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SPX Correction Looms

By: Adam Hamilton | Fri, Jan 21, 2011

The US stock markets have enjoyed an awesome run since late August, with the flagship S&P 500 stock index (SPX) up 23.7%. Traders have earned huge profits in sectors that leverage general-stock-market gains, including commodities stocks. But as usual after any long and uninterrupted rally, complacency reigns supreme today. Such sentiment is a prime breeding ground for spawning corrections.

Nearly all short-term price movements are driven by the collective emotions of traders. When they feel good, they buy stocks. And rising prices eventually lead to greed. When they feel bad, they sell stocks. And falling prices ultimately spark fear. These two emotions are perpetually warring, swinging back and forth like a great pendulum. Greed dominates when prices are up, then fear flares when they are down.

Complacency is a close relative to greed. It is "a feeling of quiet pleasure or security, often while unaware of some potential danger". Like greed, complacency grows when prices are high. The conditions that generate it are long, uninterrupted rallies leading to big gains. After the stock markets rally gradually for months without retreating, the majority of traders start assuming the risk of a selloff has vanished.

But this is always a foolish assumption, as all markets flow and ebb. Bull markets advance forward two steps before retreating one step in their periodic selloffs. Far from being bad, these retreats are extremely beneficial for traders. They rebalance sentiment, bleeding off excessive greed and complacency. This extends the life of the bull market, as it will burn out prematurely if greed sucks in too many traders too quickly. And they drag prices back down, creating the best buying opportunities seen in an ongoing bull...


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This obviously depends on Fed

This obviously depends on Fed policy and when the big money machine is throwing more at the market. But it gradually must cost more as there are fewer shorts in the market and as such a short cover squeeze will no longer aid the bull side as it did over the last 18months, especially from June 09 through summer 10. Lots of stocks have low relative short interest and the Fed and PPT sure must have taken advantage of the help from the short squeezes...

As far as Fed policy goes, there policy is the same as usual and the new voting members are changing their tune...


the stranger's picture

Au/Ag weekly

Hell, may as well throw in the Gold Daily and Silver Weekly Charts. I thinking, go ahead, hit the 200 day moving average...

Michael Nystrom's picture


The 200 day MA isn't so far away. It would cause a few heart attacks, but the bull market is still in tact.

And not to scare the living daylights out of any silver investors, but check this 25 year silver chart w/200 day (?) MA.

A pull back to 10 and the bull market is still in tact (i.e. higher highs & higher lows).

We see from the chart it did it in 2009.

Just sayin'

Like I said before, this is why Jim Sinclair always says to never be margined.

He's the man.

well.... atleast she is hot.

well.... atleast she is hot.

the stranger's picture

only interventions

Interesting; nice T&A, I don’t put much faith into short term technical analysis though. There are no more markets, only interventions. I figure there are a dozen super computers with every wave theory from the beginning of time on the hard drive. But a big drop wouldn’t surprise me. Whatever the US, Chinese, and other leviathans decide I guess. And what do they have to fear – that we’ll snap up the physical while it’s low? We’re all getting broker by the day…

Michael Nystrom's picture

20 Year Gold Chart


He's the man.
the stranger's picture

long view

Here is a long distance view of the same thing we’re looking at, from a very non financial author; John Michael Greer. You might find it interesting. This guy always has a perspective worth considering.

An excerpt -

It’s easy enough to track catabolic collapse at work in retrospect, when you can glance over a couple of centuries of decline in an evening with one of Michael Grant’s excellent histories of Rome in one hand and a glass of decent bourbon in the other. Catching it in process, though, can be a much more challenging task, because it happens on a scale considerably larger than a human lifespan.

the stranger's picture


Michael Nystrom's picture


Some observations:

- It is hilarious that these cartoons refer to Ben as "The Bernank"

- It is interesting to me that as much as we all hate this corrupt system, we also all fear the collapse. Like these imaginary numbers actually mean something. It was mentioned about midway through this little movie. Perhaps this is is just our transformational event, like going to the dentist.

- If this is true (and I have no reason to believe it is not), I imagine that the Fed will eventually be absorbed (not just bailed out) by the Treasury. Ron Paul may indeed be able to show how evil the Fed is, but "replace it with nothing" is never a solution in Washington.

This is an acceptable endgame to for the status quo that I see occurring. It will look like a win-win; the Fed will be sacrificed.

I don't think the idea of a North American / Global currency will fly - not after the Euro collapses.

What do you think, stranger?

He's the man.
the stranger's picture

overlooked point

Well, you have a point that may be overlooked by most. You read here on the DP a lot where “the Fed is privately owned – not part of the government” which is true, to a point (a starting point). I was looking for a quote from a recent issue of The Privateer, but I think a poster here (Republica?) has made the point as well – but essentially the Fed was absorbed long ago.

Makes my mind race, “so, you read the book on the history of the Fed, now put it in context”

Same thing, “so, you read the constitution, what did you learn? That things don’t work through the mythology you were taught – now what?” and drop that indignant look and stop acting like this is a Republic, it’s embarrassing.

As to the imaginary numbers, they’ve been used an invisible buttress to a structure that would have fallen long ago. If we used an engine as an analogy, I think these numbers served as an additive to the oil. The fuel is the real market but the monetary system is the lubricant. That's why deflation, that results in an appreciating FRN, is an illusion. The engine would simply seize.

Michael Nystrom's picture

Bump for digestion

drop that indignant look and stop acting like this is a Republic, it’s embarrassing.

Indeed. Somewhere in Chalmers Johnson's book Nemesis, he quotes some government official who says, "It is as though we woke up one day to find that the government has been taken over in a coup; it is the only way to make sense of what has happened."

And Ron Paul has said the same thing before, about the CIA:

There's been a coup - have you heard? It's the CIA coup. The CIA runs everything! They run the military .. and they're every bit as secretive as the Federal Reserve. And yet, think of the harm they have done since they were established at the end of World War II. They are a government unto themselves. They're in businesses, in drug businesses, they take out dictators... We need to take out the CIA!

I still think "deflation" is a possibility, simply because I think that the forces in play are too large to be controlled. But I go back to our discussion about simply replacing that word with the word "collapse" as something we can all agree on.

I'm reading the Archdruid now.

He's the man.
Joη's picture


Michael Nystrom's picture

The second one


Strangerr recommended it way up there somewhere.

Wow, and thanks for the reminder, Jon. I got distracted & never read it. Just came back around to reading it.

Holy crow! I cannot find much fault with the argument. I've always placed the peak a little bit earlier than 1974 - to around 1967 or so, which is when real incomes peaked in the U.S.

He's the man.
fireant's picture

Well worth the read


Undo what Wilson did

Michael Nystrom's picture


awesome interview.

He's the man.
the stranger's picture

here’s another one

I agree, this article speaks to this as well -
Low Volume Meltup Resumes

It will be interesting either way, perhaps more so if it keeps rising.

Michael Nystrom's picture


Notice the divergence between the Blue Chips & the broad market?



Russell 2000

Nothing too major so far, but something to keep an eye on.

He's the man.
the stranger's picture


Those charts make me gasp. The insider selling ratio, the lack of volume, I can’t help but wonder what effin date they’re trying to hit.