Patience...

Richard Russell is about a million years old and he says over and over again that great bull markets start when valuations reach extreme levels. That bit of knowledge along with your own research into historical valuations will make it crystal clear when great value is upon us in the stock market. We are still far from it...patience...it won't come in a day or a week or even a year, great value will build and build and build and from the period of overvaluation that we have seen for some three decades now it will take at least a decade of the stock market being undervalued before it is ready to take off in a new secular bull market.

--Fred

Annualized Stock Market Returns Based on PE Ratios

An excellent post by Mish with some fantastic data on annualized stock market returns based on Price/Earnings ratios.

http://globaleconomicanalysis.blogspot.com/2011/02/negative-annualized-stock-market.html

What's really scary is that pe ratios have yet to drop below the historic average of 15 since 1987, at least not for an entire year. If I combine that bit of knowledge with the incredible debt of our nation and an ever worsening demographic I can only come to the conclusion that bad times are ahead and they will either be REAL bad or they will last for a long, long time. Likely it's a bit of both.

We have and continue to live beyond our means. I not only see this in the data but in the people that I speak to on a daily basis. I believe we have hard times ahead as a nation, but as Mish points out, when it happens is impossible to predict. I will continue to take stabs at shorting the market but mainly I think the prudent position is to save for the proverbial rainy day and be prepared to invest heavily on the long side in about 15 years. I base that time frame on demographics and my knowledge of Generational Dynamics and the Fourth Turning.

--Fred

No Change

I am 100% short despite the slight breakthrough above the 11,782 level. I'll have to see a stronger move above to exit this position as there are too many indicators flashing bright red warning signals.

--Fred

Inflection Point Opportunity

AT this point we are approaching a point of what I consider extreme resistance but with little support and I have taken a short position via SDS.

The resistance comes from the August 2008 high of 11,782 on the DJIA. All gaps have been closed at this point and market sentiment is at extreme levels so the opportunity here is great. A close above the 11,782 level would almost certainly cause me to cover this position.

--Fred

Bought SDS

I took about a 35% stake in SDS just before the close today. While I had expected an up market today and possibly Monday this market simply appears too weak to rally. I expect to be in at a 100% level soon as I expect the next 2 weeks to see the stock market drop well under the 11,000 level.

--Fred

Neutral on Market Short Term - Exited SDS Position

The Investor's Intelligence newsletter today painted a very bearish picture as bullish sentiment has risen to heights not seen since early May, two weeks after the market top. The balance to that is a very bullish short term picture painted by the Quantifiable Edges newsletter and the seasonal affect heading into the Thanksgiving holiday.

This morning I exited my short position with a small gain with the intention of reevaluating prior to Thanksgiving or the following Monday. I believe the stock market is likely to struggle off these levels and stage a rally for the next week, but regardless, I plan on letting the stock market clarify it's position before I take another position.

--Fred

Added To Short Position

I've added to my short position at the 11,000 level on the DJIA. The stock market toyed with that level much of the day but showed little ability to bounce and the trend remains down until it doesn't. Therefore I have increased my SDS position to 100% with no stop but I will likely sell all on a strong open tomorrow morning. A weak gap up will not impress me; I will need to see a strong, across the board rally to exit this position.

--Fred

Quantifiable Edges?

I've been getting a free subscription to the Quantifiable Edges newsletter for at least a week now and I really like it. Right now they are suggesting a very strong upside potential and I have to say that, along with some other seasonal evidence I've been exposed to, I do believe there is a chance we see a continuation of the rally up until Thanksgiving, and possibly a strong rally as volume lightens.

While my trade from earlier today turned positive quickly I will be looking at the stock market closely tomorrow and may exit this position and wait for a better entry just before or after thanksgiving.

I would also like to add that another leg up her would be the icing on the cake and would create an almost perfect short setup.

NY Fed Manufacturing Index Takes a Dive

http://globaleconomicanalysis.blogspot.com/2010/11/ny-fed-manufacturing-survey-new-orders.html

The above report on the NY Fed Manufacturing Report came to me from Mish's blog, always an excellent source of information.

But how does this factor in to the trade? For a long time now it seems that the stock market has been levitating way above where it should be. Yes, I expected the DJIA to reach the 11,000 level before resuming the secular bear market and it did so right on cue, but since August of this year the stock market has been on a tear that made little sense, except, of course, for the affect of Quantitative Easing.

But now that that has been front ran and all the little guys have been suckered in it seems like all the dominoes are lined up perfectly and even the slowdown warned about by Consumer Metrics seems to be finally showing up in the official economic numbers.

LOOK OUT BELOW!

--Fred

Investor Sentiment at Extreme Levels!

I was surprised to see the ISE Sentiment Index (ISEE) at 161. That's 100 points above the 52 week low and only 24 points away from the 52 week high. This indicator is very volatile, from what I've seen, but considering the late day plunge I am very surprised. At Friday's close it was 84.

Short Position Taken

Investor's Intellegence reported today that Buying Climaxes took a big jump upwards and so that adds the last straw to the camel's back. Sentiment is very high according to AAII also and it appears that all the smart money that front ran the Fed's Quantitative Easing Program is now selling (everything) and the typical investor is panic buying, afraid of missing the rally to new highs. This is a classic stock market top, ripe for the picking.

Investor's Intellegence has also reported strong insider selling for some time now and let's face it, this rally is long in the tooth, even if you are long-term bullish, which I am not.

I took a 50% short postion in the stock market via SDS. I won't use a tight stop but instead will allow the market some leeway as the next 6 days up until Thanksgiving may provide a bit of seasonal support.

Stock Market Trading: Short Via SDS

I've decided to start fresh on this blog now that I've moved from my hosted site to blogger.com.

Today I took a 50% short position in SDS at $26.40 with a stop loss order at $26.20.

Reasons: Extreme bullish sentiment according to Investors Intelligence and AAII; entering the weekend with a potential panic developing over the European debt issue and currencies wars; over extended stock market; longer term bearish expectations in the macro economy based on Consumer Metrics Institute data.

Adjusted stop loss to $26.45 at 11:26 PST.

--Fred