One year later, a real head and shoulders?

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Solid deflation trade on today: bonds, yen, dollar up and everything else down. This is hard selling, so it looks like we’re completing the top of the great dead cat bounce of ’09-’10. Once stocks and commodities break May’s lows, they could fall very quickly towards the levels of winter ’09.

Here’s crude oil, continuous contract futures. This is a beautiful short right now. How quickly the phrase “demand destruction” disappeared from discourse, along with all the other reasons why $35 was a perfectly reasonable price for oil.

Long term Russell and Nasdaq charts

These two have the furthest to fall, and are really still in the process of making an historic secular bull market top.

The Russell looks like it’s forming a giant head and shoulders:

Prophet.net

See those RSI trends on the bottom? This is a market that’s running out of steam. We know from mutual fund reports that managers are already “all in” again as of January, and as Richard Russell says, it takes buying to put stocks up, but they can fall under their own weight.

And the NASDAQ 100 is back at 1999 or 2007 levels! These indexes, like Chinese and Indian stocks, show that the world still has an astounding appetite for risk in the face of depressionary business conditions. It was one thing to pay 100 times earnings when the credit expansion was still going and almost nobody knew how the story ended, but now that it is plainly over, what are people thinking?

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Russell 2000 yield: 1.2%

Nasdaq 100 yield: 0.49%

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Stocks in the Nasdaq 100 with zero dividends:

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Adobe Systems
Amazon
Amgen
Apollo Group
Apple
Autodesk
Baidu
Bed Bath & Beyond
Biogen Idec
BMC Software
Celgene
Cephalon
Cerner
Check Point Software
Cisco Systems
Citrix Systems
Cognizant Technology
Dell
DirecTV Group
Dish Network
eBay
Electronic Arts
Express Scripts
First Solar
Fiserv
Flextronics International
FLIR Systems
Foster Wheeler
Genzyme
Gilead Sciences
Google
Henry Schein
Hologic
Illumina
Intuit
Intuitive Surgical
Lam Research
Liberty Interactive Series A
Life Technologies
Logitech International
Marvell Technology
Mylan
NetApp
NII Holdings
NVIDIA
O’Reilly Automotive
Patterson Companies
Priceline
Qiagen
Research In Motion
SanDisk
Seagate Technology
Sears Holdings
Starbucks
Stericycle
Symantec
Urban Outfitters
Verisign
Vertex Pharmaceuticals
Warner Chilcott
Yahoo

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After the last year’s action, it should be abundantly clear that fundamentals do not drive stocks, and they only offer resistance and support at the most extreme heights and bottoms. Herding behavior, animal spirits, fear and greed are what make the tickers tick.

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That said, we are now entering a long phase of value restoration. By the end, people will talk about steady cash flow and yield again, as they did in 1982 and 1942. It will take a lot more than the above to lure them in, and since there are no more miracle cures for the numerator in the yield equation, the denominator will have to come down to earth.

A little morning TA

2-year view of QQQQ here (Nasdaq 100 ETF):

Image: Interactive Brokers

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Red: Trendline from 10/07 peak across June and Sept 08 peaks.

Light blue (nice fit): rising broadening wedge

Dark blue (maybe a stretch here): rising tightening wedge

White: Declining volume since start of rally, an unambiguous warning not to trust it.

Hat tip to Jim at slopeofhope.com for noticing the wedges.

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As for the failed head and shoulders pattern that we saw a few weeks ago, Edwards and Magee had this to say (Technical Analysis of Stock Trends, 9th ed., p62):

There is one thing that can be said and is worth noting about Head-and-Shoulders Formations that fail completion or produce false confirmations. Such developments almost never occur in the early stages of a Primary Advance. A Head-and-Shoulders that does not “work” is a warning that, even though there is still some life in the situation, a genuine turn is near. The next time something in the nature of a Reversal Pattern begins to appear on the charts it is apt to be final.

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And without comment, here’s the 2-year view of the S&P vs. the 20-day average Equity Put/Call ratio:

indexindicators.com