Almost there

It's been a while since my last post. Work is getting busy so I haven't had as much time. Plus the market was pretty bring during May. June, however, is a new month and things are getting more interesting.

I have a good reason to believe that this P2 wave up is nearing completion faster than I previous thought and much faster than most think. It occured to me the other day that the P1 wave down ended earlier than most were looking for. I thought maybe this P2 rally up could also end early. Since everyone and their mothers are looking for 1000+, perhaps we could fizzle out short of that mark. Then I went to work to see if it is possible.

From an EW standpoint we've hit the minimums for price. We've also hit the minimums for shape, that is the wave structure. This is actually what gave me the confidence to make this call. The structure looks almost complete.

From a trend analysis standpoint we have three very solid trendlines all converging at the 985-900 mark. According to trend analysis (TA) whenever there exists several lines all converging in one area you can expect a reversal or at least a significant pullback. We also tagged the 200 dma this week.

The momentum indicators also jive with my thought that a top is near. We have a clear divergence on the ROC, CMF, OBV, Accum/distr, MACD, RSI, CCI and the NY$I. That's about all of the significant indicators. The stochs still have room left to the upside, but not much. What these indicators are pointing out is that the participation of buyers is waning. Prices are moving from the inertia of the previous almost 300 point advance and not from aggressive new buying.

All of the sentiment indicators are at extreme bullish readings, many of them at levels not seen since the 2007 high! The DSI for SPX futures is at 86%, last seen in Oct. of 2007. The DSI for Nasdaq is at 85%, also last seen in Oct. 2007. European bullish sentiment is at 93% with traders only at 97%! When someone answers these surveys as bullish it means they are already long. When 85% or 97% of investors are long there are no more seats left on the bull bus. As they exit prices fall.

Banks have lagged. The financial index peaked on May 8. It has not come close to breaking this despite the fact that the major indicies have continued to put in new highs. The XLF has put in a triangle shape which suggests the move upward is almost complete. It could break the May 8 high, or fall just short. Also the banking index has been even weaker than the overall financial index. The pattern made by the banking index indicates the high has been put in and will not be broken. Since the banks led this market down this past winter and up this spring I believe it is telling us we are going down again sooner rather than later.

Furthermore we are nearing 2Q reports. It is my belief that 2Q will be disappointing. Those green shoots seen after 1Q have withered. The banks led the 1Q earnings surprises through mainly manufactured earnings. Most of the banks were counterparties to AIG and received billions from AIG (via us taxpayers) in 1Q. This money went straight to the bottom line. Also with the suspension on mark-to-market these banks were allowed to "write up" billions in loans previously written off. Well guess what those "write ups" count as earnings and also went straight to the bottom line. A few other one time items such as GS moving all losses to December as they changed their fiscal year so their first quarter, amazingly enough, was profitable while their December was disasterous. WFC made $1 billion off of the stock purchase of a company they bought the previous year. It was a great investment, but guess what that stock isn't gonna deliver $1 bill per quarter. My point is that the banks made tons of money through one time items, not a surge in new loans.

From what I gather the only thing keeping this market afloat is the inflation and weak dollar trade. That is shorting bonds (raising yields) and buying commodities. Sound familiar? That was the 2007-2008 playbook that gave us $4 gas and high grocery bills. The difference this time is that the world is in a deep recession so the fundamentals do not support higher commodity prices. If investors were to get spooked by these weakening fundamentals it could begin a race to unwind these positions, just like early 2009.

This is concerning though. It could be that the trillions of dollars that the Fed has pumped into banks is making its way into commodities as the banks are tired of getting no return on treasuries. It could also be that foreign central banks (ie China) have lost confidence in the US and are in the process of unwinding their long bonds in favor of commodities. Either way if the fundamentals do not support higher commodity prices (and they don't) the higher prices at the pump and grocery store and higher mortgage rates will absolutely destroy those little green shoots that Bernanke and Obama have been smoking for the last three months.

So this has been the evidence for a top. How could this play out? What I am looking for is a slight pullback to the 925-930 area possibly today and then one last push up to new highs, possibly 985. If this push up comes on low volume and further divergences it could be the short of a lifetime as that price will not be seen for years. We should trace out a large five wave move down possibly 100 points. This will be followed by a move back up almost to the 985 top. Then we get the fastest scariest drop in prices sometime this fall or winter. I have laid out some fundamental reasons for this drop in the past. If any of this actually plays out, things will never be the same.