Market Complacency Threatens Stocks

There's a certain level of complacency out there that we haven't seen in some time. It's not the same kind of complacency that comes along at market highs.

This one is that for the past six weeks or so -- ever since the January lows -- the proper course of action has been, to quote my pal Doug Kass, buy the dips and sell the rips.

Everyone talks about it, everyone quotes it. And what's more that triangle pattern speaks of it as well.

First let's review the triangle.

Where are all those folks who proclaimed the big breakout from the triangle just a week ago? Nowhere to be found. Why? Because they never once read Edwards & Magee so they did not know that for a triangle to work it should break out between halfway and three quarters into the apex of the triangle. And the farther into the apex you go without breaking out the more likely it is the market will continue going nowhere.

That's the triangle pattern everyone mistakenly called a wedge. Notice how far into the apex it was when it broke out. We were too far into the apex for that to be a breakout. I even cautioned that we did the same thing - twice -- in 1987.

But now look at the chart with different lines drawn. A break of that 12,100 area would now be important because we are between halfway and three quarters into the apex.

And yet I don't see anyone discussing the triangle. I don't see anyone discussing the potential breakdown. In fact I only see folks telling us how we must buy them if they are down on Monday morning. Funny how we just 'had' to buy the breakout of the triangle but we don't 'have' to sell the breakdown. Guess you know what the bias is out there!

It has always been believed that the Utilities are a leading indicator in the market. They are not so in terms of perfect timing, but they are in terms of general market trend which is why I find it fascinating that no one seems to have noticed they broke their January lows last week.

You can see on that chart they have not quite broken the August lows yet, but I'm more concerned over the longer term chart:

The Utes have broken that long-term uptrend line, so that alone is quite disconcerting. I've drawn in a flat trend line on the chart, which comes in not much lower than here (red line) that is also the neckline of a head-and-shoulders top. A break of that neckline would measure to about 400 on the Utes. What should concern you is that every major bear market has been accompanied by a top in the Utes.

As I said there is no perfect timing to this. For example in 1987 the Utes made their highs five months before the market did and 7 months before the Crash. In the 2000-2002 bear market, they made their highs in December 2000 well after the major averages did. This time they made twin highs in December and January.

Sentiment-wise the NYSE Members Short Ratio is now at 37%, a level not seen since the highs last fall.

So if we get the big down opening today and everyone flies in to buy it since they are so accustomed to buying the dips we ought to get that early month seasonality rally discussed last week, but I suspect it's a chance to do some selling into, not buying for.

The market teaches us a lesson over and over again until we learn it. Then it usually changes the rules. In the past six weeks it's taught us to buy the dips and sell the rips (well Dougie was the teacher and the market was the student!). At some point the market is going to change the rules now that everyone knows them.

Overbought/Oversold Oscillators

For more explanation of these indicators, check out The Chartist's primer.

Helene Meisler manages TheStreet.com Top Stocks service and regularly writes about stocks charts are poised for strong moves. The service currently has a position in the XLU ETF, and has recently discussed stocks like General ElectricGE, MastercardMA and Lehman BrothersLEH.