Zak Mir on bull market tops, “goldilocks” and “switch flicking”!

In the financial markets, it is perhaps understandable that what can be a somewhat grey subject (finance that is!) needs to be livened up a little sometimes (hence the good looking female commentators!)

However, in the wake of the latest March non-farm payroll data last Friday with the delivery of the so called “Goldilocks” figure of 192,000, we have seen a surprisingly negative reaction following on from the initial knee-jerk spike for stocks just after the figure.

Of course, we have been here many times before – US jobs numbers invariably produce added volatility for the stock market at the time of their release, whether the figure is good bad or indifferent. But, it is often the case that the biggest economic number on the calendar can indeed be a trend changing event, a point which has been highlighted by the author of the Gartman letter, young Dennis himself.

What is interesting about Gartman’s postulations to me, is that unlike many other revered pundits over the course of the post financial crisis rally, he is not so much calling a top in a technical or fundamental way, but actually identifying something of a turning point in the sentiment associated with the market.

It is actually quite intriguing and almost mystical the way he points out how, in the wake of last Friday’s data, it was as if a switch had been flicked, changing the situation from bullish to bearish in the markets almost instantaneously.

As far as I’m aware, this is quite a unique observation, but nevertheless one that probably most of us will recognise as being the tipping point for price action. While it may be difficult to quantify, it is possibly the case that after the market flips in this way that the very same data which would have made it rally will now be that which undermines it going  forward. In other words, rather than “Goldilocks” we are now looking at the case of “The Big Bad Wolf”, of which Mr Gartman now confesses to be scared..!

Friday at 11.15am was the time he apparently sold half of all his equity holdings and covered the rest by going short of S&P futures. This turned out to be not only a good day trade, but may actually in fact turn out to be one of the trades of the year.

Clearly though, “flicking of the switch”, are not always easy to recognise. In the case of Gartman I would venture to suggest that having 40 years experience in the financial markets behind him helped him last week (only a few more years to go!!!).

But there is some solace for us young(er!) folk and for those who have at least a basic knowledge of technical analysis. For instance, the CNBC interview in which Gartman appeared did allude to the way that Friday was what is called a “key reversal day” to the downside. This occurs when the price action of a session first breaks the previous day’s high, but then closes below the previous day’s low.

The usual technical way of trading this is to go short either on the day the support breaks, or on the open of the following day. The stop loss is the high of the key reversal day, which is assumed to be very difficult to break, and can mark major turning points.

In fact, added spice was given to Friday’s key reversal to the downside by the way that the initial up move was a temporary break for the Dow through the former all time record high of December at 16,588. While it may be a little premature to do a Gartman and run for the hills, people of experience, insight and instinct are now identifying the way the negatives are piling up.

For instance, Jim Mellon, who I interviewed for the current edition of Spreadbet Magazine (see here – http://issuu.com/spreadbetmagazine/docs/spreadbet_magazine_v27_generic) points out In his latest Monthly Article “Is A Sell Off Coming?” on T1ps.com how the momentum from the U.S. market is starting to wane. Being hamstrung by frankly some very frivolous / ridiculous IPOs at the moment certainly does not help the likes of the S&P, Dow or Nasdaq but it could very well be that Gartman has successfully identified the mystical moment when the beginning of the end came…

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