Nailed the Stock Market Top? Probably

By: Peter_Navarro

For the past month, as both market technical indicators and macroeconomic fundamentals have deteriorated, I’ve been warning of a possible market top in my Always a Winner newsletter. In preparation for that market top, I took my profits from the March run-up by closing almost all my long position.

I say “almost” because the only long positions I have maintained are a couple of penny biotech stocks that move largely outside the business cycle and a GE 2011 leap that I still like in that time frame.

That said, even though I hung on to that GE 2011 leap, I fully hedged it by shorting actual GE shares.

Last week, I went from warning about a possible market top to calling an actual market top and bearish trend reversal.

Putting my money where my mouth is, I also went to a net short position by buying a significant holding of TWM, the ultrashort exchange traded fund for the Russell 2000.

While I may be wrong about this market top, I’m still amazed at the level of ignorance of many of the commentators I hear on my favorite financial network on which I myself am a contributor – CNBC.

In fact, some of my colleagues are insisting that market drop to end October was simply due to end of quarter profit-taking by mutual funds trying to put their best bottom line forward.

This seems like all so much nonsense when one looks soberly at both market technical indicators and macro fundamental.

Let’s start with the market technicals. Both strength and momentum indicators for all major U.S. indices – the S&P 500, the Dow, the Nasdaq, and the Russell 2000 are negative. In addition, key sectors ranging from financials and technology to real estate and communications are showing marked deterioration.

Note that this is a very, very different landscape from just a few months ago when virtually every major exchange traded fund for every major market index both within the United States and around the globe could be considered a strong buy.As for the macroeconomic fundamentals, the scenario that I raised in an earlier video for the Street.com of consumers failing to follow through on what has been an investment led recovery seems to be coming to fruition. The central problem that consumers continue to face is a lethal combination of high unemployment, rising oil prices, falling home prices, and stagnant wages.

Looking ahead -- as the stock market almost always does -- it's becoming more and more difficult to envision a scenario in which strong robust economic growth in 2010 significantly reduces America's double digit unemployment rate. In addition, we are facing at least 10 more years of historically unprecedented budget deficits that are likely to turn today's dollar into a few pennies in value. That's a recipe for precisely the kind of bearish trend reversal I think we are about to be witness to.

Even though I have now called the definitive market top, for most traders, I don’t recommend going short. This is because stocks tend to fall a lot faster than they rise. What this means is that a trader has to pay even more attention to day-to-day, and even hour to hour, movements of the broad market indices.

That said, as I indicated earlier, my shorting instrument of choice is TWM, the ultrashort exchange traded fund for the Russell 2000. I like using the Russell 2000 because it generally has more volatility than the other major indices.

If you would prefer going short the other major market indices, here's how you can do it. SH is the shorting ETF for the S&P 500 while SDS will take you ultrashort. PSQ is the shorting ETF for the NASDAQ while QID will take you ultrashort. Finally, DOG is the shorting ETF for the Dow while DXD will take you ultrashort.

Peter is a regular CNBC contributor and has been featured on 60 Minutes.  His internationally recognized expertise lies in his "big picture" application of a highly sophisticated but easily accessible macroeconomic analysis of the business cycle and stock market cycle for corporate executives and investors. He is a Professor at the Merage School of Business, University of California-Irvine and received his Ph.D. in economics from Harvard University.

Professor Navarro’s articles have appeared in a wide range of publications, from Business Week, the Los Angeles Times, New York Times and Wall Street Journal to the Harvard Business Review, the MIT Sloan Management Review, and the Journal of Business. His free weekly newsletter is published at www.PeterNavarro.com.

© 2009 Copyright Peter Navarro - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.