My sense is that a great many speculators are simultaneously imagining some clear exit signal, or the ability to act on some “tight stop” … History teaches that the market doesn’t offer executable opportunities for an entire speculative crowd to exit with paper profits intact. Hence what we call the Exit Rule for Bubbles: you only get out if you panic before everyone else does.
–John Hussman,
Noted Financial Guru and long-term Bear

Years ago, in an earlier millennium, a pre-historic precursor of a financial blog ran an article entitled “The Bells They Ring at the Top” discussing the warning signs of the end of a long bull run. One of our new junior associates read it and asked naively: “Do they really ring a bell?”

No, dummy. They won’t ring a bell to tell you when to get out. You’re expected to be smart enough to figure it out for yourself.

But if they did have a bell, it might be tinkling a little now. Consider:
•    Retail investors are extremely bullish. But insiders like Warren Buffett have been going to cash for most of the year and George Soros – who made billions by being right about turning points in the market – has opened a bearish Put position of historic magnitude.
•    Corporate executives are selling more than six times as much stock in their own companies as they buy. And a lot of the time they are selling it to their own companies, who have instituted stock buy-back programs. Who will still be buying when those programs end?
•    The volume in US markets is a mere fraction of what it once was, and is largely provided by High Frequency Trading firms. Both retail investors and the big players are sitting this one out. Financial institutions and hedge funds have been net sellers this year. Who are the algos going to sell to?

Last Week

With everyone listening for the bells to ring, it is small wonder that even a modest squiggle like the market produced last week is seen as a sign of apocalypse. The S&P 500 cash index (SPX) lost 27.50 points last week and closed at 1982.85, a decline of 2.63% from its all-time high set earlier in the month.

But consumer confidence remains high – we wonder why – and in a Friday (Sept. 26) bounce-back the market regained about a third of the territory it lost during the week. Last week’s downward retracement could be extended, and could even turn into a minor selling panic, before it would seriously affect the long-term up-trend.

The first major support line for the long term is around 1900 level, which would be a decline of about 5%. The second long-term support is at the1800 area, which would be a 10% decline. As long as those supports hold the SPX up, the long-term uptrend remains intact and we would expect long-term buyers – if any are left – would be stepping in on the dips there.

This Week

Our position is unchanged; for the long term we are bearish, and if we were the type of buy-and-hold retail investors Wall Street loves, we would not stay in US equities. There is much more room on the downside than the upside.

But we are traders, not investors, and for traders the kind of volatility provided by last week’s wobble is an invitation to the dance. We don’t care if it moves up or down, as long as it moves.

The moves in the early part of next week are more likely to be up than down. The end of the month and of the quarter is Tuesday (Sept. 30), and bonuses depend on good results. Look for some window dressing.

For our preferred trading vehicle, the S&P E mini futures (ESZ4), we see upside resistance around 1982-84. If that is broken and the price moves above 1986, we could see a stop run that pushes up to 1992-94.

On the downside, as long as ESZ4 stays under 1982.50 it could make one more push down toward 1946.25 to end the short-term correction.

The major support levels: 1950-56, 1946-45, 1935.50-33;
The major resistance levels:  1992.50-89.50, 1999-2000.50, 2007-08, 2014-18

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