Best of the Week
Most Popular
1.How U.S. Dollar Destruction Threatens the Global Economy - Steve Forbes
2.Why UK House Prices Will Continue Rising - 'It's Immigration Stupid' - Nadeem_Walayat
3. Bitcoin Price at Beginning of a Move up? - Mike_McAra
4.Gold Price to Plunge, Visiting Fort Knox - David_Hague
5.Silver Price Forecast - Metal to Gain Ground in August on These Factors - Jim Bach
6.Gold And Silver Will Rise With US Dollar Demise, Just Not Soon - Michael_Noonan
7.Bitcoin Price Strong Move Possible - Mike_McAra
8.Israel Gaza War Crimes - Soldier's Ordered to Shoot Civilians Including Children - C4News - C4News
9.UK House Prices Crash Warning - Daily Mail Cognitive Dissonance - Nadeem_Walayat
10.UK House Prices Boom - Top Quick Cheap Tips to Help Sell Your Home - Nadeem_Walayat
Last 5 days
Why Emotional Discipline is Key to Trading Success - 21st Aug 14
Getting the Most Value from Your “Geriatric Cruiser” - 21st Aug 14
Mafia Boss Claims Stocks A Bubble, Buy Physical Gold and Silver - 21st Aug 14
Outrage! On The Beheading of Our Media Brother James Foley - 21st Aug 14
Stock Market Crash a Historical Pattern? - 21st Aug 14
The Black Box Economy - 21st Aug 14
The Bond Market is taking Advantage of Janet Yellen`s Dovishness - 21st Aug 14
Meet Your Investment Manager - 21st Aug 14
Gold and Silver Trading Alert as U.S. Dollar Soars to New Highs - 21st Aug 14
President Obama Strongest Statement Yet on Israel Gaza War - 20th Aug 14
Peak Gold? Russia To Surpass Australia As World No 2 Gold Producer - 20th Aug 14
AI, Robotics, and the Future of Jobs - 20th Aug 14
Stock Market Investors What's Your Exit? - 20th Aug 14
The Gold War - Thinker, Trader, Holder, Why? - 20th Aug 14
Ukraine Interest Rates Soars to 17.5% As External Debt Cannot be Repaid - 20th Aug 14
Rising Interest Rates and The End of Stimuland - 20th Aug 14
Inflation Watch: $245,000 to Raise a Child in United States - 20th Aug 14
Inside the Stunning Deal That Put Apple and IBM on the Same Side - 20th Aug 14
The US Gold in Fort Knox is Secure, Gone, or Irrelevant? - 19th Aug 14
Bitcoin Price On The Brink of a Possible Reversal - 19th Aug 14
Why Tesla Stock Price Will Double in the Next 12 Months - 19th Aug 14
Europe's Economic Malaise: The New Normal? - 19th Aug 14
The Coming U.S. Economic Collapse Will Trigger a Revolution - 19th Aug 14
Market Bubbles, Bubbles Everywhere - 19th Aug 14
This is Your Economic Recovery With and Without Drugs - 19th Aug 14
Stock Market Strong Start to Jackson Hole Week - 19th Aug 14
Iraq, Ukraine - Oh, What A Tangled Mess We Weave - 19th Aug 14
How to Apply Moving Averages as a Trading Tool - Video - 18th Aug 14
Why Short Stock Traders Are Losing Money This Week - 18th Aug 14
Stock Market Rally May be Complete - 18th Aug 14
Why Chinese Citizens Invest In Gold - 18th Aug 14
Palladium Reaches 13-Year High Over $900 oz as Gold Trading Volumes Surge 66% - 18th Aug 14
Understand and Profit from Surging European Volatility - 18th Aug 14
No Escape from The Dollar as The Currency Standard - 18th Aug 14
Stock Market New Highs Less Certain - 18th Aug 14
German Stock Market DAX About To Drop - 18th Aug 14
Stay on Board - Stock Market Big Picture - 18th Aug 14
Europe Economy Is Tanking, QE Is Coming - 18th Aug 14
Are You Ready for The Greatest Technology Revolution Yet? - 17th Aug 14
Why King Coal is Bigger than Oil or Gas - 17th Aug 14
U.S. Empire of Death and Lies - 17th Aug 14
Ukraine - Whose Spin Are We Caught Up In Here? - 17th Aug 14
Time Decay And No Escape For Abenomics - 17th Aug 14
India BSE SENSEX The Party Is Over In Bombay - 17th Aug 14
Stock Market Uptrend Looks Underway - 17th Aug 14
The Key Role Of Conspiracy Theory In Dumbing Down Society - 17th Aug 14
The Federal Reserve in Denial Mode - Bond Market Explained - 17th Aug 14
Stock Market Ukraine-Triggered Volatility, But a Flat Finish - 16th Aug 14
Stock Market Investors Conditioned To Catch The Falling Knife - 16th Aug 14
Decline And Fall Of The CO2 Crisis - 16th Aug 14

Free Instant Analysis

Free Instant Technical Analysis


Market Oracle FREE Newsletter

The Biggest lie in Stock Market History Revealed

High Risk of Near Term Global Financial, Stock Market Crash

Stock-Markets / Financial Crash May 15, 2012 - 02:36 AM GMT

By: Steven_Vincent

Stock-Markets Diamond Rated - Best Financial Markets Analysis ArticleAt each juncture, I look at the available information as represented in the market price and technical data. I approach the body of evidence without preconception and with an open "beginner's mind". I see what I see. I analyze. I develop a set of probabilistic outcomes and then rank them. Then I write my report. I simply report my findings.

There is an extraordinarily high risk of some variety of global market panic in the relatively near term. In fact, I would say that there is a extant setup that is as perfectly aligned for an extreme market event as could be dreamed of by the most bearish of permabears. I'm no permabear, but a thorough review of the current price and technical charts has revealed an inordinate confluence of data points which collaborate to represent a very high risk profile. The current extreme risk profile is amplified by a nearly total lack of recognition on the part of market participants. A deflationary episode, potentially on the scale of the 2008 event, is presently on the table. Investors would do well to at least consider the facts, analysis and conclusions of this report.


BULLISH CONSENSUS

I generally place Sentiment and Psychology at the bottom layers of my analysis since it it the softest and least reliable data to consider, but in this case I am going to lead with it simply because there appears to be not merely a significant gap between perception and reality but apparently a widening chasm.  Bulls are repeatedly citing "excessive" or "extreme" Bearishness as a primary basis for an ongoing Bullish outlook, but the evidence strongly suggests this is not only not warranted but that the exact opposite conditions prevail.

There appears to be nearly total complacency in the present market environment.  Few if any analysts are currently willing to consider a market top of any kind, much less a crash.  Based on the findings in my current BullBear Market Report, the continued bold bullishness of the overwhelming majority is simply not supported by the technicals of the market.  

Of late many Bulls are citing American Association of Individual Investors poll data which they view as proof positive of extreme bearishness in the market. First, let it be said that this data is soft and its interpretation is highly subjective and as such it is rarely useful and its best use comes when one side of the market is leaning heavily on its perception of the data to justify its market position.

Let's have a look at the current AAII data. Theoretically, a reading of 25% bulls and 43% bears tells us that most individual investors are bearishly aligned and therefore out of the market or short, setting up a bullish resolution. Let's backtest that a little:

In late May of 2011 there was a reading that exceeded the current poll. While it did mark a short term bottom and a sharp rally ensued (and the current setup could be similar), it was very brief and was immediately followed by a market crash. At the 2007 top, there were multiple readings which exceeded the current poll and yet that turned out to be a spectacularly good time to be Bearish. In 2008, just before the main leg of the crash, there were readings which exceeded the current poll and yet that was certainly a time when the smart money was Bearish. It only took a glance at the actual data to discover that drawing a long term Bullish conclusion from a single week's AAII polling data is entirely unsupported by the facts.

One might also want to look and see if there is some supporting, corroborative data. I did, and there isn't any. In fact, the exact opposite appears to be true. Other similar sentiment data appears to suggest excessive Bullishness in the market at this juncture.

Investor's Intelligence Bull/Bear ratio remains relatively high with a slight increase in Bulls and a sharp drop in Bears to very low levels:


In addition, the percent of II respondents calling for a Correction has surged to a 12 year high as the percent who are Bearish has dropped to levels seen at the 2007, 2010 and 2011 tops:

In this context those calling for a Correction are in fact long term Bulls who are looking to buy this dip. For the contrarian, this can be interpreted as a strongly Bearish setup.

National Association of Active Investment Managers poll surged to over 60% bulls last week and increased yet again this week:

Consensus Inc survey is certainly in the sell zone:

Market Vane is at levels far more correlated with significant tops than bottoms:

Hulbert Stock Sentiment is closer to its Bull extreme than its Bearish extreme:

Now let me be clear. I am not basing my Bearish market view on this sentiment data. I am merely pointing out that, contrary to current popular perception, sentiment polling data supports a Bearish rather than a Bullish view.

A survey of the financial news media and popular blog sites also reveals very little in the way of bearish psychology. Few if any are calling a top of significance while some grudgingly admit the possibility of a "pullback" or "correction".

BEARISH ASSET ALLOCATION, LOW CASH

A little more digging into the AAII data shows that the same investors who are supposedly "extremely bearish" have allocated assets in a pattern that closely resembles that which has been found at important tops:



Stock allocation is at the same levels found immediately preceding the 2008, 2010 and 2011 crashes and only slightly below levels found immediately preceding the 2001 and 2002 crashes. Investors were similarly allocated to bonds just prior to the 2010 and 2011 declines. Cash allocation is identical to that found at the 2007, 2010 and 2011 tops and only slightly higher than that found at the 2000 top.

Rydex fund asset distribution data corroborates the AAII data:



Available cash in Money Market funds is nearly at a 3 year low. Rydex Bull fund allocation is hovering near the highs while Bear fund allocation is at the lows. Total assets in all Rydex funds is falling as money exits the markets.

Rydex asset ratio also corroborates the AAII data. It has surged to the bullish side recently to levels above the 2011 highs and is at levels far above those found at the 2007 and 2010 tops:



It appears that market participants have clearly chosen to view the recent decline as a buying opportunity and show no sign of fearing a significant bearish turn in the markets. This smacks of late bulls desperately seeking an entry point at the top of the market, trying to make up for having missed the big run. In light of the technical analysis I present in the current BullBear Market Report, this behavior may represent a dangerous misalignment with reality.

Much ado is currently being made of equity Mutual Fund outflows and Bond fund inflows. In my view the evaporation of public interest in stocks in the current environment is not bullish. Bulls argue that this means that the public is not invested and therefore represents latent buying power on the sidelines. While this may be true in the context of a healthy bull market, we will see later in this report that this market is not technically sound. In this context the flight of public capital from the markets represents a dearth of available cash, not a surplus:

Mutual Fund cash is at all time lows.

The available cash sitting on the sidelines in money market funds ready to be deployed is near record lows:

In the context of a bullish consensus coupled with a technically weak market, this is a very dangerous situation. Any unexpected market dislocation could result is a free fall with little in the way of sideline cash to stop the fall.

The 200 EMA of Total Market Volume peaked on the first decline of the 2007 bear market:



It has been declining steadily since then. Declining volume during the 2007-2009 bear market was not Bullish.

Even downside volume slipped during the 2007-2009 decline:


Upside volume is now at levels seen in 1997:

How does the behavior of market volume during the current Bear market compare and contrast with prior bear markets?

As we can see, volume on the Dow has fallen off a cliff since 2007 and since 2009 volume has come in well below the 50 Quarter EMA. Volume declined in every quarter sequentially except in the down quarters during major market pullbacks in 2010 and 2011.



During the 1966-1982 bear market, volume stayed well above the 50 Quarter EMA and even managed to expand during the course of the Bear, with periods of higher volume during Bullish phases and lower volume during Bearish phases, the opposite of what we have seen during our current market. As the Bear neared its end and began to enter a new Bull, market volume began to expand dramatically, doubling as the Bull began its run. That's the opposite of the behavior we have seen in the present market. It's well known that the public fled the markets during this period, much as they have during the current phase, and famously the "Death of Equities" was declared. A dramatic drop in public participation was bearish then, until the bear market ended on expanding volume.



During the 1929-1932 Bear market, volume fell dramatically during the Bear as investors fled the market. During the early stages of the new Bull, volume in excess of the 50 Quarter EMA came almost exclusively during big rallies and Bullish phases with very low volume during Bearish phases. Again, this is quite distinct from the behavior we are seeing in the present market.


Historical precedent does not support the thesis that low volume and investor flight is a sign or condition of a nascent Bull market.

CONCLUSIONS

The current sentiment and psychology of the market, when taken together with the rigorous and thourough technical analysis provided in the latest BullBear Market Report, shows that there is simply no question whatsoever that the overwhelming weight of evidence indicates a strong potential for a near term crash of world financial markets. Certainly, there are many times when latent potential is not realized and there is a valid setup for a near term rally as well. But in an environment of psychological and emotional complacency the probabilities become heavily skewed towards a realized bearish outcome. Global financial markets are currently in a bona fide crash window and panic events similar to the 1987, 2008, 2010 or 2011 episodes are all very real possibilities.
There's an elephant in the room and no one wants to acknowledge it.

Go here to read the full BullBear Market Report:


Disclosure: No current positions.
By Steve Vincent

http://www.thebullbear.com

Steven Vincent has been studying and trading the markets since 1998 and is a member of the Market Technicians Association. He is proprietor of BullBear Trading which provides market analysis, timing and guidance to subscribers. He focuses intermediate to long term swing trading. When he is not charting and analyzing the markets he teaches yoga and meditation in Los Angeles.

© 2011 Copyright Steven Vincent - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2014 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Comments

ktt
15 May 12, 11:51
Woh I can not beliefe this

attention High Risk of Near Term Global Financial, Stock Market Crash While it did mark a short term bottom and a sharp rally ensued (and the current setup could be similar).

What is your proberbility of the first scenario in your heading and what is the properbilty in the second scenario of A SHARP RALLEY

Or is this a 50/50 coin flip.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

Free Report - Financial Markets 2014