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NFTRH; Market Technicals, Indicators, Amigos & Global View

A fairly extensive update this morning. Please pardon any typos or otherwise sloppy writing. There is a lot to get to.

There is talk of market liquidity issues among some commentators and with the shock of yesterday’s add-on decline (and this morning’s pre-market) you would think we are in the midst of another Armageddon ’08. But that liquidation came as a climax after the market had been topping since 2007. This event has come as we thought it would, abruptly, and is a straight drop down from massive all-time highs (like 1987, which not coincidentally is the last time Investors Intelligence over bullish readings were at the levels attained in January). Given the sentiment backdrop that reached bull killer readings, this could be like silver in spring 2011.

But the market is firmly in a long-term uptrend. While a normal yet violent pullback would have put on a hard test of the daily SMA 50s, this one has cut right through them. Could the market go for the 200 day averages all in one fell swoop? Well, the margin man is working this week and he’s making calls to all that new, dumb money that levered up on margin in brand new discount broker accounts. So, it’s certainly possible, if not likely.

Using SPX as an example, the greater uptrend is intact even with a hit of the SMA 200.

spx

Here is the weekly view showing that SPX can take out the daily SMA 200 above and then some and still be at a support shelf and a moving average that has supported previous downturns in 2014 and 2016. If you look closely, you will see there is a gap from September on both the daily and weekly charts. It coincides roughly with the blue dashed EMA 70 and support, below.

spx

The SMA 50 seemed like a logical pullback area, but it’s been taken out. I think the market is running now on the reverse of the animal spirits that pumped it up so egregiously since Q4 2017, with some help from the margin man.

But the VIX has put on a massive spike in just a few days, rivaling 2008 and 2011. It seems to be too much anxiety, too quickly. I think much of this has to do with all the new entrants into the stock market. In other words, as symbolized by Trump’s stock market pumping on Twitter, the true believers bought the promotion hook, line and sinker. They came in hard and they are going out even  harder, because the margin man does not give a damn.

Looking at the VIX chart, I cannot see how a massive spike that erupts out of nowhere within an uptrend is going to be bearish, beyond the current event. There was a massive ‘short volatility’ trade and it is unwinding with extreme violence. If the market’s uptrend breaks we need to respect it. But as long as there is a major uptrend in place and emotions are running this high, we should also respect the idea that this is the market finally cleaning itself of unsavory and unhealthy elements.

In short, I am prepared to view this as brand new, ideologically engaged (pro-Trump, pro-fiscal policies, anti-Commie) market entrants getting their first dose of how markets really work and that it just ain’t that easy (ref. the Bitcoin bubble bursting). We are shaking off the ‘dumb money’ aspects of the market.

But it sure does feel like silver felt in spring of 2011, before an extended bear market ensued. We’ll update precious metals in a separate post.

Our early Semiconductor related cyclical signals may be giving a negative forward message, but the general economy is fine right now as long-term Treasury yields have approached, but not smashed into their would-be limiters. As noted in NFTRH 485, I don’t know whether we have higher to go in yields, but it is time to be on watch for this Amigo (#2) to reach destination. What about the others?

In NFTRH 485 we noted that daily SPX/Gold (Amigo #1) could drop all the way to the SMA 200 and still be in its big picture trend toward resistance around 2.50. Viola…

The weekly shows that the drop has already hit a shelf of what would be support. If the 2017 lows get taken out and such a breakdown holds however, we’d be on a major negative signal for this Amigo and also a major positive one for the counter-cyclical gold sector.

As with the VIX, this too could simply represent an adjustment to casino patrons’ attitudes. A loss of the daily SMA 200 would not be good for casino patrons. A loss of the 2017 lows would cook them.

There is no law that Amigo #1 has to reach target. As of now this macro indicator is intact. Again, the 2017 lows will tell the story.

Amigo #3, the yield curve has bounced toward steepening a bit.

But the larger flattening trend is fully intact, which means there is no long-term indication that the inflated boom is over.

So as far as the Amigo indicators go, the events of the last week are interesting (especially in long-term yields), but there is no indication yet that what is going on is something other than a stern cleaning of the seedier elements that had overtaken the markets. There is talk of crashes and liquidations and truly, that is when markets get interesting. But this crash is coming from an all-time high and this could one day be looked back upon as a big buying opp. Just asking for open minds at this point.

We should also keep in mind however, that bubbles end this way; with an initial hard crack. Again, we trot out silver in the spring of 2011 as the example. When it hit the old Hunt Brothers level of 50 it was going to 100, so claimed the silver bugs. On the current stock market situation, legions of conventional analysts have been telling us why it’s going to go higher as well. The Tax Bill and other fiscally stimulative policies are the rationale, just like runaway inflation (this was also the time of Bill Gross’s famous ill-fated short on the long bond) and a very low silver/gold ratio were reasons why silver was going to 100/oz. and well beyond. Didn’t happen. What happened was a bear market.

So while I am not yet taking the bear bait on the micro event in play right now, I am going to stay open minded that this could be the first crack in the bull market. We’ll watch cyclical indicators like the Semis/Semi Equipment all the more closely going forward. We’ll watch the counter-cyclical gold sector. We’ll watch market sentiment, nominal technical levels, etc.

Moving on, let’s look inside the market…

The ‘man in the middle’ is on a February hard down. Similar lagging big picture breakout items like Canada’s TSX are failing key support. It would be instructive to market breadth and internals as to whether or not XVG can hold the breakout.

Financials are still gently leading and Healthcare is a place of interest if economic growth eases.

Medical Devices are still firm vs. general Healthcare.

And firm vs. SPX/SPY.

With the monthly chart in breakout mode.

The point of the above is that Medical Devices/Equipment tend to be relatively stable during economic soft patches or worse.

Biotech is also firm vs. broad Healthcare.

Banks’ market leadership and long-term yields seem in line.

In a positive note for the stock market, Growth is still elevated vs. Value.

And the big picture never did do anything worse than twitch a bit in its fully intact long-term uptrend.

Palladium/Gold ratio has declined with the negative signal in Semis. As you may recall this was the cyclical ‘cross reference’ indicator we used years ago to confirm a positive economic phase. It’s under pressure, but is still in a major uptrend above the SMA 200.

Moving to the global picture, the Baltic Dry index continues to weaken.

TSX-V, which we use as an inflationary speculation barometer, has tanked in line with the risk ‘on’ trades. It is back to support and will be instructive going forward.

Finally, let’s take a quick look at some other global markets and ETFs. The issue hitting the US is more or less global as overbought markets (as noted by weekly charts in NFTRH) get corrected across the board. The relatively constructive stance on UK, Canada, Japan and Russia was in the absence of a negative market event. Now it’s all in correction and until the correction is over, cash equivalents (like SHV, paying monthly dividends) is the thing. There are no favorites when casino patrons are impulsively selling.

Europe got dope slapped and I clipped a loss on HEZU.

UK was the same situation. Not sure why the FTSE charts are not updating @ stockcharts.com and I have not had a chance to look into it. Here’s the iShares.

EMs are getting the correction they richly deserve.

As is Asia.

China large caps are dropping for a test of the SMA 50.

Australia was intact yesterday. But it followed Canada on the way up, so why not on the way down? Canada (below) is dropping hard now.

Japan needs to reclaim the SMA 50 or it could test the major uptrend at the SMA 200.

Russia is relatively normal.

LatAm is relatively normal.

Canada was in blue sky. Now it is not in blue sky. Very oversold and very bearish.

Bottom Line

It’s bearish out there! But seriously, margin calls are ongoing and lots of novice players are getting swept up in this “panty raid” as one subscriber calls it. Personally, I was not good enough to have enough shorts (i.e. I did not foresee the crash) and even then I covered the shorts too soon (never been a great momentum player, whether long or short; I need setups).

So the next best thing is dividend paying cash and an eye toward what is ahead. If the cycle really is changing, the gold sector, when it finishes grinding, is going to be the place to be. Quality gold and silver mining operations. Yet the stock market is not dead yet. This could be the first crack in a new bear market, but this will take management. For me, the interesting thing will be the first real bounce. From there I’d think indicators will start falling into place to create a narrative, perhaps even a new one for the macro that we have been patiently awaiting.

There is a lot of information to process. I hope this update is not too noisy. We’ll dig out key elements in as calm a manner as possible going forward.