alice

NFTRH; Pre-Market Observations (high priority)

Yesterday Biiwii was, as usual, pleased to post the latest from Kevin Muir, a market watcher/writer who I really enjoy:

I Hear 1987 New Wave is Back

You might want to check it out. Kevin’s main point is that it is so obvious why stocks should go down that it just may not happen. He gives some examples of well known investors (including the increasingly cartoonish Jeff Gundlach) taking a bearish stance.

In yesterday’s update we noted…

[The Trade War] needs to be tuned out, because it is already factored in and is at this point a macro food fight with the combatants slinging hash (and eggs, bacon and bananas) at each other. The market does not move (beyond knee jerks) in real time on inflammatory events.

And sure enough much of yesterday’s downside looks to be erased, going by pre-market indications. So we are back to this, also from yesterday’s update…

The weekly chart dials out the price to the context of the entire post election rally and could qualify as a failed test if it were stopped at resistance. But MACD has a sneaky bullish look and as noted above, the Trade War stuff is not a reason for the market, which has been rising since April fully aware of the brewing Trade War, to go down now and stay down.

Today’s bullish activity, if it follows through, simply cancels out the knee jerk Trade War bear crap from yesterday, which was not a valid reason for the market to go down. With due respect to Kevin Muir’s concerns about the preponderance of experts calling bear – and I do very much respect it – we are back to square one, and that is a good thing because it has taken only a day to get the negative emotion back out of the market. This was yesterday’s bottom line and it is today’s bottom line as well…

The bottom line is that risk has been rising but the Trade War news, if it means anything at all to near-term market prices, would be more coincidental than fundamental if the market were to take a correction in July. Of more importance will be the market’s reaction to earnings season. A lot of expectations have been built into this pig over the last year.

Personally, I consider standard sentiment indicators more important than a sampling of well known wise guys who are bearish. While at least one of these wise guys (Gundlach) was successfully used by us a contrary indicator on bonds (and that does give me pause on a bearish stocks case) the VIX has been driven down (aside from a blip yesterday) and other sentiment indicators have been slowly creeping toward over bullish per our top-test plan.

The top-test may or may not be over. SPX remains at the key resistance noted in yesterday’s update, after all. But it could also continue until things are good and over bullish. Sure, it could also just continue… as in bull market extension (ref. 2016, per below). But again, the key for us is that we should be getting clues coming in aplenty as the market shows its hand with respect to its views on earnings. Patience seems like a good reco in the near-term.

Here is a view (from Sentimentrader.com) of the S&P 500 tracking the 2015-2016 correction, which was set to take the next leg (of its ultimately bullish ‘W’ pattern) down a this point. Whether the ongoing correction is a precursor to a bull extension (breakout) or failure (significant correction), the analog (all due notice about how often analogs fail to repeat!) calls for a new leg down imminently.

Recall that the 2015-2016 correction was our original model for the current, thus far minor, correction. We used this chart to view the previous ‘W’ pattern and a theoretical ‘M’ (top) on the current correction. Let’s review. Both cases kicked off with massive spikes in the VIX as complacent herds were sent into a panic. Both cases also saw the herds eventually regather their wits and calm down. But whereas the VIX remained persistently elevated into the 2016 correction end, the current case has seen a much more subdued volatility situation.

Another way to view it is that it has been a more extended version of 2015-2016. With a grind higher in the VIX yet to come. That would likely coincide with lower stock prices.

The market is relatively complacent, intermittent Trade War food fights aside. Every time Trump throws a bomb, the Chinese throw one back and then they leak conciliatory stuff to the media, the stock market goes through a mini-cycle of sell-off & re-buy.

So we are following the 2015-2016 analog with the potential for the top test’s resolution to be unlike 2016, when the market broke out to new highs. But at this point, as Kevin Muir is doing, we can have an open mind as well. Let’s keep an eye  on the market’s reactions to earnings, which would likely be the main event while the children through food around in the cafeteria.