A Look at the Market December 15, 2013

I don't really worry too much about fancy technical studies. You can do a lot more with simple trend lines, volume profiles and market tempo. Studies just get in the way.

However, with the overwhelming consensus among the chattering class being that the market has nowhere to go but straight down, it's always nice on a weekend, when there's nothing better to do, to look at a study or two. The weekends are when the Bogeymen come out and fill the chat rooms with doubt and fear.

Above, we present the McClellan Oscillator (this is courtesy of Financial Iceberg, a great site). It is pretty self-explanatory. The market may or may not be bottoming out for the medium term right now, only time will tell. However, this particular indicator, for what it is worth (and there are many, many other indicators out there for everyone to use to prove whatever point they are trying to make at any particular point in time), suggests that the market is oversold. Naturally, it could get more oversold. If you like to play the odds, you look at stuff like this and act accordingly.

Let's look at that again, this time in color

In a general sense, there is absolutely no indication anywhere that I can find, using objective indicators rather than truisms like "the market is too high" or "the Fed is running out of money," that the longer-term trend higher is over yet. If you call a top every time you see a small pull-back, eventually you'll be right. However, that's no way to trade and succeed.

Bubble Bubble Toil and Trouble

I am going to get Socratic here for a moment, it's just more engaging that way in a narrative sense.

It is not different this time. When it is time to sell, you sell, take whatever gains or losses you have, and get out. OUT. I can't remember if it was the movie "Poltergeist" or "The Exorcist" that had the demon entity saying "GET OUT" in that classically malevolent way, but that's what I'm thinking of here. You get out, and you don't look back. That is, unless you are prepared to wait for a decade more or less to get your money back.

I am reminded of the guy who walked into his broker's office in 1955 or thereabouts to sell his RCA stock. When asked why he wanted to sell all of a sudden after holding for years, he replied that he had bought it in 1929 and vowed then never to sell it until he got every single penny back.

Is there a bubble in the market right now? Actually, yes, I think there is.

Is the market itself in a bubble? I don't see one. Valuations overall are not extreme. This does not strike me as a 1999 with the Nasdaq suddenly at 5000. I would instead say that it is properly valued, given company earnings.

So, how can I say there is a bubble, but there isn't?

Because there almost always is a bubble either brewing or in full maturation.

Well, where is the bubble at the moment then? Here, I am going to ruffle some feathers. Sorry about that. Again: where is the bubble right now?

I think that valuations of the social media stocks and some alternative energy issues are dramatically over-inflated. Markets vastly overshoot. That's what they do. That's what they always do and have done since at least Roman times. I think if you are looking for a bubble, look in those areas. But don't assume that means the entire market is in a bubble. Bubbles in individual sectors do have the potential to drag the entire market down for a while. Those kinds of limited bubbles, though, don't drag the entire market down for too long - just long enough to ruin whoever actually was over-leveraged in the actual bubble sectors, like dot.coms in 2000 or real estate in 2008 or silver in 1979 or the Nikkei in 1987 or....

The things about bubbles is that they can last far, far longer than any smart guy thinks they will. But when they pop, they pop and fall so fast you will never catch the balloon before it hits the ground. And then you have to wait. And wait. And wait some more. Along with everyone else. And probably wind up selling right at the absolute bottom because it's obviously never going to come back and you could use the money to buy lunch that day.

No, I'm not going to name any names, though I could. Do your due diligence.

Incidentally, in terms of bubbles lasting longer than you would ever think, below is a video of Ron Insana (brought to my attention by ChessNwine on Stock Twits) pointing out the real estate bubble over five years before it burst. The smart play at that time was not to short real estate - that only became the smart play five years later. Our brains are often far ahead of reality.

Event Risk

We obviously have to watch for what the Fed does, because most unfortunately the government has assumed control over the direction of the market without anyone realizing it at the time. If the Fed really wants to wreck the market, it can do so at any time with one twitch of Bernanke's eyebrows. Do I like that? NO. I'd be much happier if the government had never started meddling with the market and the S&P 500 were somewhere like 1620. We have this overwhelming event risk now that is oppressive. That said, we must trade the market as it is and not how it should be.

One interesting aspect is that the event risk alone is keeping a lid on the markets. I know you will find this hard to swallow, but so many people are staying on the sidelines, afraid of losing their life savings, and so many keep going short because of the sheer precariousness of the underpinnings, that the market might just be exactly where it should be. Market volume has been terrible because of that, when you would think it would be going crazy. Fear is rampant. That's what happens at market tops - you get crazy volume leading into it. Remember 2000? I do. Crazy volume happened, crazy volume that has been declining ever since (yes, still). We have seen just the opposite of that craziness in 2013. It is very weird.

Price-earnings do not suggest a bubble ready to crash. Valuations are roughly where they should be, with sectors rotating up and down fairly normally.

Yes, maybe I'm a crazy loon too.

Game This Out

I don't believe the Fed and Obama and all the rest want to wreck the market right now. They don't have to, and they have enough troubles. Employment is only okay, is is hardly great. Yes, unemployment dropped to 7%, but only because hordes of people have dropped out of the work force. That's hardly terrific.

The MO of the current Fed is that, when they want to do something that will be market-changing, they send very discrete signals. You get the drip-drip-drip of Fed Governors coming out and making speeches that roil the market. We haven't had any of that so far this time around. That makes me think they aren't going to do anything decisive.

The last thing that Bernanke wants to do is cause a crash right before his handover to Yellen by tapering, right during the holiday season. People will go and burn down his house if he does that. Yellen won't want to cause a crash as her first act. Nobody wants to go down in history as "the crazy crash lady." Besides, she has a reputation of being even softer on this issue than Bernanke.

The Fed's accumulation of assets is working wonderfully from a balance-sheet perspective. If they keep this up long enough, they could fund the entire government with the income from the assets they are acquiring (I'm only partly joking there, I have no idea how far these crazy loons will go with this). I think that Paulson and Bernanke and this entire crew should be tried and convicted of something. It can't end well.

But that doesn't mean it ends now.

If we have to be mind-readers, then be a mind-reader.

Play the odds.