The S&P 500 is Looking Parabolic

The S&P 500's increasingly parabolic shape has many wondering if the rally can continue.  Valuations are high when we look at Robert Shiller's Cyclically Adjusted Price-to-Earnings Ratio (CAPE), the Q-Ratio (the replacement cost of the S&P 500), and the regression trend of the market going back to the early part of the 20th Century.  However, as the old saying goes, "markets can remain irrational longer than you can remain solvent."  Just because valuations may be stretched, the underlying fundamentals of the economy may not compare to previous rallies of this magnitude (another article for tomorrow), and technical indicators are signaling overbought conditions does not mean the market will do a 180 tomorrow and plummet like a rock.  Actually, these overbought and overbullish symptoms have been in place for most of the post-financial crisis rally.  The permabears like Roubini and Schiff have been proven wrong day in and day out.

What is the point of this post?  In any market environment there the common excuses can be heard, "this can't be happening because the fundamental don't support it", "as soon as I jump in the market will reverse", "I'm just waiting for a pullback to purchase at lower prices."  Listening to people's opinions is a mistake.  The real profits are made with systematic, quantitative systems that eliminate human emotion and make decisions based upon known facts.  These models can be based on fundamental factors, technical data, sector rotation strategies, business cycle theory, or any combination of them all.  Basing your trading or investment strategy on a well designed system will keep you off the sideline and in the game during rallies like we've seen since the 2011 lows [Figure 1].

Figure 1

Dollar looking extremely vulnerable

Check out this monthly chart of the US dollar index. The dollar formed a triangle pattern over the last few years. Triangles are continuation patterns and considering the dollar's 90% fall since 1971 it's not hard to imagine the trend continuing lower. This pattern points to an almost 50% further reduction in the value of the dollar over a number of years. We don't have to get into politics or any economic debates between Austrians and Keynesians outlook on the debt debate and the dollar. All I have to do is look at this chart and have a good understanding of history to realize that the dollar is in trouble and no one, including Bernake, Obama, Geithner, or Superman is going to save it. It was not caused by one political party, but both, as they all had a part in destroying our economy over the last three decades with insane policies that encourage the build up of debt and the creation of one of the largest wealth gaps in the history of the world. Yes, I said it..... Ronald Reagan and Bill Clinton share in this ginormous policy failure that is the US two party system.

Also.... Just so we are clear. A 50% reduction in the value of the dollar is not going to be the end of the world if it does materialize. Gold bugs, doom and gloomers, religious zealots, and Fox News would have you believe that if the dollar loses it's value all hell is going to break loose and we will be taking hunting rifles with us to the grocery store. This is just absolutely not true, so quit lying to yourself and others. The dollar falling is what the economy needs to reset itself. It's a natural correction process that needs to happen to rebalance the excesses of the last 30 years and bring manufacturing back to the US. If you disagree with me feel free to e-mail me as long as you have a rational response not memorized from Fox News or any other propaganda machine.

US Dollar Index (monthly)

We have arrived at a critical junction

Time for a market update as I feel we are currently at a critical junction for the financial markets.

The VIX is signaling an end to the high level of complacency that has gripped the market since mid-2010. Any number of events could trigger a selloff resembling the one after the Japanese tsunami. However, I feel that the upcoming pullback could be severe if not handled correctly by the world's policy makers...... and my faith in government to handle these matters isn't great.

The VIX has started moving aggressively northward in the last week. The S&P 500 has also began a small pullback after not being able to challenge the April highs. The market seems vulnerable right now as it's back below the 50 day moving average and still a few percent away from it's first pivot support. The S&P has also hashed out a nice head and shoulders topping pattern. If the neckline breaks, confirming the pattern, lookout below. I think the likelihood of this happening is fairly high at the moment considering that market internals have already started to deteriorate and worldwide risk is high right at a time the slow recovery is falling apart. Look for a clean move below the S&P 500 1250 zone to confirm the start of a larger downtrend and a new bear market.

Events most likely to be a catalyst:

1. Sovereign Debt Crisis
2. European Union Banking Crisis
3. Geo-Political Event
4. China Bubble
5. Rising Inflation and Interest Rates

S&P 500 Bullish % Index






Volatility (Weekly)






S&P 500 (Weekly)

Location:We've arrived at a critical junction

What I'm reading - 7/20/2011

This will be a recurring post, hopefully done daily to detail what I've been looking at and studying up on lately. It can give you a good idea of what I'm thinking about and why.

1) Economists: The Economy Can Only Recover If We Repudiate the Debt

http://www.zerohedge.com/article/economics-professor-we’ll-have-never-ending-depression-unless-we-repudiate-debt-which-never-

Not much for today but I'm just now getting back up and running. More to come shortly along with the first trades for our model portfolio.

Back in Business

Blog back up and running. Post on the way detailing important economic events, our take on them, trade ideas, model portfolios, and whatever we feel is necessary for our audience to get a better sense of the world economy and finance in
general. Enjoy!

Buyable Pullback

S&P 500 60 Minute Chart (Elder Impluse)

• As of right now this pullback in the market looks to be corrective and should be bought. We have seen no selling pressure on an extreme basis that indicates institutional liquidation. This could change, but as of right now this looks like your standard 3-5% pullback in this liquidity driven frenzy of a bull market.

Great buying opportunity

Walter Industries Daily Chart (WLT)

• I love this chart. I also love the fundamentals of the company. This is an amazing buying opportunity and I am initiating a position at the open tomorrow morning.
• Walter Industries, Inc. produces and exports metallurgical coal for the steel industry primarily in the United States. The company also produces steam coal, coal bed methane gas, metallurgical coke, and other related products. It principally serves electric utility and industrial customers. The company was formerly known as Walter Industries, Inc. and changed its name to Walter Energy, Inc. in April 2009. Walter Energy, Inc. was founded in 1946 and is headquartered in Tampa, Florida.
• The chart is just perfect and on top of that the last 3 quarters average EPS growth is 290% EPS Estimates for the current quarter have recently risen 93% and last quarters EPS growth year over year was an amazing 80%.
• The debt/equity ratios is a small 26% and annual ROE is running 93.1%. The coal industry is blazing ahead, especially because of the nuclear disaster in Japan. This one looks like a golden opportunity.