I recommended the purchase of Citigroup June 47.50 puts yesterday around mid-morning, but someone stepped ahead of my miserly 1.00 bid and grabbed a bunch for 1.10. I sure hope it was a Rick’s Picks subscriber, since any profits that result will at least be  “in the family.”  If you bought all 178 of them and they quadruple, please think about sponsoring a picnic, or perhaps a Cinco de Mayo party, for the rest of us, okay?

Fortunately, some of you may have profited elsewhere, since the March bond futures took a powerful, albeit short-lived bounce from within a single tick of the 114^18 target I’d advertised.  The intraday low has the potential to be an important bottom, since it occurred so close to a predicted swing point. However, if the March bond should trade below it today or Tuesday – or still worse, settle below it – we would infer that still lower prices lie ahead.  A 113^11 print is where the downtrend would begin to grow worrisome, since it would create a bearish impulse leg on the daily chart.  Until such time as that happens, though, my outlook for the intermediate term, at least, will remain bullish, since an unachieved rally target at 118^19 (a hidden pivot) remains.

Bearish, Like Granville

Yesterday I mentioned that one of Joe Granville’s market indicators is flashing yellow, warning of a potentially important top. A subscriber, John Boutiette, has written an interesting note that fleshes out Granny’s theory:

“Mr. Granville was a guest on Bloomberg news the other day, arguing the bearish case with permabull Bob Fraelich. Granville was calling for a top, and I'm with him on this one. Recall that, the other day, the Nasdaq 100 (NDX) rose 22 points.  Previous tops in this bear market have begun in this fashion, with the NDX making a top, pulling back, then the INDU hitting a new high without a follow-through confirmation by the NDX.

“As we all know, markets can rally and sell off despite fundamentals and long-term trends. The amount of speculation and risk investors are willing to take on is what drives the markets over the short term. Thus, if the Dow makes a new high, which seems bullish, without the NDX, this would be evidence that investors are not willing to take on more risk. What we would be witnessing is merely a game of bearish musical chairs, as investors move into 'safer' stocks. Off-the-record, a good way to measure this 'de-speculation' is the ratio of  NDX:INDU. It has been a very accurate tool and led the market down before major tops. I say 'off-the-record' because it isn't a top secret, but as you know, the more people who follow an indicator, the less accurate it will become.

(Click on image to enlarge)

NDX Not Even Close

“So now the Dow is poised to make a new high, but the NDX isn’t even close. This might also explain the narrow range of the SPX, which is reflecting a transition by investors from speculatively active to risk-averse.  My guess us that the last hurrah for the NDX was Tuesday. I’m not sure, but  I think we are close. Maybe you can see what your pivots tell you.

“By the way, great work with the bonds! I really appreciate the detail and follow-through when your targets are breached, and your not leaving us wondering what’s next? With confirmation of a new high or a break below 109^14 so far away, another indicator may be able to shed some light before the markets tips their hand. [Note: See the first paragraph of today’s commentary.]  Financial stocks outperformed the broad market as interest rates went lower. A ratio of the BKX:SPX shows this relationship quite well. Now the BKX is at relative support, but any lower and it will break down.”