Tuesday, December 25, 2012

Stock Market Outlook 2013: Rising $VIX Extremely Bearish

I would like to wish my readers a Happy Holiday season, a Happy and Prosperous New Year, and Thank You for reading the blog, StockTwits and/or Twitter posts.  I wish I could deliver some bullish news to start the new year, but there are too many signs that the first quarter is going to be extremely turbulent. But, 2013 might not be completely bearish.

Since turning bearish in September, Stock Market Rally Intact But Warning Bells Growing Louder, nothing much has changed.  Followers of the StockTwits or Twitter feeds (follow if you don't for timelier updates) were alerted, that days reversal could be the start of a rally that could carry the market to 52 week highs.  There were enough leading stocks and possible good news out of Washington and FED that could have carried the stock market higher.  But, followers were warned not to over stay their welcome, as the narrowness and length of the consolidations could not sustain the rally much past the 52 week highs.  Unfortunately, as quickly as the market & leading stocks looked good, warning signs started piling up.

The Leading Stocks Analysis, which initially confirmed the possibility of a profitable rally, started flashing a warning signal two weeks ago and has not stopped since (signals precede major pullbacks and correction by as much as two to four weeks).  Since 2006, not heeding the warning signals by taking profits or tightening stops, has led to major profit giveback or losses.

Leading stocks that were poised to breakout, financials, ASPS OCN NSM STI GS, home builders, RYL SPF MHO LEN, gun makers, SWHC RGR, Chemicals, CLMT RNF, commodities, GLD SLV, others, GNRC AAPL PCLN REGN SSYS DDD QIHU ISRG, etc..., failed to breakout, breakouts failed immediately their breakouts, made almost no progress, or just took too long to start breaking out, making them more laggards then leaders (list not all inclusive).  Stocks that have managed to breakout, extremely narrow group, and make progress are too extended to fuel the market much higher.

Short setups which typically fall apart by screaming higher through key moving averages on higher volume, spent most of the time since the November 16th bottom rallying higher on lower volume, stalling at key moving averages, and tightening further.

The big winners of this bull market, started in March 2009, BIDU AAPL GOOG PCLN ISRG ALXN LULU VMW FIRE BWLD CMG NFLX GMCR COH etc..., appear to have put in or started putting in major tops.  Generally when this happens, it is an indication that a bear market is not too far off.  Unfortunately, in the stock market, not too far off isn't always measured in weeks.  In 2006, GOOG and AAPL appeared to have put in major tops only to recover and lead the market higher into November 2007.  Even then, it took another ten months, September 2008, before the bear market really started ravaging the stock market.

The VIX and VXN, measures of stock market volatility, have risen almost in lock step with the stock market, even as the NYSE is attempting to hit 52 week highs.  Indicating that fear is rising and institutions are hedging.  Unlike the contrarian view point of bearish sentiment, when the VIX and VXN start making higher highs and lows, it is extremely bearish and an indication of lower prices ahead.

The good news is that there is still a high probability that this bull market could continue into 2014 after we first experience a major bear like correction of 15 - 25%.  I say bear like, because many of the old leaders could re-appear for one more run.  After all, even Washington isn't looking to hang their political careers and not come up with a Fiscal Cliff and debt ceiling solution even if it is somewhere in the first or second quarter.  Short term the economy will take a hit and spook the markets, but a solution and the FED's commitment to print approximately one trillion dollars a year, forever, will keep the stock market excited for a few more months.  Unfortunately, none of these solutions will get to the bottom of our main problem of balancing our budget and incentivizing job growth, which will ultimately lead to a severe bear market later into 2013 or 2014.

Longer term, the stock market resembles the NASDAQ of the late 1970's.  The market topped in 1968 and spent the next 14 years consolidating sideways, finally bottoming in 1974.  The NASDAQ then spent the next 8 years moving higher, few months up followed by a few months down after the initial surge off the 1974 bottom.  The economy experienced a financial shock between 1973 and 1974 and the government tried similar stimulating solutions that led to the high inflation and stagflation of the late 1970's.  Eventually the government and the FED, realizing the decades poor policy decisions, allowed interest rates to rise and economy to fall into recession to wash out all the excesses that weren't allowed to be cleansed in the early part of the decade.  Unfortunately, until our policy makers stop thinking about re-election and start thinking about the well being of the country as a whole, not in classes, we're in for more of the same.

The overall good news is that the 2009 lows will, in hindsight, be the bottom of the secular bear market/consolidation that started in 2000 with the bursting of the tech bubble and the start of a secular bull market that will run into the 2030's or 2040's.  The bad news is your going to have to be traders until we experience a washout of the stock market and the economy over the next few years.  For now, stay in cash if you don't short and prepare for the next possible leg higher.  If you do short, the short setups listis a good place to start your hunt.  It won't be easy as headline risk continues increasing and good and bad news is hurled at us by our elected officials over the next few months.