The Russell’s 30 plus PE ratio when adding in negative earnings makes this index a sure fire bet for an eventual swoon. If the 3.5 price to book value ratio doesn’t concern you, take a look at a chart of the Russell in 2008.

While the short run is anyone’s guess, a long term investor can short the Russell 2000 here against their long positions in undervalued investments and expect a strong risk adjusted return over time. The chart shows major problems in the RSI, Stochastings, and MACD as well as the moving averages (break below 10 day for example). Yes ,folks, now would be the time to leg into a meaningful short on the IWM, TYH or go long the RWM but wait until Tuesday afternoon to hedge your long positions.

Happy investing Hedgephoners

Technical Analysis for Value Geeks Posted on January 28, 2011 by nsl

Robert Shiller recently said the CAPE PE ratio makes stocks overvalued if margins revert to historical averages. However, the last 100 years have shown a positive market in all 3rd years of US Presidential terms except during the Great Depression, when stocks plummeted in 1932 — betting against the market here is incredibly contrarian, which may make stocks vulnerable. Remember, Shiller was pretty adept at calling the top of the Technology bubble and was accurate in forecasting the housing meltdown. Additionally, John Hussman is more bearish than he has been since 2007. These value investors don’t see much besides risk after the doubling of markets over the past two years. Instability across the world over QE’s food inflation side effects could derail the global recovery. 

However, many are more hopefull about markets here. Jeremy Grantham sees us in the start of a stock bubble in which riskier stocks will outperform and the S&P hits $1500… Grantham has made some very accurate calls and does see the markets overvalued, but believes that the markets will rise from overvalued levels to double secret insanely overvalued status. 

I come in somewhere between these views as I see continued pressure in the US dollar going forward. Commodities should outperform as should select foreign stocks going forward, and the tailwinds from a lower dollar will be a “put” on equities here. However, after a 25% run the potential for some type of flash crash ordeal is very possible. IF stocks drop 10% or so, I am willing to take a stab from a 60% net long perspective if the FED wants to print more money. If we see real desire and a real push for an end to accomidative monetary and fiscal policy (the sane course in my view given our debt(on and off balance sheet)/GDP then I could justify moving to a bit more defensive posture and even going slightly net short with put option exposure (no more than 2% of capital). 

In the short term, I see the last day of January as a dangerous time to be short stocks, and the first day of the month has been very positive the past few years. Mondays are up days and so are the first days of every month, so prepare for a sellable rally in the next two trading days… With that said, these two “up days” may be too widely followed to work next week, so keep your eyes on the manipulated Sunday night futures contracts and be ready to take off risk in either direction. Something tells me volatility will be very big over the next few weeks… 

All in all, those who are “bullish” are usually long only asset gathering types with a pretty clear agenda and conflict of interest. If a long short guy is extremely bullish and has a valuation argument so be it, but make sure your advisors aren’t just giving you the sales pitch that every broker knows by heart — you don’t want to miss the rally, it’s going to be huge! 

For me, I am going to patiently wait until a clear path unfolds and will be researching the best and worst values/companies in the markets and moving on both sides of the tape to buy dips and sell rips. I will be coming into monday flattish in stocks, but long commodities which seems like a good way to play defense and offense at the same time… People betting too hard on a crash or too hard on a bubble may want to pull in their line here, as the vix was up 8% today… Here are the charts you need for next week… 

Notice some very ugly technical developments emerging on the IWM Weekly chart — the divergence in the MACD where the histogram is not rising with the market for past few weeks, and looks to cross below the signal line. Additionally the blue line is crossing below the red line in overbought territory suggests another sell signal. The Money Flow and RSI indicators suggest we are overbought as does the Stochastics which show a crossover and a signal line crossover moving out of overbought territory. 

All in all, this index looks like a great short if the market breaks down on Monday despite everyone’s pavlov Monday rally expectations. I will post some TA on the QQQQ and SPY tomorrow morning. 

Valuation appears relatively rich in public markets here with notable exceptions, but with all of the attention focused on stocks be very cautious riding the wave of the pump in the hopes to get out before the dump — a 100% rally leaves plenty of downside.

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Today’s Market Comments; Jan. 28, 2011 — Today, the markets predictably sold off when Thursday’s rally could not break into new highs for the markets above the psychologically important $1300 level on the S&P or Dow 12,000 (we didn’t keep our dow 12000 hats from the nineties, but it does feel a bit like groundhog day for equity investors) — the NFLX short beating yesterday wasn’t enough to create a legitimate panic buying bid for stocks as the unemployment data was horrible and today’s GDP was much lower than expected at 3.2%… while the economy is growing, it may not be able to “grow its way out of this” because of the increasing mountains of debt and interest costs owed by the states and federal government to the taxpayers. Essentially governments have levered themselves up huge, and want the taxpayer to bare the cost of any default through a collapsing currency.

With that said, some of the “bernanke put” luster wore off in today’s action as Gold and Silver skyrocketed with oil and stocks plummeted – the last time I can remember oil rising causing stocks to sell off was in 2008 or 2002 — in any event the correllation today was the opposite of it’s regularly manipulated pattern going back to 2004. Several leading stocks such as Open Tzoo Amzn etc… were bludgeoned along with Ford, which makes relatively unnattractive cars that are not very fuel efficient (the new mustang is OK and so is F150) and could see a plunge in sales if oil keeps going up as 401K’s drop. Ford was down double digits today but the stock has risen all the way from $1 to $16 while they still operate the business with a net deficit (owe more than they have)…

Monday has been an up day around 70% of the time according to my analysis and therefore I see no reason for anything other than the same old same old next monday. The real question for the squeezathon will be where the close on monday sets us up for Tuesday, although I would imagine the fist day of the month pump to be a large one as well – expect more choppy action with a bias to the downside next week but a squeezathon Monday and Tuesday…. Look for markets to climb 1% or more both days, and then short the sucker on Tuesday’s close.  By Tuesday we should either be 10% lower than we are here, or we will be 3% higher, at around 12,000 with everyone feeling bullish again…. So that Wednesday-Friday the market can crash hard into the $55 level on the QQQQ and the $75 level on IWM…

The situation in Egypt makes things a bit tougher for the Prop Department this weekend, so make sure to watch the headlines closely for all of the latest world unrest which is largely a function of skyrocketing food and energy prices. I would expect commodities to perform much better than US bonds or Stocks so look to gain exposure here — I don’t like it, but until the QE fairy tail for prices ends, you don’t want to long dollars here.