THE BULLS HAVE 99 PROBLEMS BUT A RALLY AIN’T ONE
I have multiple reasons to believe the market is headed much lower during the first quarter of 2012. There is, of course, the various negative fundamental angles, the sentiment angle, the technical angle...and now we have the leadership angle.
There is no leadership in this market. Technology, perhaps the most outstanding leader for any bull market worth its salt, has fallen off the map. The price action in the Nasdaq Comp and Nasdaq 100 leaves much to be desired. The all important Semiconductor Index (SOX) looks dead in the the water. I'll be going over the enormous obstacles ahead for both indices in the weekly chart review on Monday.
The types of price patterns both the Nasdaq and SOX are exhibiting is resolved one of two ways: 1) Through powerful enough undercurrents, mostly as a result of an overly-negative sentiment picture that creates a disequilibrium in the balance of longs and shorts, creating a surge pushing the index up and through the negative price pattern OR 2) A capitulation to the downside that serves as a reset button for the index, allowing it to carve out a new trajectory. A cleansing, if you will.
The bulls have a major problem. The problem lies in the sentiment picture and how it is converging with the negative price pattern in the most important indices. We already had the overly-negative sentiment picture. It came during the August-October time frame. The market had the opportunity at that point to carve out a substantial move higher through the end of the year that would have negated the ominous price patterns and allowed the market a more amicable point from which to correct or consolidate.
Instead, we got a powerful surge during October that led to overwhelming choppiness during November and December. The market was on the verge of negating the price patterns across multiple leading indices during October-November. It failed miserably.
It's like a 16 year old girl that wants to try out for American Idol showing up for the tryouts two months after they took place. The opportunity to impress the judges in order to further her singing career took place two months ago. There is nobody left to impress. The 16 year old girl goes back to making bean burritos at Taco Bell until she gets her timing right.
Here's the kicker ----------- All the meanwhile the sentiment picture has deteriorated (by deteriorated I mean become increasingly bullish) to the point that we are now sitting at the most bullish levels of sentiment for all of 2011 according to the numerous indicators I track measuring option activity. As a result, barring a QE3 type of event, there is no fuel left for a substantial rally.
Bottomline: We have a market that failed to negate the price formations that inevitably lead to lower prices. All the meanwhile bullish sentiment has increased to 12 month highs in the face of an enormous failure and further reinforcement of the bearish price formations by the major averages. The most serious of which is occurring within the Nasdaq and Nasdaq 100.
It is not a matter of IF we test the October lows, it is simply a matter of when. And I think it will be sooner than most expect.
