The Ass-Backwardness of Reality

Experience is what you get when you don’t get what you want

—Anon

End of session note in my trading journal, Thursday, December 5th:

“Need a pop, probably a good one to complete a reaction”

My thirty minute chart ending Thursday:

thursday

My thirty minute chart ending Friday:

Friday

There it is. A huge gap opening on the best economic news in four years.

What should an investor expect at a turning point in the market? At tops, there ought to be really good news, prompting a spectacular rally that stops below the actual  high. So far, that is what we have.

What else? Sentiment should be at an extreme, in this case extreme bullishness.

We certainly have that:

1) Investors Intelligence Advisory Survey is at the most extreme bullishness in 26 years

2) Rydex Gov’t Money Market Fund Assets are at a record low, indicating no desire on the part of individual investors to hold cash.

3) The “I don’t want to miss out” psychology is driving individual investors into stocks at a record pace, as reported by the Wall Street Journal.

I’ve called for a top several times since the reaction rally began in ’09, only to see the market continue to rally. Each time, the case was more compelling for a top than the last. I don’t know if this will be the final top, but I do know that you cannot make and keep money when these conditions prevail. Sooner or later, reality will kick you in the ass.

Manias are always fully retraced, no matter how high they go. This mania started with the Dow Jones Industrial Average at around 700. That is the minimum downside target. More likely, the decline will not end until it gets down to the area of the Supercycle fourth wave, which topped in 1929 at 389.

Forewarned is better.

Cheers,

Rod

No one should consider any part of this presentation as a recommendation to buy or sell any securities whatsoever.

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