Blow off or blow out?

Something happened in the markets this week … I’m just not entirely sure what. Did the bears just get blown out or did we just witness a near term blow off top? I favor the latter.

The stock market, gold and oil all rallied. From Friday to Thursday we’ve had seen the following gains.

• S & P 500: +0.86%
• GLD: +2.21%
• OIL: +2.32%

The S&P 500 is tantalizingly close to its all-time high of 2,130. It closed as high as 2,119 on Wednesday. Gold rallied sharply after its modest correction. Oil closed above $50 a barrel and reached as high as $52.

Anyone who was short any of these assets got hurt this week … and yes, I speak from personal experience.

But as the dust settles and I take a look at the charts that I look at every week … it doesn’t look like to me like much has actually changed. I still see the risks as decisively to the downside … at least through the end of June.

The most important charts for the stock market continue to be this chart … showing the huge overhead congestion that the stock market bulls continue to wrestle with:

And this chart … showing that the smart-money in the S&P futures markets are at bearish extremes of sentiment.

Admittedly, the smart-money hedgers have had to cover some of their short positions in the past couple of weeks but the above chart also shows what has eventually happened each time smart-money has reached such bearish extremes. These guys may be underwater but they eventually get their money back.

There are also some troubling divergences between different indices.

The Dow Jones Transports continue to signal caution … even in the face of higher highs in the Dow Jones Industrials. How is it that industry is thriving if the companies that move stuff around for industry are not thriving?

Additionally, we’re seeing a divergence between the S&P 500 and the Dow Jones Industrial Average. On the right side of the chart below you can see how the S&P 500 has recently made a higher high but the DJIA has not. You can also see in the chart below what has happened the last couple of times we’ve seen new highs in the S&P without new highs in the DJIA.

For the record, I’m also continuing to see the same kind of risks in gold. The situation in gold is very similar to the situation in the S&P 500. There is big overhead volume and off the charts negative sentiment from the smart-money in the futures markets.

In spite of all of the above concerns, however, I do want you to understand that what I’m looking for in these markets is a correction, not a collapse. Both the S&P 500 and Gold triggered SSI Entry signals in the past few months. I expect both markets will eventually break out, especially gold. I just am expecting some short-term pain before further long-term gain.

There is a fly in the ointment that could unravel my on-going thesis for near term corrections – the US Dollar. The dollar corrected sharply lower this week after the terrible jobs report. It was, however, just a correction. It didn’t make new lows.

If the dollar does indeed go on to make new lows, all bets are off.

There is a lot of global political pressure for a weak dollar because the world is awash in dollar-denominated debt. If dollars are more expensive, that debt load is harder to service.

It’s this political risk that scares more than anything. Frankly, it’s disastrous and disheartening that politics have come to be such a big factor in financial markets. Unfortunately, that’s the reality that we’re dealing with today.

Hope you forget all about the markets this weekend!

Sincerely,