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Tom Demark, founder of Market Studies LLC is calling for a 10%+ decline in the S&P 500 that should begin within the next two weeks. DeMark’s Sequential and Combo indicators are used by many of the largest hedge funds in the world and are currently generating their first sell signal since 2007. Demark told Bloomberg that the decline could be “pretty sharp” and “I’m pretty confident that in one to two weeks, the market will be in a descent.”
http://pragcap.com/demark-predicts-10-decline-as-complacency-rises
Fisher is just the latest Fed official to applaud this trend. Here’s the backstory. In the 1970s, there was a lot of inflation. The oligarchs of the time didn’t like this, because it made their portfolios worth less money. So they decided they would clamp down on inflation by no longer allowing wage increases. To get the goods they needed without a high wage work force, they would ship in everything they needed from East Asia and Mexico. The strategy worked. Inflation collapsed. Wages stopped going up. There were no more strikes. Unemployment jumped.
Tomorrow is options expiration and if you watched the action in the market this week it is nothing short of wild and volatile. This is the one week of the month when institutional money will shake the markets both ways in order to shake out the small retail options trader. Look at the action in stocks such as Apple Inc.(NASDAQ:AAPL), Netflix Inc.(NASDAQ:NFLX), and F5 Networks Inc.(NASDAQ:NFLX) this week. These stocks have been all over the map this week trading in choppy fashion, and sometimes making violent swings in both directions.
Many investors will say that this action in the market is due to corporate earnings and that certainly is partially true. However, if you have followed us over the years you will have noticed that this type of action that we are seeing this week occurs every month during options week. Just look at the intra-day swings today and any trader will have to admit the action is down right violent. It is important to remember that most retail options traders play options because they do not have the capital to actually purchase the stock. Therefore, these options traders usually look to settle their options before the actual expiration date for a premium gain or loss.
This is a week to trade only the best chart setups and protect profits when you get them with a stop in the money or at break even. This is not the week to get cute and look for the home run trade. Money management is essential during this week when trading the market.
Look at some of the wild and violent action in the market this week. F5 Networks Inc.(NASDAQ:FFIV) declined by 30.0 points yesterday after reporting earnings. I could only wonder how many retail options traders had calls on the 150 strike price. A call option is a bet that the stock will reach a certain price by a specified time. Oh well, I guess all those traders that bet on FFIV are just out of luck this week. Another leading stock name that was punished this week was Mosaic Co.(NYSE:MOS). On January 18, 2011 Mosaic stock was trading at $85.00. Yesterday the stock was trading down to $72.00 a share before bounce a little higher. Just think about how many retail options traders were betting on Mosaic stock to reach the $90.00 strike price. Apple Inc.(NASDAQ:AAPL), Goldman Sachs Group Inc.(NYSE:GS), and VM Ware Inc.(NYSE:VMW), all had sharp, violent action away from the popular strike prices.
Commodity stocks also joined into the options expiration tornado. Just a week ago copper, and oil were making new highs for the year and right as options expiration week began these leaders just fell off a cliff. Remember the retail options trader is usually the Average Joe or often called John Q Public. It is very difficult for the retail options trader to try and beat the institutional money that can certainly move any stock that they see fit for five trading days. The lesson here is to always trade only the best chart patterns during options expiration week and have stops on all positions.
It is important to note that in the past a lower U.S Dollar would have boosted most precious metals and commodities. These days the precious metals have all turned down as the Asian growth countries are now being forced to raise interest rates to fight and counter the high inflation that the Asian countries are now facing. China, India, Thailand, Brazil, and Vietnam are just some of the countries facing major inflation. Food riots have recently broke out in various countries around the world due to high food inflation. It is important to remember that hard and soft commodities are traded in U.S. Dollars and the weak U.S. Dollar Index is certainly the leading cause of this inflation.
If the weak U.S. Dollar Index begins to fail to inflate the stock markets higher there could be problems in the markets down the road. The entire stock market rally since March 2009 has been on the back of a weak U.S. Dollar Index.
Other signals that the market is near a top are amazing earnings, being released by such companies as Apple Inc. (NASDAQ:AAPL), International Business Machines Corp. (NYSE:IBM) and Google Inc. (NASDAQ:GOOG). All three of these mega market movers reported stellar results, all of them gapped higher but only IBM held the gains for the entire day. In addition, even IBM could not push the markets higher as we have seen a stall out.
The problem here is simple. The markets are up over 20% in the last few months. Even the best earnings, perfection on all levels cannot justify the recent gains. Institutions are looking to sell for now, take profits and evaluate their positions. This is creating a market that looks much different than what was seen just a week ago. In addition, let's not forget options expiration and the sneaky institutions wanting to push some key stocks lower, to have the plethora of calls they sold expire worthless. When options expire worthless, the institution enjoys the entire premium as a pure profit.
Bottom line is, this market is acting differently these last few days. This must be watched as a top could be near. To gain more market analysis, guidance, swing trades and education, join the Research Center.
Gareth Soloway
Chief Market Strategist
www.InTheMoneyStocks.com
Negative:
all data from sales, housing and unemployment is not good
Higher inflation promotes the increase in interest rate.
Austerity measures, higher taxes, immigration policy will negatively affect economy too.
Positive:
The shrink demand will reduce the inflation effect and devalue the pound, thus boost the export.
If UK, happen to outperform other EU countries like Spain, Italian and etc, the net immigration from these countries might increase.
Migration_Review_2010-2011_Dec2010.pdf
Ireland’s embattled prime minister has been forced to call an election in March, a victim of political tensions stoked by the eurozone debt crisis per Financial Times
http://www.forexlive.com/161018/all/cowen-forced-to-announce-early-election
