About Ready To Pull The Trigger

You are forewarned that this will take you all week to read and digest. Sorry, but when I (Volar) play in the sandbox, I want to be very sure of my unbiased examination ;-). I think my analysis here is something you just might want to print and save for the future- 15 charts worth more than $29 bucks IMNSHO. This is much to write, and I pre-apologize for spelling and grammatical errors (I am a quant & a trader- not much more).

Moreover, I think you should first read THIS && THIS . You will notice that I had some bearish thoughts on that new high- which happened to be the top. I remember many bulls then. Well I only bot OTM puts then- they have worked well. However, I never really played the short-side very much (unfortunately). Nevertheless, we need to trade today’s tape, so let’s look at the exact opposite situation…

First, 1 comment on options. Call Rape.

I love to call rape and will continue to call rape here. By call rape I simply mean sell calls till IV gets low. It is an easy trick, but was a better trade when the VIX was at 45. So if you are bullish, don’t buy calls here. This does not mean I am bearish- I am NOT bearish. In fact, I think that if the lows, or values just under the lows, hold we may have a low for some time (I think Fearless and I are the only two in that camp? Maybe Kass too).  I guess that is what you get for looking at data in an unbiased fashion.

Now on to a variety of custom Volar crap you should know.

First let’s start with a presidential cycle chart.

This chart (and all cycle charts for subs. below) are 4 YEAR CHARTS.

So I ask you rats- is this bearish??? Heck no, that is utterly bullish.  Only 3 of the 12 instances where the market stopped making new lows in the first two years did the values close less than 1.4x the Jan 1 value of the initial year.  Likewise, by selecting analog momentum years, I would say the probabilities are well over 75% that we make new all-time highs in the DJIA. The average return for my non-analog years over the 4 year period is 16%, while the average return for my analog years is 70% (or roughly north of 14,300). Yes I can be wrong, but I am just playing the probabilities of very thoroughly analyzed data.

Here is one more freebie. Everyone is completely bearish! I have been hearing much on coppocks (killer waves /MACD), moving averages, P3. Honestly, none of those really back-test worth a hoot. If she falls out of bed it will not be because of “killer waves.” The “Classic Coppock” was based on month ending closes–and was designed as a “Long Term Buying Guide”–Mr. Coppock’s exact words.

The freebie is the HFDSI (Hulber Daily Sentiment Index) 35 sma

If you remain a bear, I guard you against betting on that 3/122 year event. This is clearly bullish (as a contrarian). Are Fearless and I all alone or what?

Ok now for your secret decoder ring.

Here is NYSE short interest.

Clearly we have a few shorts.

Moreover margin debt has cooled of a whole bunch (and this is through AUGUST).

Clearly margin traders have raised cash. Or I don’t think we will pull off 2008. Maybe, but I would presume a short squeeze is more PROBABLE.

Why do I say that? Well lets go back to the Presidential 4 year cycle. Here is the cycle index:

This shows us that (1) cycles do work; (2) seasonality still works; and (3) if you are bearish, odds are you are entirely 5 years LATE!

Moreover, consider that this cycle started with extremely bearish momentum.

This chart shows us that when we start a cycle with bearish momentum (aka values are well below the 200sma after an election), the market tends to rally. Or specific years started with stagnation or a sell off. Those years had a certain pattern, and as many of these charts show, odds are we do go higher starting in October.

We all know (by now) that OCT into JAN is a great seasonal trade. Consider more proof.

HFDSI seasonality of positive momentum years.

Amazing…. All the stars align (go figure). I will also add one more chart on HFDSI.

HFSDI drawdown:

This just simply shoes that we have fallen 70 points from our peak. Only in the mid-cycle of 2005. Consider that 2002-2003 was the bear rape and the bulls jumped on the bandwagon with record bullish sentiment (just lie 09-10). Then we consolidated and broke a trend in 2005…. The crowd got utterly bearish in an instant. A very similar situation to what we are experiencing today. Now I can hear the bears saying “but what about 2008 when we broke trend and everybody got bearish?” Well here is my best guess: the ADV- DEC line. We have yet to have divergence!

I am not entirely sure that we are NOT in a bear market, but this is one signal that says we are not…

And one more for the nail in the coffin on seasonal years- AAII analogs. Here is that index:

Clearly this is bullish. We have not followed the bear pattern, which generally suggests higher values by December.

Now let’s check out the cycles of the DJIA- ignoring presidential cycles.

First is my index of major bubble and price cycles following that index.

This would suggest what the chart says, we have a potential for a drop, but the Nasdaq new highs pretty much negates the NIKKEI situation IMO. If we were to fall here, it would be contra-seasonal (unlikely) and it would not reflect my presidential analysis above. Likewise China may find support for a 3 year rally here- not sure the 2009 high will be taken out or not.

Here is a long-term chart of the DJIA.

This just shows that the market is likely to remain consolidated, but a break out should be taken seriously. The red dots depict situations I think we may currently be experiencing.

Now for some shorter-term thoughts.

Check out the bullish divergence on BPI (Bullish Percentage Index)

That is clearly bullish IMO. Divergence in this index has been highly reliable.

Now on to some comments on the RECENT and ONLY RECENT correlation of copper to the S&P. Though copper represents the global economy (which represents say over 40% of S&P’s estimated $100 EPS), it also represents Chile supply disruptions, and only about 200K in open interest. So I trust copper, but I take the ADV-DEC line much more earnestly.

Copper sentiment is absolutely low:

Longer-term this is bullish copper I presume.

Now about Copper and predictions. Consider more from sentiment trader.

Again, careful with presumptions. Only did copper work in 07/08.

Bottom line: I doubt it is the end of the world today.

Best of luck, unbiased trading,

-Volar