Dogs that bark don't bite, they say.
Perhaps you beg to differ or would like to have more of a background check.
What kind of dog is it, how was it raised and when it was last fed. Looking back at what happened over the
past week, it would be more apropos to talk about bears than dogs. Up until
recently, bears were viewed as docile and stuck in their winter-sleep. The few
bears still standing weren't quite being taken seriously. After all, the Dow Jones (DJI: ^DJI),
S&P 500 (SNP: ^GSPC) and Nasdaq (Nasdaq: ^IXIC) have rallied beyond 70%
from their March 2009 lows. Just at the beginning of January, bullish sentiment
measured by various indicators had reached its most elevated levels in years,
even decades. Looking at the facts, the January 15th,
2010 issue of the ETF Profit Strategy Newsletter released the following
warning: 'Bullish sentiment has reached a level
where it is suffocating nearly all bearish currents and undertones. The natural
reaction would be, and has been by most, to conform to the trend, join the
crowded trade and turn bullish. Historically, such extreme optimism leads to
market declines. Even though the up-trend has lasted longer than expected, we
believe that every day that brings higher prices presents a better opportunity
for the bears. In the following pages we will explain why stocks are at the
cusp of a decline and how today may differ from historic patterns.' The biggest decline in seven months;
now what? Obviously there's been some technical
damage done to the charts of the major indexes. Support lines and confidence
have been broken and the question is whether we've simply entered a period of
minor indigestion or if there is another chance for a 2008-like decline. After a few days of subdued trading
this week, the indexes are down major again today. Disappointing reports on
unemployment and lack of manufacturing orders have investors spooked about any
sort of economic recovery. Other factors are, or should be weighing in, as well
(more in a moment). Short-term vs long-term In the January ETF Profit Strategy
Newsletter we contrasted the short-term chart of the S&P 500
(NYSEArca: SPY - News) with a hypothetical investment in one of
Bernie Madoff's funds. Obviously, there's more substance to
the S&P (NYSEArca: IYY - News) than to any of Madoff's concoctions,
however, the message was clear: If it looks too good to be true, it must be too
good to be true. At a point when the majority believes it is too good to be
true, it usually becomes a self-fulfilling prophecy. That tipping point has no
doubt moved closer. With no consideration for investors'
unfounded euphoria, the market decided to put a stop to rising prices and deliver
a dose of reality. Insider trading Obviously, nothing goes down in one
big, swift, relentless move. With the string of down days we've seen, some sort
of bounce should be materializing sooner than later. The key question, however,
is whether this bounce is just a flash in the pan or a meaningful extension to
last year's bull market. Released this morning, was the most
recent data on insider selling (released by Investors Intelligence). Corporate
CEO's are not viewing dropping prices as an opportunity to pick up their
shares; they are using them as an opportunity to sell. The most recent data
shows that insiders are selling about 3 times as fast as they are buying. Buying Climaxes The past weeks have also seen elevated
levels of buying climaxes. Buying climaxes take place when a stock makes a
12-month high but closes the week with a loss. They are a sign of distribution
indicating that stocks are moving from strong hands to weak ones. At the midst of last year's meltdown,
when everyone was prepared to run for the exits, the ETF Profit Strategy
Newsletter issued a Trend Change Alert on March 2nd and recommended to buy
long and leveraged long ETFs. These included the Financial Select Sectors
(NYSEArca: XLF - News), Consumer Discretionary SPDRs (NYSEArca:
XLY - News) and Technology SPDRS (NYSEArca: XLK - News), along with their leveraged cousins,
Ultra S&P ProShares (NYSEArca: SSO - News), and Ultra Technology ProShares
(NYSEArca: REW - News). Lack of economic activity The trend has changed. However, being
long the market is not prudent anymore, it's actually become treacherous. The January issue of the ETF
Profit Strategy Newsletter took a look at the Baltic Dry Index (BDI). The
BDI measures the stock of actual shipping companies and the performance of the
Index. In essence, it measures the global capacity for shipping and is thus one
of the few accurate barometers of the volume of global health. The chart below shows clearly that BDI
activity has been slowing for months, despite rising stock prices. The logic,
nevertheless, is simple. If no one ships goods, no one buys goods, no body
profits, earnings fall, and stocks fall. The Lynchpin The lynchpin for all equity prices
remains valuations. Who wants to overpay for assets at this time? The rush to
all asset prices like gold (NYSEArca: GLD - News), silver (NYSEArca: SLV - News) and other commodities (NYSEArca: DBC - News) stopped in December. All assets, aside
from a brief spike in equities, have been declining. As of recent, the Standard & Poor's
published P/E ratio (based on all actually 3rd quarter reported results) was
84.30. Historically, this is more than 10x the number you'd like to see around
a market bottom or fair value prices. Dividend yields, in particular for the
Dow Jones (NYSEArca: DIA - News), have dropped close to their all-time
1999 levels painting a similar picture. Market bottoms of historic proportions
are accompanied by sky-high dividend yields; not yields around 2 - 5%, if that. There are a number of gauges and
indicators discussed in the ETF Profit Strategy in the past. The most potent
four have been dubbed, indicative of their implications, the 'Four Horsemen.' The November issue of the ETF PROFIT STRATEGY NEWSLETTER includes a
detailed analysis of the Four Horsemen along with target levels for the
ultimate market bottom. The most recent issue includes a clear-cut short term
and mid-term outlook for the major U.S. markets, along with easy to follow
trading strategies and target levels. 
