Most of the participants that missed the lows in early March are now looking for those winning lottery tickets that may have been neglected by careless traders. The only problem is the observant players have already made their money and have locked in their gains. The “easy money” is over.

Seasonally, we are in a bearish period, although if the bulls want to kick off a sustained, secular bull market, they have to exert a great deal of firepower to extend this rally into August. If this happens, then we’ll be in the early stages of a secular bull. With continued weakness in the US Dollar, I remain bullish on oil and gold, and neutral on bonds.

During the course of this rally, technology, retail, housing, and cyclicals all led the way up. These sectors have now broken their relative strength uptrends, which had remained intact since those March lows. The groups holding onto their relative strength uptrends, albeit with very little breathing room, are: financials, agriculture, chemicals, oil drillers, and emerging markets. I continue to favor emerging/frontier markets as well. Global stock markets have become more correlated over the past decade. Generally when the S&P 500 has risen in a secular bull market, it tends to underperform the global equity complex.

The 10-day moving average of the put/call ratio is still moving up (which is bearish for the market). But here is the chart of the daily ratio, which shows how high Friday’s reading was in comparison to the last few months.

All of a sudden, showing strength for the past several weeks and clamoring to exit the TARP and government meddling has resulted in a mandatory stock sale by these same banks. So JPM, AXP and any bank wishing to exit the TARP, must prepare to dilute their current shareholders. That dilution is rather severe, but the devil’s in the details.

The ownership of the nation’s most important companies is being quasi-socialized, by transferring ownership to the “public” via the hands of the institutions, those same banks handling the government’s massive new injection of liquidity. The institutional buyers will include a larger and larger chunk of pension dollars. These pension funds, like CALPERS, are buying these share distributions hand over fist, along with many nationally strategic banks and corporations. They’ve figured out the only way to ensure continuity in the nation’s retirement support system: to become direct shareholders. Voila, you’ve got socialization right before your very eyes.

But it’s not really some ignorant version of Canadian or French socialism. This is capitalist socialism, not socialist capitalism. Huge difference. And it’s Jumbo size, in the true American spirit. This young nation of 235 years was able to follow Keynesian demands to offset a depression in terms of output. When a country with a growing economy like China slips, or has to burp from indigestion, the entire planet will feel the shock. Whether that was an intentional tap on the breaks via controlled devaluing of the Yuan is beside the point. Although that’s exactly what it was, there’s another issue. The financial crisis triggered by China’s Great Burp of 2008 resulted in the American Recovery and Reinvestment Act of 2009. And TARP, and PIPP, etc…

In the States, the capital structure of those banks handling this influx of funds is ballooning to unimaginable heights. This is a mandatory inflation of their balance sheets. This is the Fed and the Treasury forcing the new supply of dollars onto their hands to buy the shares of the companies now about to have an equity offering.

The Federal Reserve is now the largest bank with a balance sheet that went from $6 Billion to $1.3 trillion in about 6 months. For their governments, including the UK, France, Canada and now Venezuela, Bolivia, perhaps soon Ecuador, China (obviously), own the actual companies, or portions thereof. And therein you have it ladies and gentlemen: This is American Capitalism adapting to compete with Chinese Capitalism, where the state’s role not only yields the companies an advantage, but also provides the government with national security. For China, that security is in the form of owning sources of raw materials. For the United States, and Western Capitalism, security comes via the almighty US Dollar (for now). And funny how all major global commodities are priced in US Dollars. When there was a massive dollar shortage last year, it was resolved via bi-lateral lending facilities with the G-20 Central Banks and the Federal Reserve.  National security through state supported champions of global commerce. The need to cross borders, currencies, regulatory frameworks, governmental oversight, etc…, is another matter.

This full scale conversion to Chinese Capitalism around the globe is both the cause and effect of the Financial Crisis of 2008. But everywhere you look, on the tags, it says “Made in The United States”.

Fact: China has already exceeded the amount of copper and zinc it imported in all of 2008.

That doesn’t mean run out and buy BIDU. In fact, I use BIDU to hedge overnight beta risk against my growing list of Chinese stocks. Again, liquidity is a rarity and any sudden stupid moves and you create a spurt of algo chaos. These algo’s control most of the liquidity during the day, except for the first and last 45 minutes. If you trade like a monkey and spray the bid and ask, you’re going to get filled like a monkey would trading with a blindfold on.

The Chinese stocks covered in last week’s post have all shot up significantly on a % basis. This is only the beginning. Remember, these are stocks that overshot the downside as much as they had overshot the upside last year. Trade the tape and make a market in the names you hold core positions.

All the littles had textbook short written all over them on the open. Where were you looking? Oh ya, standing around staring at the projector. That’s not gonna happen again.

FRE/FNM/AIG.

FAZ and SKF were textbook overnight holds. Regardless of their own individual chart, which makes me remember why I like this profession so much, but mainly because the VIX exploded today. And TRIN? That dandy little reliable heart beat of the market. How poetically it jumped from bizarrely low readings to all of a sudden FLASH 1.35 1.45 1.55. Unreal.

Tune everything and all else out. Focus on what you are a professional at. This is about expertise, not “protocol”.

PERFECTED COUNTDOWNS

“Perfected”

Buy Countdown — Low of Bar 13 must be less than close of bar 8 to give some assurance that market is really oversold

“Perfected”

Sell Countdown — High of Bar 13 must be
greater than the close of bar 8 to give some assurance that market is
really overbought.

SPECIAL 13th BAR CONDITION FOR TD SEQUENTIAL/COMBO COUNTDOWN

Tom DeMark refers to a “termination count” on the 13th bar only:
For a Buy Countdown, the 13th price bar will fulfill a countdown if
either the Close of the bar is less than the Low from 2 bars earlier,
or the Open is less than the Low from 2 bars earlier

For a Sell Countdown, the 13th price bar will fulfill a countdown if
either the Close of the bar is greater than the High from 2 bars
earlier, or the Open is greater than the High from 2 bars earlier

In both cases, I’ll still require a perfected Buy or Sell countdown

Here are a couple very good primers on TD Sequential/Combo:

Download td_sequential_article_1.pdf

Download td_sequential_article_2.pdf

In Tom DeMark’s book Day Trading Options, he covers some
ideas for entering a trade based on a TD Sequential or TD Combo 13
Signal.
Reverse anything shown below for a Buy.

1. For a Sell, the close of the 13th bar should be above the close of 4
days earlier. You could have a 13 hit, but the stock could already be
into a deep downtrend.

2. Watch the price bar following the 13 for a close below the open. This probably applies better to shorter term trading.

3. Opens higher than previous bar’s high, then, trades below that high. I think this is basically the Williams Oops! trade.

4. DeMark also talks somewhere about looking for a low less than
the previous day’s low, or a close below the previous day’s low.

5. I’ve also mentioned that some traders like to go in on
thirds — 1/3 on the 13, another 1/3 on the bar following the 13, and
another 1/3 on the next bar. I don’t like this idea very much at all
because it leads to knife catching/averaging down, and it is not
recommended by me to anyone.

6. The idea of the above is that these signals can have a window of 2-3 bars to work.

Finally, remember that failed signals can be important because they
often show extreme momentum, possibly a market headed to a new higher
(or lower) range.

The major indices all fell between 4% to 5%.  Breadth was deeply negative, which is the only silver lining right now. The NYSE Up Issues was 6% and the Up Volume was 3%. Total volume declined relative to Friday’s levels.

The S&P 500 is down 20% from its February high and is just beginning to register some extreme readings within the 500 stocks that make up the index.

The McClellan Oscillator, a widely used breadth indicator, closed at -299 on Monday. It’s pretty rare to see a reading outside of -250.  The percentage of stocks trading 1 Sigma and 2 Sigma below their 40-day moving average is now at historical extremes. 85% of all stocks are at least 1 Sigma below their 40-day moving average. The number of stocks at least 2 Sigma below their 40-day moving average is 65%. This is actually even more extreme than the first number because 2 Sigma is exponentially greater than 1 Sigma.

There have only been 6 other periods where stocks were at least 1 Sigma below this MA:

1) 10/19/87 – 10/29/87, 2) 8/31/98, 3) 9/21/01, 4) 7/23/02, 5) 10/2/08-10/17/08, and 6) 11/20/08.

ALL of these marked market bottoms and 4 of 6 instances lasted ONLY a single day.

Disclosures: NONE

“If nationalisation is what works, then we should do it.”
Sen. Lyndsey Graham, R-S.C.

”You would have to be very careful about imposing any loss on senior creditors of any bank taken under government control because it could impact the senior debt of all other banks,” he said. “This is a credit crisis and it is essential to preserve an anchor for the financing of the system. That anchor is the senior debt.”
Alan Greenspan

Campaign - Searching for a successful test of S2′s, watching for major break through Nov. lows.

PRIORITY- VIX double bottom. Watch spread between VIX and Variance Futures

Week of Feb. 02

WED:Looking at the S&P, I see a massive diamond pattern representing a significant bottom. These are rare patterns, kind of like the Loch Ness Monster of charts. I inverted the scale so the chart is upside down, and the diamond becomes clear mainly because I’m used to seeing this pattern at major tops. Not only is the diamond visible, but the H&S is also obvious. This feels like the early false starts of a rally, where weak/fast money is going to be shaken out.

JPM continues downtrend. Is it possible for SPY and SKF to rally again together? Bizarre.

BAC at Jan lows. Double bottom or failure or whipsaw or all of the above!!!! This market.

The range contraction in SPY’s tells the story (see below). There is no reason to trade until there is a resolution out of this range, which I think resolution will be to the upside. Plus, embrace the inspirations and their source…fear only the old…accept the new. When you’re on, you can walk on water. So let’s get it on…there’s a big ocean I have to cross without drowning!

XHB possible for more upside.

Strength in Nasdaq.

Chip stocks showing leadership:

MRVL, MCHP, NVDA

Visit internet names:

YHOO, AMZN, CRM, EBAY, EXPE, GOOG, NFLX, AKAM, DRIV, ARBA, GSIC, CYBS

Revisit:  JNS