REGRESSION TO THE MEAN

The market is heading into dangerous waters. Sentiment has become skewed wildly bullish and historically the market hasn’t performed well during earnings season when entering at new 52 week highs.

One of the few principles that never fails is that all market eventually regress to the mean. That one you can take to the bank. Usually the further anything stretches the harder it snaps back.

It looks like the market desperately wants to reach the 1200 level but in doing so it will have stretched further above the 200 day moving average than at any point during the middle and final leg of the prior bull market.

The market is now dangerously stretched and due for some kind of correction to reset sentiment. My guess is that sometime during earnings season we are going to see a violent correction similar to what happened in February 07. That should reset sentiment and set the stage for possibly a final parabolic move higher that will likely cap this cyclical bull.
The catalyst will be the same one that crushed us in 08, spiking energy costs. $100+ oil in a very high unemployment environment is going to be an economy crusher…again!

36 thoughts on “REGRESSION TO THE MEAN

  1. pimaCanyon

    I think you’re right on with this post!

    Are you trading this outlook (short at 1200, long after correction looks done for one last push up)?

  2. Gary

    Yes I saw that. I’m still not interested in adding with the market stretched this far aove the 200 DMA. Even if this is the beginning of a C-wave continuation I really doubt this is going to be the parabolic part of it. That should come with the next daily cycle or the one after that.

    It’s just too dangerous to chase right now epsecially going into earnings season this overbought.

  3. Anonymous

    This year has sucked for us.

    Jumped in 100 (you recommended 125%) in January. Watched out positions get creamed in the epic death plunge.

    Then we get out after a minor rally/chop action and go to 25% positions. What happens next? The miners decide to take off and leave us in the dust. The HUI looks like it’s running towards 465 min. now.

    I predict we will get our brief correction, everyone will jump in and Jan/Feb will repeat.

    A lot of time and energy for nothing. F me.

  4. Gary

    The key then for you is not to trade. Just take a position and forget about it for the next 5 years. But be sure not to watch your computer because a D-wave will end up knocking you out again.

  5. Anonymous

    Gary,

    I recall you recently set 2 conditions for the continuance of the C-wave, reaching points in the $1140s and $1160s. So is this a C-wave continuance?

  6. Anonymous

    Gary — Regarding the dollar, I know there is no weekly swing high (80.52 marks that) but is there a potential of a failed rally? What would level would constitute such a failure?

    thanks

  7. Anonymous

    Bob Hoye (commentaries can be found at safehaven.com and http://www.321gold.com) has two recent reports. Bottom line based on prior, similar rallies in 1985, 1987, 1993, 2002, 2006 and 2007 is that gold goes up until May 26 to June 9 – or 9 to 11 weeks from mid- March low. Price targets from 1182, 1236 and 1475. Pretty vague as to price there so I am focusing on the timing. Importantly, most of these rallies have a flat or decling S&P 500. Stocks do look way too believed but the surprise could be gold ignoring the stock market. Point is that it has happened before. FYI

  8. Patrick

    By my model gold has finished it’s correction and is about done for the first leg of it’s next impulsive move up. Buy the mean reversion and ride it to above 1300.

  9. Anonymous

    Gary,

    Adam Hamilton has had a spectacular track record during this secular gold bull/stock bear. He has nailed entry points pretty much perfectly — though that’s not why I read him. I prefer to stay long for the most part and trade only in tax-deferred accounts, so as not to pay a “toll” in long/short-term gains taxes every time I trade.

    He has a surprising point of view for those waiting for a SPX correction:

    http://www.zealllc.com/2010/spxlevi2.htm

  10. Anonymous

    Anonymous,

    Thanks for posting the link to the terrific Adam Hamilton/Zeal “SPX Levitation” article. I would really like to hear Gary’s take on this.

    In recent days, some of my precious metal positions are erupting like popping popcorn with double-digit gains and heavy volume. It’s welcome but seems a bit odd.

    Maybe those left-behind investors are getting impatient?

  11. Gary

    Anon,
    We really won’t know if this is an A-wave or C-wave until gold moves convincingly above the Nov. high.

    Tom,
    It’s not unusual for the market to get really strecthed during the first two legs but it is during what should be the middle part of the cyclical bull.

  12. Gary

    I didn’t actually read it all but I do know at tops everyone gets bullish and can only see blue skies ahead. I still think we are going to see a scary retreat at some point during earnings season.

    We are now seeing a virtual orgy of call buying in the options markets. That has never been a great sign for a sustained move.

    The market is now on the verge of a parabolic advance. Those never end well.

  13. poozizik

    Gary, thanks for the post and your always kind response to the comments. Won’t miss it when you hop on the gold train 🙂

  14. Farra Serge

    Hi Gary, always appreciate your insights.
    I’m Sergio from http://www.etf-corner.com and am a friend of T.Knight.
    I’d want to ask you a simple question .. isn’t the violent correction we have witnessed in late January 2010 similar to the one in February 2007 ? The ISEE C/P reading shows also similar reading between now and then ..
    Couldn’t you rule out a thrust to another higher level ?
    Don’t you think that a the steepness of the Nasdaq or S&P are not parabolic at the moment ?
    Thanks

  15. Gary

    The Jan./Feb. correction was just a normal intermediate term correction over a 3 week period. Now the market is due for a move down into a daily cycle low. Those occur much quicker. usually in 5-10 days.

    However the persistent grind higher has moved sentiment to extreme bullish levels (and I mean really extreme) that needs to be corrected in order for the market to sustain much more upside.

    Usually that would happen with a move down into an intermedite low over a period of 3-6 weeks. The porblem is that it is way too early for an intermediate corretion so the market needs another way to reverse that bullishness. I think it’s going to do it with a mini-crash similar to what happened in Feb. 07.

    That would quickly reset sentiment and still fit in the cyclical structure of a brief daily cycle low.

    And for what it’s worth, that is usually how these type of grinding moves end, with a big whoosh down as everyone tries to get out the door at the same time when the music stops.

  16. marketmakerX

    Hey Serge, yes they have been similar.
    Gary, re read what Serge said and learn to analyze charts and patterns correctly. That mini crash already happened in January/Feb similar to Feb/March 07.

  17. Gary

    Nope not a mini-crash just a normal intermediate term correction between the second and third leg of the cyclical bull. What I’m looking for is something that unfolds very quickly over the space of just a handful of days.

  18. Anonymous

    Since you don’t want to read anything that might make you question your assumptions, I’ll give you the short version.

    Hamilton says that his preference would be for a fast, sharp correction of the kind you’re waiting for. But the history of similar post-cyclical bears shows an equal or greater likelihood of a long slow grind with a downward bias. Both work off the overbullish sentiment: it’s just a question of how long it takes.

    That’s hardly an example of “everyone gets bullish and can only see blue skies ahead”.

    Not everyone with a viewpoint that differs from yours is a moronic permabull. And presumably you don’t have to be a genius to know that sentiment is a contrary indicator.

  19. Gary

    The only reason I doubt we will see that kind of correction is because it’s too early in the intermediate cycle and we still don’t even have a daily cycle low yet.

    If we had already put in a daily cycle low and the next daily cycle was starting to falter after only a couple of weeks then I would be in the camp for another 3-8 week correction similar to what you are describing.

    The history of these kind of persistent rallies is they typically end with a big whoosh down as everyone scrambles for cover all at once.

    Mostly I’m just looking at the cyclical structure of the current market and the sharp correction fits best as the most likely way to reset sentiment so the market can continue higher.

    Either way I think we both agree we need to see some kind of profit taking event before this market is going to sustain another big push higher.

  20. Gary

    The problem is that no one actually wants to write the check that everyone knows will immediately go right down the drain.

    Merkel knows that writing that check is going to be political suicide in front of May elections.

    I suspect they will drag their feet at least till after elections on actually writing the check.

  21. jg

    Boy, that would be nice, that the threat of upcoming elections actually force rational behavior.

    I hope that you are right.

  22. Anonymous

    gary

    comments on the dollar? We have a weekly swing high and possible failed rally. Unless it takes out new highs this week, what can we expect from a cycle perspective?

  23. Anonymous

    Just bot mo’ dawlers and sold my yeller @ 1170…thank you!!!!what a gift…I will not short the yeller junk at all…no way no how…I will be buying on the next dip…

  24. Anonymous

    So Gary, you are buying back in. Why not wait until gold goes past 1180 to make sure this is not a fale out?

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