Short the S&P 500 Index in Early 2011

Who You Callin Short?

This Wall Street Greek author is now short the market, specifically the S&P 500. In my view, we have reached the tipping point in a rally that has lasted almost two years on borrowed money and borrowed time. Time is growing short and I am afraid smart money is about to do the same.

Relative Tickers: NYSE: GS, NYSE: C, NYSE: BAC, NYSE: WFC, NYSE: MS, NYSE: JPM, NYSE: TD, NYSE: PNC, Nasdaq: TROW, NYSE: STT, NYSE: STD, NYSE: DB, NYSE: BCS, NYSE: NBG, Nasdaq: MEMKX, Nasdaq: GECMX, Nasdaq: JEVOX, Nasdaq: PEMAX, NYSE: EEM, NYSE: VWO, Nasdaq: VEIEX, Nasdaq: ADRE, Nasdaq: PEBIX, Nasdaq: GMCEX, NYSE: MSF, NYSE: EEV, Nasdaq: REMGX, NYSE: GMM, NYSE: EDZ, AMEX: ETF, NYSE: FEO, NYSE: ESD, NYSE: MSD, NYSE: EMF, NYSE: TEI, Nasdaq: EMIF, NYSE: EFN, NYSE: EMT, NYSE: PCY, NYSE: PXH, NYSE: GMF, NYSE: GUR, NYSE: GML, NYSE: GMM, NYSE: EWX, NYSE: GAF, NYSE: EUF, NYSE: EET, Nasdaq: ABEMX, Nasdaq: AEMGX, Nasdaq: APERX, Nasdaq: PMGAX, Nasdaq: PMCIX, Nasdaq: AOTAX, Nasdaq: AOTCX, Nasdaq: AOTDX, Nasdaq: AEMPX, Nasdaq: AOTIX, Nasdaq: AEMEX, Nasdaq: AAMRX, Nasdaq: AEMFX, Nasdaq: AAEPX, Nasdaq: AEMMX, Nasdaq: ACKBX, Nasdaq: ACECX, Nasdaq: AMKIX, Nasdaq: TWMIX, Nasdaq: NDAQ, NYSE: PIZ, NYSE: PIE, NYSE: PDP, NYSE: DIA, NYSE: SPY, NYSE: NYX, NYSE: DOG, NYSE: SDS, NYSE: QLD, NYSE: IWM, NYSE: TWM, NYSE: IWD, NYSE: SDK, NYSE: ICE, Nasdaq: QQQQ, Nasdaq: HTOAX, Nasdaq: HTOTX, Nasdaq: HTOBX, Nasdaq: JTCIX, Nasdaq: JTCNX, Nasdaq: JTCAX.

Short the S&P 500 Index and the Market in Early 2011

In previous articles, I have recommended that readers take cash out of any long positions at key junctures. In each of these articles, I have presented a case that the technical formation in the market at that particular point in time represented the top of the bear market rally. As is always true with such technical indicators, even with the market in general, any bearish or bullish outlook always comes with associated statistical probabilities. So it is up to the reader to judge in accord with a recent WSG article whether I was "wrong or early?"

In this particular case, many technical indicators suggest that odds are high a decline is about to occur and that the current formation represents the top of the bear market rally:

• According to Elliot Wave (EW) theory, the current five wave structure, which is in turn a sub-structure of the final leg in the rally that began in March 2009, logically completes the retracement of bull market highs from 2007. Of course, the uncertainty with application of Elliot Wave is that many such structures are possible within the fractal wave patterns defined by EW rules. Since these patterns are completely recognizable only in retrospect, rules offer contingency outcomes if and when those rules are broken.


• This same five wave structure forms a classic "bearish rising wedge" on the S&P. A break below 1255 on the S&P Cash Index would suggest that prices are beginning to deteriorate, with a short-term technical target at around 1180.


• Any previous technical target associated with the bullish (inverse) head and shoulders which formed with the market bottom has been fully achieved.


• Index retracement is above the key Fibonacci level of 61.8% and is now at around two-thirds or 66.7% of the drop from bull market highs. Some view this level as technically important though it does not correspond to a Fibonacci ratio.


• Two key Phi Turn dates occur within a one week trading window: Dec 29th 2010 and Jan 6th 2011. Phi Turn dates are calculated using Fibonacci ratios applied to the time period between key market reversals. The calculated dates have proven very meaningful, often identifying market bottoms and tops to the day.


• Cyclic indicators, particularly the weekly stochastics indicator shows the market is overbought and topping.


• We now have a confirmed Hindenburg Omen, which suggests a very high probability of market decline. The first omen was observed on August 20th, 2010, with unofficial confirmation on Dec 14th and official confirmation on Dec 15th. The probability that a stock market crash occurs is higher than normal, and the probability of a severe decline is quite high. This Omen has appeared before all of the stock market crashes, or panic events, of the past 25 years - all of them. No panic selloff (greater than 15 percent) occurred over the past 25 years without the presence of a Hindenburg Omen.


• Most of this rally, particularly in the waning stages, has occurred on very light and decreasing volume, very likely supported by POMO operations. This leaves the market susceptible to flash crash conditions at any time.

As The Greek often points out, technical indicators should not be viewed outside of the context of underlying economic conditions, particularly when attempting to use these indicators to identify a reversal. In my estimation and based on my experience as a small business owner, the economic recovery is farcical and is not supportive of the capital investment necessary to restore real growth.

Despite suspect reports, unemployment remains up while banks are reluctant to invest in low yield US businesses. Instead, they continue to chase emerging markets with balance sheets repaired by taxpayer money, and in the process, are creating even more dangerous bubbles abroad. In my travels during 2010, I have found that even those people who are benefiting from the investments see the growth as unsustainable.

More importantly, we remain in the midst of a bond market bubble that dwarfs any other problem on the economic landscape. Any temptation to declare "mission accomplished" with the recovery would only increase headwinds in the form of inflation and higher interest rates. Any drop in the highly suspect dollar accomplishes the same. For this reason, I remain convinced that the Federal Reserve will be forced to keep interest rates low, not through QE3 and QE4, but through the deflation of higher risk assets. This will keep investors in the bond market for the foreseeable future, ensuring that bank balance sheets are protected from further, more devastating loss.

Disclosure:I am short S&P 500 Index Futures



Article may interest investors in NYSE: GS, NYSE: C, NYSE: BAC, NYSE: WFC, NYSE: MS, NYSE: JPM, NYSE: TD, NYSE: PNC, Nasdaq: TROW, NYSE: STT, NYSE: STD, NYSE: DB, NYSE: BCS, NYSE: NBG, Nasdaq: MEMKX, Nasdaq: GECMX, Nasdaq: JEVOX, Nasdaq: PEMAX, NYSE: EEM, NYSE: VWO, Nasdaq: VEIEX, Nasdaq: ADRE, Nasdaq: PEBIX, Nasdaq: GMCEX, NYSE: MSF, NYSE: EEV, Nasdaq: REMGX, NYSE: GMM, NYSE: EDZ, AMEX: ETF, NYSE: FEO, NYSE: ESD, NYSE: MSD, NYSE: EMF, NYSE: TEI, Nasdaq: EMIF, NYSE: EFN, NYSE: EMT, NYSE: PCY, NYSE: PXH, NYSE: GMF, NYSE: GUR, NYSE: GML, NYSE: GMM, NYSE: EWX, NYSE: GAF, NYSE: EUF, NYSE: EET, Nasdaq: ABEMX, Nasdaq: AEMGX, Nasdaq: APERX, Nasdaq: PMGAX, Nasdaq: PMCIX, Nasdaq: AOTAX, Nasdaq: AOTCX, Nasdaq: AOTDX, Nasdaq: AEMPX, Nasdaq: AOTIX, Nasdaq: AEMEX, Nasdaq: AAMRX, Nasdaq: AEMFX, Nasdaq: AAEPX, Nasdaq: AEMMX, Nasdaq: ACKBX, Nasdaq: ACECX, Nasdaq: AMKIX, Nasdaq: TWMIX, Nasdaq: NDAQ, NYSE: PIZ, NYSE: PIE, NYSE: PDP, NYSE: DIA, NYSE: SPY, NYSE: NYX, NYSE: DOG, NYSE: SDS, NYSE: QLD, NYSE: IWM, NYSE: TWM, NYSE: IWD, NYSE: SDK, NYSE: ICE, Nasdaq: QQQQ, Nasdaq: HTOAX, Nasdaq: HTOTX, Nasdaq: HTOBX, Nasdaq: JTCIX, Nasdaq: JTCNX, Nasdaq: JTCAX.

Please see our disclosures at the Wall Street Greek website and author bio pages found there. This article and website in no way offers or represents financial or investment advice. Information is provided for entertainment purposes only.