Monday, March 31, 2014

Bear market mentality: From here, it gets complicated

By Jeff Greenblatt

March is gone and so is the time of market judgment. I believe that. We all get judged to one degree or another. We get grades in school. If you work a corporate job, chances are you get a review. As a trader, all you need to do is look at your trading account balance. If you are the Philadelphia 76ers, I don’t know what to tell you. Maybe they ought to be in the NCAA tournament. They probably wouldn’t win one there either.

So it is when time window season comes. The cycles expire, and somehow the market reveals itself. How does it do that? I’m glad you asked. It’s the time of the year when it should do something according to higher probability. It either does it and that’s the time it’s supposed to do it, or it doesn’t. If it doesn’t, that’s also valuable. I’ve shown you that back in the 1950s the market routinely did not honor important time windows. What did that mean? It meant a lot because it was the longest period of gains in the 20th century. If you looked around in the natural, it was the greatest period of growth in American history. We were the only major participant in WWII whose cities were not destroyed. That gave us a tremendous edge on Europe and Asia and allowed us to become the world’s first superpower. But if you look at the Fibonacci cycles, a lot of them didn’t validate. Did that mean they were useless? Quite the opposite: The strength of the market painted a rare historic picture of American super strength.

We can learn a lot each time a cycle matures. So what did we get here? LEN was down13.6%, BZH was down 19.8%, and KBH was down over 19%. The HGX was down 9.88%, which is a lot for an individual sector in a month. Arguably the second most important sector in the entire market (only to banking), housing got hit really hard. By the same token, the BTK was down over 15% so think about what I just told you about sectors. Some stocks had to have been hit even worse. Then you have the Dow Transports, which has been relatively flat. Since the start of the window, the DAX is relatively flat but it had to fall flat on its face and make a total recovery to pull that off.

The NDX broke down from the pattern I’ve shown you. The bottom line is it tried to hold the line but couldn’t. Of course this is a result of biotech, but it’s also a result of some newer tech stocks like Mark Zuckerberg, which got hit. But here’s the problem.

This is rapidly becoming a market that is frustrating to both bulls and bears. No sooner does it break down do you get a stiff bounce back. I’m not supposed to come here in frustration if I can’t offer a solution to the problem. Frustration is the wrong emotion. When you get frustrated, it offers you an opportunity to answer it. My answer here is to shorten your stride and quicken your time frame. In other words, take money out on the short side but don’t overstay your welcome.

The most likely outcome here is a winding, grinding complex correction. The new breed of bear we’ve discovered since 2011 is now finally willing to take a walk on the wild side. He’s developing a little bit of courage. He’s willing to venture outside the box. Not far from the box, just enough to dip his feet in the ocean to see if it’s warm. For the bear, it’s not Miami Beach. But it’s not Southern California either. The Pacific Ocean is cold in the summer time. For the bear, it’s likely Brighton Beach on Labor Day weekend. As you probably know, the ocean in New York is not all that warm in the summer either but it’s certainly warmer in New York than it is in LA. I know. I’ve been to both. But it takes a whole summer to warm up the Atlantic to get it to feel good. So the water isn’t very warm like it is in Florida. It’s a little warm and if you can understand that, you understand this market.

The bottom line is the bear is slowly getting over his trauma of 2011. Of course he’s been helped by history. I’m here to tell you that markets don’t climb a wall of worry during a geopolitical crisis. Since 2011 when the Arab Spring broke out I started showing charts of prior geopolitical crisis points. They almost always drop and the drop starts with a level of fear and it only accelerates from there. So I can tell you that when Hitler threatened Czechoslovakia or France the market got scared but it did not climb a wall of worry from there. What this time window produced was a geopolitical crisis we did not expect and was over 20 years in the making. I don’t know about you but after we won the Cold War without firing a shot I always wondered how the Russians would like having NATO in their own backyard. For the answer to that question all you need to do is think about how much Kennedy enjoyed having Soviet missiles sitting 90 miles from the Orange Bowl in Miami.

It took this time window to see the end of that era. I’m not going to comment on the crisis today but rest assured we all know the history of Europe is filled with sinkholes of disagreement over how they’ve drawn the map. Since many of us were born right after WWII we’ve been lucky that we’ve lived the majority of our lives of relative peace in Europe. But now history might be catching up to us. Just yesterday I was invited to a meeting hosted by a very well-known spiritual leader. What many of us didn’t know how well this man is connected. He knows many of the top political officials in the Middle East (those who are not of the Muslim extreme), several heads of state, is a friend of Israeli Prime Minister Netanyahu and is also a friend of at least one former US President. This man spoke his mind on world geopolitics and believes the Middle East is hanging on by its fingernails. What was his solution to all of these problems? Pray and do it quickly.

In our work, what this likely means is the pattern started by the time window is likely going to continue. The higher probability is it will continue to frustrate both bulls and bears alike. But here’s the wild card. As markets don’t climb a wall of worry during a crisis its likely to get hit again if and when the next problem hits. Last year at this time I thought Israel would hit Iran sometime in 2013. It didn’t happen but the West instead is trying to make a deal with Iran. My concerns were right on the money. Now we find Iran being double minded because while they are trying to get rid of the sanctions and become a functioning member of the 21st century they still insist on sending weaponry to the terrorists who would use it to destroy Israel. I know some of you really don’t understand the true significance of Israel. Thanks to American intelligence they got caught (check out If the day ever comes that Israel is seriously threatened it will be the start of WWIII. What our host told us is that most of the leaders in the Middle East have come to the conclusion they must make peace with Israel. At the same time many of these leaders are at risk themselves to losing their monarchies to Islamic terrorists. Do you understand the problem?

Sooner or later all of this can and will impact financial markets. Although we couldn’t anticipate it on January 1, the year 2014 is slowly turning into the surprise geopolitical problem. The cycles have spoken and the chickens are coming home to roost.

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