Time to Sell Short? The Rude Awakening
San Francisco, California
Friday, January 12, 2007 - A plethora of indicators pointing towards a selloff…
- Words of warning from Thailand, San Francisco, and other foreign regions…
- Money making with the minority - pure contrarian investing, and plenty more…
Eric Fry, reporting from Laguna Beach, California… Is there any individual left in America who does NOT believe the stock market will rise tomorrow…and the day after that…and for the rest of the year…and forever thereafter? If there is, we cannot find him/her. We know of one individual in northern Thailand who fears a stock market selloff. But here in the States, bearish investors are extinct…which is probably not a good sign for the stock market. When investors are feeling extremely pessimistic, stock market rallies often begin. But when they are feeling supremely confident and complacent, as they are today, stock market selloffs often begin. At least, that's the bedrock assumption that inspires 'contrarian investing.' Bloomberg News reports that 12 out of 12 Wall Street strategists predict a rising stock market in 2007. Not a single dissenting voice - at least not on Wall Street. But from northern Thailand comes the warning, "In the next few months, we could get a severe correction in all asset markets." This voice behind the warning belongs to Dr. Marc Faber, editor of The Gloom, Boom and Doom Report and author of Tomorrow's Gold. In a recent interview with Bloomberg Television Faber related, "During a selling panic you should be buying. But during the buying mania that we have now, the wisest course of action is to liquidate." Faber offered an especially dire forecast for emerging markets like Russia, China and India. "They could get kicked in the next three months," he said bluntly. But Faber is not all Gloom and Doom; he's also Boom. "The price of gold will continue to go up and probably very substantially," he predicted. "In the long run, it's very clear that central banks are basically increasing the supply of money, while the supply of gold is obviously very limited." Faber's outlook - bullish on gold and bearish on stocks - is quite clearly the minority opinion. "The relentless rally that started last summer is thinning the bear ranks to near zero," observes Jay Shartsis, a seasoned options pro at R.F. Lafferty in New York. "The Russell Investment Group survey of 87 money managers found 80% bullish. Elsewhere, USA Today opened the New Year trumpeting, "10 Reasons Why the S&P 500 Could Hit a Record High in 2007." The following day's headlines proclaimed: 'Up,Up,Up' and '10 out of 10 market gurus interviewed by USA Today say stocks will post gains.'…"There wasn't a single bear!" Shartsis exclaimed. "Not one person calling for a loss!" "Perhaps the most astounding observation of all comes from the Elliot Wave Financial Forecast ," Shartsis continued. "They produced a chart showing the 60-day moving average of bears, as reported by the Daily Sentiment Index Survey. Current reading: 12% bears! For perspective, the readings for this gauge, going back to 1987, before the crash, show nothing like the present 12% reading. Figures near 20% bears were the most extreme ever recorded. So a contrarian interpretation of this survey would point to serious market trouble dead ahead." Shartsis is a New York resident and also bearish on the stock market. So I guess I lied; there is at least one American who fears a stock market selloff. In fact, there may be a second one out in San Francisco. My northern Californian colleague, Jeff Clark, who produces an excellent research letter called the S&A Short Report, has just advised his clients to prepare for a stock market selloff. Eric's Note: When Jeff isn't busy preparing the Short Report, he sometimes contributes his thoughts to Daily Wealth. Jeff typically identifies individual stocks to sell short, or option trades on specific securities, both long and short. But this time, he's advising an option play on the Nasdaq 100 - put options to be exact. In the column below, Jeff sheds some light on what's making him nervous… --- Special Alert THIS Monday --- This CIA-based "New Intelligence" alert could make you $64,250 What began as a pattern-recognition theory developed by the U.S. Government, U.S. Air Force, and the CIA, is now being used in the private sector… And starting next week, it's going to trigger a special email alert for a small group of people scattered across the country. If you receive it - and act quickly enough - you'll have a chance to make $64,250 in the space of 48 hours… But you have to be ready. To learn more about this situation, click here. ---------------------------------- Time to Sell Short?
By Jeff Clark
I've been studying stock charts for more than twenty years…
In fact, every Saturday morning I go through the exact same routine… Get up insanely early. Prepare an insanely large pot of coffee. Review an insane number of stock charts. Take note of the charts that look similar and watch how those stocks perform over the following week. Repeat. It's a laborious process. But it's the best way I know to assess the market's "behavior" and to anticipate key inflexion points. Simply stated, market patterns tend to repeat themselves in remarkably similar ways…for better or for worse. And right now, nearly every chart I use to trade the overall stock market is telling me that a significant decline is around the corner. We have sell signals on a number of technical indicators… - The Volatility Index (^VIX) has broken out to the upside of a falling-wedge pattern and is headed higher.
- Semiconductor stocks - which typically lead the market - are vastly underperforming the major indices.
- Investor sentiment is overwhelmingly bullish.
- The Nasdaq Summation Index (NASI) is heading lower.
- The Nasdaq Composite Bullish Percent Index (BPCOMPQ) has crossed below its 20-day exponential moving average.
I could go on and on, but you get the idea - the stock market is extremely vulnerable to a sharp correction. But as long as buyers keep showing up on every dip, betting on a market decline is a losing proposition. It's not as though the bulls are cleaning up, however. Despite all the hoopla over the Dow Jones Industrial Average reaching new highs, the S&P 500 and Nasdaq Composite are pretty much at the same levels reached one month ago. Indeed, buyers of index calls and index puts have nothing but losses to show for their troubles. The market usually rallies during the first week of the year. But those gains are just as often given up by the middle of the month. I think the right time for betting against the stock market is very close. But what may be the most bearish development in the market is what's happening with Merrill Lynch… I've kept a close on the share price of Merrill Lynch (MER) for over ten years… and don't ask me why, but the stock is one of the best leading stock market indicators I've ever seen. If the price action of MER is bearish, you can almost always bet the overall market is due for a fall. I even had a saying around my brokerage office, "As Merrill goes, so goes the stock market." Right now, the chart of Merrill Lynch (NYSE: MER) looks bearish: This is a long-term bearish rising wedge pattern… and if it breaks to the downside, it will be an ominous sign for the broad stock market. Take a look at the decline that started in MER shares in late April 2006. The correction in the S&P 500 started two weeks later. Given all the other technical indicators that are screaming SELL right now, if MER breaks down, I doubt we'll have much time to run for the exits. Oh, and one more thing… The decline in MER shares back in April got started exactly one day after the company announced record earnings. I can't help but notice that MER's next earnings announcement is coming up on January 18th. No doubt it'll be another record - but that's not necessarily a good thing… and it's time to beat the crowd to the exit. Eric's Note: Jeff Clark's market calls are not always correct, of course. But his analysis is always exceptional…and often very profitable. That's why his S&A Short Report has gained such an avid following of investors, professional and non-professional alike. If you'd like to learn more about Jeff and what makes his investment process so successful, click on this link. | 
