Top Line: Last Friday's action looked like the start of a downtrend as we mentioned in the comment section in our last post. The stock market should now retrace a great deal of the rally from the July lows down around 870 in the SP500.
The stock market's reversal on Friday didn't lead to much in the way of net selling but the opening blast followed by a cliff dive fits our definition of an important reversal. This reversal came at the right time and could be a harbinger of near term selling. The Asian markets, other than Japan, are down with China down over 5% as we write. The Chinese market has been the source of a lot of movement this year and that continues this evening.
We want to point out that the best course of action right now is to get out of at least some of your long stock positions. There will be lower prices in September to get back in. We sound like we know that will be the case and we Don't know for sure. The market's position Seems to be poised for a reversal. We are short and would certainly like there to be some selling.
What we do know is that sentiment has grown to a level that is too high to ignore. This sends chills down a contrarian's spine and keeps us firmly in the bearish camp. This message will be lost as the market drops over the next several weeks but for now it rings loud and clear...Sell.
What we do not see is full public buying of stocks. There may be some bullish sentiment in the press and among investment advisors but we still don't seem to see the public enamored with stocks. This would be the final piece in the puzzle for now but it just doesn't seem like there is much buzz about the market. This type of behavior will take more than a four digit Dow, which is one reason we are not convinced these current highs are the final ones for the countertrend move. This should start the chatter back up at work and in your family discussions. If bullishness is the conversation already, please let all of us know. That would definitely put us in a longer term bearish mood.
That thinking does not allow us to hold stocks here because the probability of a high here is just too high to ignore. As the market drops, or if it does, we will then see how the world reacts to lower prices. If there is a huge build up of negative sentiment, then we will get bullish again. If the volatility indexes go up very fast to levels of March, then we will probably get bullish again. But, if the market heads down and people continue to buy the dips and volatility does not go up, meaning there is no fear of a larger down move, we will have to conclude that the market will go into the abyss. We don't have to worry about that thinking just now but we will be watching it closely.
Right now we are watching the Treasury bonds, or our proxy for them, the TLT. We have seen a nice rally and this provides us with some confidence in the stock drop. Our other consideration is the GDX which popped over 40 on Friday but is well off its early June highs around 45. We continue to think its lows for the move are in down around 34 and will be looking to buy it back if it gets into the 36 range. We'll keep you posted.