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Rosenberg: "The Pattern Would Suggest A Test Of 5,000 On The Dow

The latest set of fundamental and technical observations from the bearish Canadian.

Well, well, so much for consensus views. Like the one we woke up to on Monday morning recommending that bonds be sold and equities be bought on the news of China’s “peg” decision. As we said on Monday, did the 20%-plus yuan appreciation from 2005 to 2008 really alter the investment landscape all that much? It looks like Mr. Market is coming around to the view that all China managed to really accomplish was to shift the focus away from its rigid FX policy to Germany’s rigid approach towards fiscal stimulus.

What is becoming clearer, especially after the latest reports on housing starts, permits, resales and builder sentiment surveys, is that housing is already double dipping in the U.S. The MBA statistics just came out for the week of June 18 and the new purchase index fell 1.2% – down 36.5% from year-ago levels and that year-ago level itself was down 22% from its year-ago level. Capish, paisan? So far, June is averaging 14.5% below May’s level and May was crushed 18% sequentially, so do not expect what is likely to be an ugly new home sales report for May today to be just a one-month wonder. Meanwhile, the widespread view out of the economics community is that we will see at least 3% growth in the second half of the year: fat chance of that.

What is fascinating is how the ECRI, which was celebrated by Wall Street research houses a year ago, is being maligned today for acting as an impostor — not the indicator it is advertised to be because it gets re-jigged to fit the cycle.

From our lens, there is nothing wrong in trying to improve the predictive abilities of these leading indicators. Still — it is a comment on how Wall Street researchers are incentivized to be bullish because nobody we know criticized the ECRI as it bounced off the lows (not least of which our debating pal, James Grant). For a truly wonderful critique of the ballyhooed report that was released yesterday basically accusing the ECRI index as fitting the data points to the cycle – not the case, by the way – have a look at ECRI Weekly Indicators Widely Misunderstood that made it to our friend Barry Ritholtz’s blog (“The Big Picture”).

As for the equity market, we are at a critical juncture and it could break any day. After successfully testing support at the key Fibonacci retracement level of 1,040, the S&P 500 has since bounced up to the 200-day moving average of 1,115 – and this failed to hold. Resistance prevailed. My sense is that the market will break to the downside, and for three reasons:

  1. Even if a double dip is avoided, the market is not priced for a growth relapse.
  2. The intense volatility in the major averages over the past three months is consistent with the onset of a bear phase.
  3. Bob Farrell believes a test of the March 2009 lows is likely. I don’t think anyone is in a position to debate five decades of experience, not to mention his track record. Louise Yamada, a legend in her own right, not to mention the likes of Bob Prechter and Richard Russell, are on this same page. Notice how none of them work at a Wall Street bank. (more…)

Lessons from the Wizards

All successful traders use methods that suit their personality; You are neither Waren Buffett nor George Soros nor Jesse Livermore; Don’t assume you can trade like them.

What the market does is beyond your control; Your reaction to the market, however, is not beyond your control. Indeed, its the ONLY thing you can control.

To be a winner, you have to be willing to take a loss; (The Stop-Loss Breakdown)

HOPE is not a word in the winning Trader’s vocabulary;

When you are on a losing streak — and you will eventually find yourself on one — reduce your position size;

Don’t underestimate the time it takes to succeed as a trader — it takes 10 years to become very good at anything; (There Are No Shortcuts)

Trading is a vocation — not a hobby

Have a business/trading plan

Identify your greatest weakness, Be honest — and DEAL with it

There are times when the best thing to do is nothing; Learn to recognize these times
(Nothing Doing)

Being a great trader is a process. It’s a race with no finish line.

Other people’s opinions are meaningless to you; Make your own trading decisions
(The Wrong Crowd)

Analyze your past trades. Study what happened to the stocks after you closed the position. Consider your P&L game tapes and go over them the way Vince Lombardi Bill Parcells reviewed past Superbowls

Excessive leverage can knock you out of the game permanently

The Best traders continue to learn — and adapt to changing conditions

Don’t just stand there and let the truck roll over you

Being wrong is acceptable — staying wrong is unforgivable

Contain your losses (Protect Your Backside)

Good traders manage the downside; They don’t worry about the upside

Wall street research reports are biased

Knowing when to get out of a position is as important as when to get in

To excel, you have to put in hard work

Discipline, Discipline, Discipline !

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