Friday, January 15, 2016

Trending Lower and Overvalued

Short term traders usually ignore valuation but you shouldn't.  There is a big difference between buying something that is oversold and undervalued versus buying something that is oversold and still overvalued.  We are in the latter.

It is like the difference between buying an oversold market in December 2000 (overvalued) versus buying an oversold market in July 2002 (undervalued).  Measures of valuation are subjective, but usually a market that has gone up 200% over 6 years and goes down 10% is not cheap.  That is what has happened over the last 2 weeks.  If you buy a downtrending market that is still very overvalued, then you set yourself up for big air pockets lower like you saw in August, or even worse, what you saw in January 2008.

Now I hear people saying its not like 2008, its not that bad.  Well if you compare any market to the weakest that we've seen in our lifetimes, of course it won't be as bad.  But if this market is even half as bad as 2008, we've got lots of air underneath.  Lots.

It is hard to have much confidence in sentiment indicators and oversold readings when the trend has turned down after a 6 year bull market where prices went up over 200% and people are bearish.  There were plenty of bears in 2001, 2002, and 2008.  The market went down anyway.  You cannot read sentiment indicators the same as if this dip is the same as those in 2010, 2011, 2012, 2013, etc.  The global economy was stronger and the market was much cheaper back then.

Its like a department store jacking up the price 200% and having a 10% off sale.  That is what has happened in the stock market over the last 7 years.

Expecting an intraday bounce from this monster gap down towards 1880 support on this break of $30 in crude oil.  This is just a one day bounce I am expecting.  Not a firm bottom.  I am expecting a break of 1867 next week.

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