Taking the measure of the stock market bounce

Fibonacci Forecaster

The market found the low, and the big issue now is whether the bottom is in or if they can waste enough time to avoid hitting a fresh top when the bull market becomes 261 weeks young come March. The last time a bull market hit 261 weeks of age, we had the pivot high for an entire generation. Right now, the NDX has more than a 61% retracement of the entire drop in three days. That is a strong case for a low being in place. We already have housing stocks like LEN that have hit new relative highs.

Here’s the problem, which right now doesn’t seem like much of a problem and most people aren’t even paying attention. But your watchman on the wall is paying attention and is very concerned. Friday we had a really crummy jobs number. I don’t care if they are blaming it on the weather. At this stage of the recovery, 113,000 jobs is pathetic. Around the same time they came out with the jobs number, the CBO reported that in 10 years approximately the same number of people will be without health insurance as now and 2 million fewer people will have full-time employment. That’s a nonpartisan organization folks, with no ax to grind.

So if you want to lay blame, you need look no further than the uncertainty surrounding the new Affordable Health Care law. The jobs number comes out once a month, and someone has to level with you. But that’s not my main point. The real story is the market went up on lousy employment numbers. Normally, that would be good news because it shows the market is climbing a wall of worry. Perhaps it is, but not by the looks of the VIX.

On Friday, the VIX dropped like a rock, proving that some traders are drinking the Kool-Aid. If the VIX can drop on a crummy number, then some people are buying the weather story. Whether or not they really believe the weather story, the bottom line is some people are complacent about a bad jobs number. If they are not complacent, they are buying the dip and if they are buying the dip five years into a bull market, this is not the smart money. The smart money doesn’t buy into such a late move.

That’s the concern. If you look at any late stage bull market when euphoria hits, traditionally who do you think the buyers have been? You probably have some money managers who only buy and never sell that would never have the courage to buy properly early in the trend. You also have some hedge fund guys who are not as smart as you think they are. These people are not infallible. People like John Paulson who made their fortunes when the market only went one way have proven to be fallible when it becomes a trader’s market. I have nothing personal against Mr. Paulson, but hasn’t he been on the wrong side of some major moves during this five-year bull? Then you have Aunt Mary and Uncle Bob who only buy when it feels comfortable.

Here’s the point: Why do you think the initial move after a long-term top is so damaging? Do you think it’s because the really smart money bought that last leg up? The last leg up gets unwound so easily because the buyers have no staying power and the last man in is always the first man out.

Someone is buying on lousy information, which means someone out there is taking it for granted and you can tell by the VIX, which dropped like a rock. Now let me show you the VIX at the end of the last bull market.

While this VIX didn’t even hit 22, you might remember the 2007 market peaked in July and sold off for four weeks. By the way, that was the end of the run for the Russell 2000. That fear level bottomed in August 2007 at 37.50. That’s some real fear levels. As you can see, by the time the market topped for good in October, it was trading near 15 again. In other words, that VIX is right where we are again, right now! What does that mean? It means we have a similar level of complacency and we didn’t even get to the next time window yet.

Next page: Two alternatives

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