I’ve been around a long time, through many economic and market cycles, and I don’t recall a time when the bull/bear debate had such strong arguments on both sides.

The bullish case:

• The economic recovery from the Great Recession continues.
• The Fed promises to keep rates low until the economy strengthens more.
• Earnings continue to meet or beat Wall Street estimates.
• Corporations are buying back their stock, decreasing the supply.
• With interest rates so low, there’s no place for investors other than in stocks.
• Oil and energy costs are plunging, leaving consumers with more disposable income.
• The market has finally experienced the overdue 10% correction.
• Favorable seasonality has arrived.
• The S&P 500 breaking below its long-term 200-day m.a. was a false alarm.

The bearish case:

• The recovery remains as anemic as it has been for the last five years. The Fed is ending QE stimulus on which the economy has been dependent.  Every time the Fed let QE stimulus expire, the market and economy stumbled until they re-instated it.
• The economies of America’s largest global trading partners are in trouble. The 18-nation euro-zone is potentially even sliding back into recession. Global slowdowns will drag the U.S. economy down.
• That earnings are beating Wall Street’s estimates is only a measure of Wall Street’s ability to obtain guidance from companies. Actual earnings growth is slowing.
• That corporations are using their cash to buy back their stock, artificially manipulating the P/E ratio, rather than investing in growth, is not a positive for the economy. It’s an activity usually seen near the end of bull markets.
• The U.S. stock market is at high valuation levels even for times when the economy was already super strong and growing.
• On the 200-day m.a. being a false alarm, not so far on the broad NYSE Composite.

• After four straight down weeks, the market rallied back this week. So far, the rally looks as much like a normal brief bounce-back from an oversold condition beneath key moving averages, as the beginning of a new leg up.
• Investor sentiment has already spiked back up to levels of bullishness usually seen at market and rally tops. This week’s AAII poll showed the bullish percentage jumped to 49.7%, while the bearish percentage plunged to 22.5%. By the time a correction ends, fear has usually taken over, with bulls under 20% and bears over 50%, just the opposite of this week’s readings. For instance, in early September, just before the mid-September market peak, bulls were at 51.9%, bears at 19.2%.
• Meanwhile, in the midst of investor optimism this week, bellwether companies in important economic sectors released disappointing 3rd quarter financial reports and warnings, the likes of American Express, IBM, Samsung Electronics, Walmart, Family Dollar Stores, Coca-Cola, McDonald’s, eBay, Netflix, Amazon.

Strong arguments on both sides.

Unfortunately, at this point the charts do not settle the debate for either side.

My technical indicators have improved, but have not yet issued an all-clear signal, suggesting this still may be just a deserved bounce, after an unusual four straight down weeks that had the market short-term oversold, but may not be the end of the correction.

The answer one way or the other should not be many days away.

Related:
Rick Santelli: When the Music Is Playing, You Have to Get Up and Dance

In the last 3 years the US Dollar Index has rallied ~19% while major commodity indices have fallen ~30%. We think Market Psychology is sensing “trouble ahead” because massive Central Bank “money printing” has created a mountain of debt…but has failed to ignite sustainable global economic growth. We think smart money is therefore leaving peripheral markets and returning to the center…seeking safety. We think this trend will intensify in the months ahead.  

The US Dollar Index is at 4 year highs while…

Commodity indices are at 4 year lows.

Short Term Trading:

Stocks:

We have previously written that September 19, 2014 may have been an inflection point in Market Psychology…a date when a number of markets reversed course as “risk off” sentiment intensified. We think that the stock market may have begun a multi-month “topping process” that will produce sharp price breaks and rallies…but not new highs.

The DJIA dropped ~1500 points from its September 19 All Time High to its October 15 lows…and then rallied back ~1000 points. We wrote last week that we wouldn’t be surprised to see it rally back 50 to 70% of the break…into the 16,600 to 16,900 range. Well…here we are at 16,800 and rising (while the DJT has rallied to New All Time Highs.) Our trading plan was to wait for the “bounce back” from the Oct 15 lows to run out of steam and then we would get short. We are still waiting. If the market rallies past the 17006 highs made October 8 (notice how the market reversed after the Oct 8 rally and fell over 1000 points in the next 5 trading sessions) then the October break was probably another “Buy The Dip” opportunity and new All Time Highs are likely. If the market fails to rally past 17000 and “rolls over” then we may get a challenge of the Oct 15 lows.

Currencies:

We stayed with our long US Dollar positions into September and then stood aside thinking that the rally had gone too far too fast ( up 12 weeks in a row.) We do NOT want to be short the US Dollar and are looking to re-enter long positions…we may have missed a good opportunity below 85 but we are still on the sidelines. Everyone and his dog is bearish the Euro (and so are we) and that makes us nervous…so we wait.

What was the biggest move this year…in a major country currency?  The Russian Ruble…down ~20% (to All Time Lows) since July as crude oil tumbled, sanctions bit and capital fled the country…how did we miss that trade?

Longer term:

Last week we wondered if September 19 was what George Soros would have called an “Inflection Point”…a point at which “the trend” changes. The “trend” we were considering was the ebb and flow of market psychology as it ranges from aggressively embracing risk to desperately seeking safety. If capital really is starting to get defensive…and we think it is…then how does that play out in the markets?

Does capital, to some degree, see “trouble ahead” because fiscal and monetary policies since the credit crisis have been unable to “kick start” economic growth…but have instead created a mountain of debt?…and if there is no economic growth then how does that debt get repaid? Or, more to the point, who gets stuck with it? Does capital anticipate that governments will ramp up the “Pay Your Fair Share” campaign and raise taxes?

Perhaps the Really Big Inflection Point comes when the trend towards the lowest interest rates of our lifetime reverses…and not because Central Banks start to raise rates…but because people lose faith in the credit worthiness of the borrowers. We can imagine the initial sequence such a “loss of faith” would take…and we think that may have begun…credit spreads would widen and yield curves would steepen…but what happens after that? Do interest rates…across the credit quality spectrum…start to rise? Who defaults first?

We’ve written that the stock market drama may be the lead story on the nightly news…but the looming shakeout in the credit markets is WAY more important. Our KEY belief for our personal net worth is…stay liquid and DON’T reach for yield.

Earlier last week, Gartman said he has “north of 80 percent in cash and short-term bond funds.”’ and warned investors not to go long on stocks. The sell-off in global markets is set to continue as a bear market takes hold ‘for a long period of time.

‘This is the start of a bear market,’ says Gartman, the founder of the closely watched Gartman Letter. ‘You stay in cash and you stay in short term bonds and you don’t move out, this is a very difficult period of time and I’m afraid – and I don’t like to think about it – but this might be the very beginnings of a bear market that could last some period of time’…

….read the full article HERE

P.S. As you can see the market has given those who want to raise cash an opportunity this last week – Money Talks Ed.

….read the full article HERE 

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Summary:

• Global stock markets lost over $5.5 trillion in value during recent sell off.
• Central bankers took to the speaking circuit to arrest the market decline.
• Fear readings and oversold conditions last seen in 2011.
• Strength of current bounce to help settle bull and bear debate.
• Several supports argue for near-term bullish outlook.

Over $5.5 trillion in value has been erased in global equities since they peaked in September and stabilized last Wednesday. The S&P 500 lost nearly 200 points with the Dow shedding nearly 1500 during the correction. Commodities took a nosedive as well West Texas Intermediate Crude, which fell nearly $28/barrel from a high of $107.73 in June to $79.78 last week. Selling climaxed when the Dow fell over 450 points last Wednesday; though panic selling quickly turned into panic buying as selling pressure was exhausted.

The historical chart for the index shows last week’s readings were the lowest in two years as investors’ risk appetites evaporated:

….continue reading HERE