A reason NOT to be a Bear

[David Randolph]

There are many motives to be bearish the general market at this moment:

1) Technically the S&P500 shows a confirmed double top:



On the SPX tracker stock, the SPY, we can clearly see a double top at 124.74 that was confirmed by a break of the 120.38 support level. So technically the SPX is bearish.

2) Interest Rates have been moving higher

Since 2004 the FED has raised rates by 11 times from 1% to 3.75%. Also, the 10 year Treasury Bond Yield has made a new 6 month high this week, around 4.6%:



3) The oil price is still near all time highs



This is seen as something that can put the disposable income down and so hurt the consumer, which represents about 2/3 of the US economy.

4) Economic Slowdown

In fact, rising interest rates coupled with high energy and commodity prices has produced some slowdown in the economy, or at least an expected slowdown, as you can see on this Consumer Confidence chart:



Consumer Confidence hit the lowest level since April 2003 (which coincidentally (or not), was just after the last major low point of the S&P500).

These 4 are just some of the motives to be a Bear in the equity markets, but there are more.

With so many good reasons to be a Bear, both fundamental and technical, why am I a bull at this point?

I must confess I was just about to sell everything and sell short just before Friday's general market rally. But I had to go deeper to make such an important decision, and I found a strong motive to be a bull at this point. Let me explain:

The stocks and futures markets are not driven by fundamentals over the short term. They are both money games, games where the ones with the deeper pockets always win.

The market is a giant wheel, where big and experienced players are constantly sucking in the savings of the smaller and less informed players. You want to be in the strongest camp, not in the losers camp, of course.

In the futures market there are 3 categories of players, the small speculators, the large speculators and the commercial hedgers. Historically commercial hedgers are usually right over the medium term in the market and the speculators are usually wrong.

I found out from the latest Commitment of Traders Report (?) that at the last couple of months decline (the SPX fell from a high of 1247 to a low of 1169, a 7% decline) the people who have been selling short are mostly speculators where as commercial hedgers are accumulating long positions, specially in the e-mini Nasdaq 100 futures:



As you can see on the table above, speculators are 17.5% long and 45.8% short. Commercial hedgers are 75.6% long and 33.3% short.

(you can read the full Commitment of Traders Report here)

From a contrarian's point of view (you must be a contrarian to win over the long run, the crowd is usually wrong in the markets), the market should be going down on good news, not on bad news. Since we're having mostly bad news and commercials are accumulating long positions over the futures markets, probably speculators will be forced to cover their shorts on the way up to new highs on the S&P500, above 1250 points.

So I should be close to 100% long stocks, mostly stocks with an high beta.

[stocky]

Applaud, I have to go shopping with my 90% cashed portfolio.

[David Randolph]

Thanks stocky 

As I suspected from the positions at the futures market:

Nasdaq short interest hits high
Short-selling positions climb to 5.94 billion shares as of mid-October; close out time increases.

This is extremely bullish for stocks. I want to be close to 100% long stocks, specially Nasdaq stocks.

[422fwhp]

I'm glad to see your bullish outlook.

Thanks for the assessment...applaud.


Jody

[usedcasting]

Great insights !

Thanks Dave

uc.

[David Randolph]

Thanks for your comments 

The S&P500 broke out of its descending pattern yesterday. Everything points to new highs before the end of the year. There are so many awesome stocks to buy now that I almost feel dizzy.

Just close your eyes and buy everything you can.