Diary of a Financier

Bull v. Bear

In Capital Markets on Fri 5 Oct 2012 at 17:27

I feel the anxiety creeping in as we’re getting more and more early morning rallies that fade into the close.  Since we’re rolling into the catalyst of earnings season (starting next week), it’s time for another episode of Bull v. Bear…



  1. QE3- The open-ended stimulus also known as “QEternity” has not had ample time to work its way through the system.  At the same time, 11 months of LSAPs have been discounted by the market, ushering us to recent highs without another material catalyst.  As I’ve noted, “It’s all about what QE does to affect capital flows, confidence, and consumers… now show me why I should buy at 4-year highs.” 
  2. Analyst Bearishness- Merrill Lynch’s Sell Side Contrary Indicator has barely budged off historic lows, despite the fierce market rally to date.
  3. PMI Improvement– One month of improvement is a datapoint (not a trend), but I have to note the recent global PMI reports, which showed a deceleration in global contraction and continued expansion in the US.


  1. Head & Shoulders Tops– The Romney Rally on Thursday and the jobs report rally today have the SPX H&S tilting now, which isn’t all that different from other recent tops.  A classical H&S top has emerged in the Nasdaq (COMPQ), which gives me all the conviction in the world that broad markets have peaked in the near term.
  2. Analogues– Throughout the marketplace, I’m finding analogues to April 2012 (before the correction) and 2007 (before the crash).  Most notably, SPX’s current priceaction is shockingly reminiscent of 2007.
  3. S&P 500 Futures– Net long interest in E-mini Futures (ES/) has reached its highest level since December 2008–just before the final leg of the crash.
  4. Valuations- SPX’s PEG ratio has reached 1.7 (v. 1.2 long-term average). This means that either analysts are too pessimistic about their 2013 EPS growth estimates, or market valuations are too rich.  I think it’s both, but the latter vastly outweighs the former.  I just don’t think analysts know where the EPS growth will come from now that margin expansion has reached its outer limits and revenue growth can’t be justified in this economy. I have to say: I think they’re right.  Regardless of what “surveys” say, investment sentiment is decent out here, but it’s rolled over from the post-QE3 euphoria to a bit of anxiety.  We’ll find out next week, when Alcoa (AA) kickstarts 3q earnings (10/9), and the market will care a lot more about forward guidance than backward performance.
  5. Bonds- Always the smart money, because it’s the long-term money, bonds have begun to diverge from equities again, signalling that something is amiss (particularly in Europe).
  6. VIX– A fulcrum bottom with bull divergence has developed in the Volatility Index.
  7. Inventories– The more time passes, the closer we get to a time-tested, cyclical top in private inventories. While there’s still room between the current $66b in stockpiles and the $80-90b upper limit, gross inventories have already shown a reversal lower in the last monthly report.


As I aggregate all this information, I find an unequivocable bearish slant in the sum-of-parts.


  1. […] high has been even more lopsided than its predecessors, but H&S tops are popping up in other broad indices.  In particular, the NASDAQ’s H&S has already materialized, having fallen […]

  2. […] pattern that’s developed has provided clear warning signs. The “Qs” followed my lead lower, breaking through neckline support of a Head & Shoulder top ~$68.25. QQQ soon hit a […]

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