The biggest problem to date has been the markets extreme refusal to even give a modest decent correction and against all odds and all beliefs it seems to keep churning upwards, like a blind man with a purpose. The plaguing question is what is the purpose, what is the market trying to tell us? Or is it the market talking or just the easy money policies of the fed that are blindly pumping this market up. Every technical indicator is in the overbought range, every psychological indicator is in the extreme bullish range to(which is usually a negative for the market), contrarain indicators which most fall under psychological indicators are also suggesting that we should have already started to correct.  And the esoteric hourly cycles have been in the screaming overbought zone since the 8^th of October, while they can stay for quite extended periods of time in the overbought zone, this is extremely unusual, however the only ray of light and I mean that in an ironical way is that the daily cycles are not overbought, which is something I find very hard to believe, I do not try to  direct the cycles, I just make sure I am able to read what they are saying, so while all the indicators are in the extreme overbought zone, the only one that has not given a major sell signal is the daily esoteric cycles .

The daily cycles have just touched the overbought zone, which is technically the minimum level needed in order to start a decent correction, however this is not a guarantee and in an irrational market one usually ends going to the extreme zone, we are in an irrational market, the cycles are suggesting that 9900-10000 is a possibility.

Lets us look at the irrational factors.

Vix has dropped to multi year lows, in June 2002 it was at 54, recently it dipped below 17 and into the lower 16 point range. To show you how irrational this is if one looks at  a chart you will see we just made a new 5 year low. At the height of the biggest mania ever ( 99 peak of  dot.com era) we did not dip to such low levels, clearly insanity is in the driving seat. We have to go back 6 years to find a point in time where we were below such levels, and we find that year was 1998, when we briefly dipped to levels lower than these ( look at chart below). However that was a different era, jobs were easy to get, corporate spending was uncontrolled, and the air was filled with great expectations. Fast forward to today, jobs are hard to come by, over 3 million have been lost in the manufacturing sector and the situation is going to get worse, thousands  of  more  jobs lost permanently in the high tech sector, no hiring relief in sight, very few companies talking about a brighter future, we have no surplus anymore, we are running huge budget deficits that will only get worse. The dollar is extremely weak. The probability of another major war somewhere in the Middle East or with N. Korea looms in the horizon. The possibility that the Asian countries will dump their dollar reserves and switch to gold or the euro or a mix of the two, this alone would have untold negative ramifications that could rock this so called weak economic recovery to the stone age and the list goes on and on.

http://tacticalinvestor.com/vix.gif 

If one starts to look for positive news, one has to hunt very deep and actually stop thinking in a sane manner, you need to start thinking like someone who  has  just escaped from a lunatic asylum to be able to find any sane reasons to have faith in this economy or market,( however sanity has not made to many people rich but that is a point for another day). The only argument one can come up with is that, we needed to see some sort of rally in this market after everyone was on the negative gloom and doom bandwagon as a contrarian you knew that the market had to put in a temporary bottom and rally as the negativity had reached incredible levels by  October 2002, however this has long since ceased to be a technical rally and has actually become a rally with intermediate bullish implications. One cannot use the argument that earnings are getting better because that is like the kettle calling the pot black. Earning have ratcheted down so much that it makes no sense to do any comparison, every quarter the analysts keep adjusting the earnings, usually in a downward direction to such a point that it is virtually impossible for most companies not to exceed these lowered earnings estimates. Lets try to do that in college, lower down the % ones needs to to get an A, from maintaining an 90% average to 65% and soon you will have almost every idiot strutting around calling himself an A student. Take it one step further, to fall into the wealthy bracket you only need to make 20,000, at this point almost no one will be able to call themselves poor anymore and welfare will almost cease to exist. You get the point.

To literally find any good news you have to hunt for it, while if you are looking for bad news and this bad news that is factually correct, there is an endless supply of it, yet like ostriches who have decided to bury their heads in the sand, the masses have virtually ignored all the recent volley of bad news and chosen instead to focus on the minuscule amounts of  good data out there.

Even for seasoned traders, top notch market watchers and writers these last 3 months have been nothing short of puzzling, I sincerely doubt there is any trader or analyst or newsletter writer that can comprehend the markets persistence to march forward. The problem is not that we are in a bullish phase now, that is fine the trend reveals that, what the problem is that even in a healthy bull market you never get such stupendous advance without some healthy pull back we have virtually gone from 7400-9800 without one serious pull back.  This rise is one for the record books, if we were back in the 1990’s era this would somehow be justifiable but we are not.  Even we have been hit with the few puts plays we have taken, we did not load up on puts or get to aggressive, because we started sensing some anomaly that we could not quite place our hands on, but it was there, and so as a precaution we abstained from becoming to bearish, and recently with the our new tool esoteric cycles it has helped us avoid taking   many a short position that looked perfect technically but would  have ended disastrously had  we taken those positions.

I don’t mind saying that all of us at the tactical investor, the few individuals involved in research are completely perplexed at how this market simply refuses to give in and we have to rely on our new tools and this so called new paradigm where we rise on bad news, with no good news anywhere in sight, a phenomenon which is beyond contrarian investing the only term I can come up with is insane investing.

This would be a good contrarian view point if the we were rising on bad news but the worst was behind us, but that does not appear to be the case, in an economic recovery one main ingredient is key, companies stop firing and actually slowly start hiring but here the corporate firing squad is busy increasing their supply of bullets and trading in their  rifles for machine guns. Without new jobs you cannot have sustained economic growth, if your earnings are simply improving  as a result of better cost cutting methods, than that is not economic recovery that is called desperation, you are fighting to say alive and recovery is very very far away.

What is my point here? it is very simple I agree with all you that are writing in and sending me stories with bad news and I also agree when you tell me all your technical indicators are screaming sell and  suggesting that we should crash and I agree with you that market should pull back, crash yes but not right now. However I cannot and will not start to scream like a bear when everything around looks and sounds bullish even though it is from an insane perspective and then you have the other camp that which is primarily composed of Experienced traders and professional newsletter writers that are extremely bearish. we have two extremes sentiment readings occurring simultaneously.

. Lets take a second to reflect on these points,  If we at the tactical investor had maintained nothing but a bearish stance, and taken huge short positions where would we be now, that’s right slaughtered like pigs. Wall street is lined with graves of people who were right but right to early.  We have not changed our stance that this is market will one day crash very severely but it wont be doing so right now. However as I mentioned before we are surprised that there has not been any decent correction what so ever.

It is for that reason that we have been looking to use this market to our advantage, rather than force the market to cater to our needs, we have decided to look for opportunities that we can live with, that are contrarian in nature and that will pass our technical tests and it is for that reason we have been taking more and more long positions, but they are in extremely oversold sectors or in sectors that are already performing well but one or two stocks have been getting hammered and have reached mouthwatering levels where the risk to reward ratio is favorable, simply shorting stocks or using put options or going short via a futures for any length of time has been extremely dangerous.

There is something very abnormal in this current market and  till it returns to some sort of normality, it seems most TA indicators are not going to be use full as they once were. When in doubt sit out that is my motto.  Sometimes the best thing to do in market is be patient and that’s what we are going to have to do here. Instead of trying to force the market down lets simply invest in sectors or stocks that are extremely oversold and make a good contrarian play. Or if you are conservative then wait for a decent correction to transpire before taking new positions. As we all know when playing with the markets the saying no pain no gain has never been truer.

I will end with this, I believe the market should correct. For the last month or so we have been rising on lower than average volume and so I think we are either at or close to a short term top, however this correction is just going to be brief, before the market carries on rallying. As of right now I don’t see us going below 8800, most likely the 9000 range won’t be breached. These above scenarios should hold unless we have some catastrophic event take place, and that is beyond all timing systems. I believe this decline will provide many of us a with very good stock plays and some spectacular call options.