Market Commentary:
On Monday, the stock market gapped sharply down as programmed traders began unloading their long positions ahead of the month of May.
After their initial sell programs hit the market, the public saw this as an opportunity to buy again on Tuesday and early today--- but in the final hour of trading, guess who showed up!
Programmed traders again unloaded more of their long positions selling into the buying in that last hour that knocked the market down again.
These guys typically make their move before the opening and in the last hour of the trading day. Watching whether they are net buyers or sellers, reveals to us how their working the herd.
They can’t unload all at once. They have to feed their long positions into the market in chunks and into advances.
You have to start thinking as if you were the Goldman Sachs trading desk and what you would do with your positions ahead of an approaching seasonally weak period of the year, in the biggest recession that any active trader has experienced.
Goldman isn’t the only programmed trader out there. There are many. But Goldman is by far the biggest programmed trader and represents a huge chunk of the daily volume in a market like this.
The fact that programmed traders are selling into the rallies now suggest nervousness by smart money. Momentum is starting to slow. The fact that volume has been rising on down days and falling on up days should warn you of the approaching intermediate-term set up.
Keep a close eye on the weekly ranges because if we start to make lower lows and lower highs, you know the market is losing it.
1980-1982 BEAR MARKET
I want you to see a comparative chart of the 1980-1982 bear market because the current bear market is tracking very similarly in some ways and I think we could see a similar pattern unfold in the coming months.
Notice an intermediate-term bottom was established in October of 1981 rallying into December of 1981. We then saw a rather dramatic sell off in January and February, with the stock market making the next intermediate new low in March. The stock market then advanced to the end of April, where it set up the next intermediate-term top. Sound familiar?
Notice, in this chart the bear market rally of March-April of 1982 was rather impressive but it failed to take out the January highs---similar to what has happened this year, at least so far.
Compare this with what has happened so far this year. It is almost exactly the same pattern.
However, notice what happened to the stock market in May of 1982. An intermediate-term top developed and what followed was a vicious retest of the March lows … which were broken.
That bear market didn’t make a final low until August of 1982. We may have a similar path before us now. Given the intensity of economic weakness, the current one is even likely to stretch out longer than previous bear markets.
The 1980-1982 Bear Market took 20.4 months to complete. What followed was a 60 month bull market.
We are now in the 16 month of our current bear market and a retest of the lows over the next two or three months would put this bear market in a comparative pace with the 1980-1982 bear market.
But let me remind you this bear market is a far more powerful bear market than the 1980-1982 bear market.
A retest of the lows of March or perhaps even new lows is a very real risk as this recession is very likely to last through 2009 or even longer.
The next several weeks will reveal to us whether an economic trough has been reached and whether the March lows will hold.
I say remain defensive.
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