Thursday, November 11, 2010

Dangerous Market Conditions

I've been sounding like a broken record, warning about this for over a month, but now conditions have become even more extreme. I also acknowledged sounding like a broken record in April this year, right before the "flash" crash. [It was just a regular crash, not a "flash crash".]

  1. Ratio of sales of stock to purchases by insiders has hit a record.
  2. AAII bullish sentiment and the bull-bear spread is now unbelievably high - the percent bulls is highest since January 2007.
  3. European sovereign credit is still deteriorating in a increasingly messy way.
  4. There has been very high, sustained levels of call buying, 
  5. Investors mistakenly believe that inflation would be bullish for equities.
Scenario: As investors realize the true condition of European states and financial institutions, the anticipation of bailouts by the European Central Bank causes the Euro to fall sharply (this has already started - it peaked the day after the Federal Reserve announcement). Currency speculators - who are super long Euros and short dollars - close out these trades. The heavily oversold and crowded short dollar begins to rally sharply. These trades are highly correlated with the long gold, long NASDAQ, long risk groupthink trades, which are unwound simultaneously. The pro-risk/bullish fund managers showing gains for the year race for the exits, seeking to lock in management fees. Hair-trigger stop losses are hit just like in April, resulting in another mini-crash or crash.


Taylor Conant said...

Great work and nice job creating a public record of your calls. Will be a great marketing tool if/when your scenario plays out. Nothing raises funds like the cold, hard unvarnished truth, delivered as prophecy moments before a historical tragedy!

This is one broken record I don't mind listening to-- the tune is too catchy!

CP said...

Thanks. I think the crash will seem really obvious to people in retrospect.