Stocks higher, commodities, autos, financials push higher

Stock indexes gapped higher and continued somewhat higher during the session, with somewhat declining volume. It is interesting to note that the big leaders today were many of the issues and sectors hardest hit in recent weeks. It seems if a turn-around in the markets were at hand there would be some new leadership, rather than just dead cat bounces in many of the issued that have seen their share prices cut but 50% to 90%. But on the other hand, the recent steep sell-off has created some amazing bargains, and shorts do have to take profits somewhere. Sentiment was certainly getting overdone on the negative side. Technically the price action today pushed above the still declining moving averages, as well as price breaking above an interim pivot from December 1st on the S&P and November 28th on the Nasdaq. I try to wait for pullbacks to the moving average rather than chasing the first move up. Too many times there is a fake-out, and the first pullback usually offers a safer entry point. The moving average will most likely cross if prices don’t collapse in the next day or two. Of course, these markets have unprecedented volatility, so what would seem normal may not apply in the current environment.

For those readers who were reading this blog during the spring and summer you might remember how hard I pounded my fist on the table with my opinion that commodities were in a bubble, and that bubble was in imminent danger of finding a pin. It seemed my worries were ill-founded as the markets kept climbing higher, and nearly all respected analysts were calling for $200 oil and a million dollars an ounce for gold, or whatever their claims were. It was obvious that all traders were on the same side of the boat, and that boat was ready to capsize, and that’s exactly what happened. The chart above is representative of that upmove and subsequent collapse. It is a weekly chart of the continuous mini-crude oil contract. You can see how the entire upmove of the last two years was taken out, and then some. Notice all the beautiful pullbacks to the moving average during the uptrend. A major divergence signalled a top. The moving averages were a bit late to cross, but there was a slight pullback, or at least a pause, before the brutal collapse began. My charts at the time were mostly on the daily time frame, which had divergence as well, but the weekly chart shows the magnitude of the move much better. I had recently posted the Baltic Dry Shipping Index with a similar upmove and subsequent collapse. I could have shown any number of oil, steel, gold, or ag stocks with a similar shaped graph. The interesting thing is how bubbles form and then collapse, and trying to read the sentiment of various groups of traders as well as analysts around the turning points, and having the will to go in the opposite direction. It is not easy to do. Notice how the decline is much steeper and faster than the preceding uptrend. Many of these market now seem to be in sort of an inverse bubble. But trends are most likely still a long way from turning up. There will likely be sharp rallies for shorts to cover and bargain hunters to come in. Many traders will look at previous strong groups and think they will be the leaders in the next bull market. Many traders will still want to fight the last war instead of looking forward to see what sectors and themes will lead the next move up.

I found the above chart that shows the inflation adjusted Dow along with which party was in control of the senate. I was trying to find a chart that had the entire congress, but this was all I could find. I get so tired of hearing the down markets blamed on Republicans and credit given to Democrats for up markets. I think who controls congress is a more important measure. I would bristle every time I’d hear Hillary Clinton credit her husband with all the good things the economy was doing while he as president, aside from the internet bubble and subsequent collapse, which of course was Bush’s fault, even though he hadn’t even started his campaign when that started to unravel. She doesn’t mention how the markets had reacted in the first couple of years of their administration when she tried to socialize health care. The markets really started moving higher after the Republicans took back control of congress in the mid-terms and Bill, wanting to be popular (mainly with the girls, or in politically correct speak, pre-women) moved to the center and stayed out of the way. I still have to think that much of the recent decline is uncertainty whether the Obama administration will move center, as Bill did, or move to the extreme left, as his campain rhetoric would suggest. As he seems to moderate, the markets seem to show signs of relief. But I don’t want to get into politics. The chart was from Free Republic.