that I follow point to a possible blow-off top climaxing this coming week. Monday will be Day 16 of a classic buying stampede. Most buying or selling stampedes last between 17 to 25 sessions and are characterized by a clear trend with only 1.5 to 3 day counter-trend moves before going to new highs/lows (thanks to the bullish Jeff Saut at Raymond James for this). That translates to either this week or next. A number of important cycle indicators and historical patterns also point to this week as a critical week. We have a key employment report on Friday.

A key area is that former resistance of 940-956. I will be watching carefully to reapply my shorts (in an even bigger way) if I start to see signs of waning momentum.

Only time will tell, but the time for the bears to make their stand is within the next few weeks and months.

4 comments:

Anonymous said...

I have been following your articales which stop me from buying a house.... and now the housing prices have been going up, up and up... I cannot even afford a house now... please tell me if the housing prices will ever go down again.. please...

Marco said...

DO you still believe that a market correction is coiming this month? All economic indicators seem to say that this current run is not sustainable...yet our leaders keep saying that the worst is behind us? The recent gains over the past few days scare me as we just broke 11000....do you still think that we will retest the March bottoms? What approximate time line?

Adil Burney said...

Marco

Yes. I have the same views that I have expressed recently. I still believe that we have a strong downleg coming and the lows need to be retested at some point. However, I have to be open to the possibility that S&P666 will stick though and that we could have a successful retest (something in the 750-800 range). That is not my primary scenario but I am trying to keep an open mind.

I will post on this soon. Our leaders are not reliable. They didn`t see any of this coming. As Nassim Taleb says, they crashed the plane and we are giving them a new plane. The market is hot though, I will concede. Cash is still good in my book.

Marco said...

Thanks Adil

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