Allow me to share with you some crude artwork to illustrate the rough path most likely for US stock markets in the coming weeks through year end. I thought a simple cartoon might suit our needs nicely. The black lines are what have been, up to today. The blue is how this type of correction might typically unfold.
Now that the Dow has joined nearly everything else in marking a lower low to the August low and the sentiment backdrop is getting very bearish (per October’s reputation), a reversal can come at any time. Yesterday, as the market was positive we NFTRH+’d* a bear trade setup on QQQ, but the market reversed downward again. The parameters in that update still apply on any coming bounce.
The news driven short covering rally yesterday was impressive and now momo’s are being punished. Makes sense.
Excerpted from the September 21 edition of NFTRH, #309, which went on to do extensive technical and macro work across all the key markets…
Last week we noted that Uncle Buck would be front and center in the analysis, not because the strength in the (anti-market) currency was not expected (it was), but because our big picture theme of an ongoing economic contraction had remained intact (ref: gold vs. commodities ratio) over the long-term.
It is important here to remember that NFTRH would only be on its big picture macro themes as long as indictors implied they are still viable. I will be damned if I will let us follow a Pied Piper off an ideological cliff, no matter what readers (including me) might want to hear. We must dedicate to know what is happening, not what our hopes, dreams, egos, etc. think or worse, hope will happen.
The following is one of a wide range of analytical topics covered in NFTRH 293’s 35 pages this week, much of which is straight ahead technical analysis. But the T Bond market is usually central to an overall macro view at any given time. This segment is not meant to provide actionable direction (other than perhaps to prepare for a potential rise in T bonds yields), it is meant to dig into the mechanics beneath the financial markets in an effort to have people consider that there is much more going on with markets than simple nominal TA or conventional fundamental analysis (PE ratios, growth metrics, reported economic data, etc.) can account for.
US Treasury Bonds
Yields on long-term Treasuries have continued to decline in line with our view that was contrary the ‘Great Rotation’ (out of bonds) hype. The [30-year] especially is now close to support and the next play seems like it could be rising yields and declining T bonds.
The 30-year ‘Continuum’ view above makes the simple case that players had to be put offside believing in the ‘Great Rotation’ at 4% yields. The nearly half-year decline since then has now satisfied the chart as yields have come to our 3.1% to 3.2% target range, where there is support.
“The real issue is that the Fed has expanded its tool kit so dramatically…” –Andrew Huszar
In line with our theme of outlandish and immoral (in my opinion) Fed policy a former Fed official calls QE a backdoor bailout of Wall Street, which anyone with two functioning brain cells knows to be the case. The Andrew Huszar Op/Ed (Wall Street Journal) Confessions of a Quantitative Easer is I suppose old news, but it illustrates what we have been hammering on for so long now; that Fed policy is serving to pump the stock market and pump up the wallets of asset owners.
QE gets about 10 times the notoriety of ZIRP, but I’ll still maintain that it is this evil tool in the Fed’s ‘tool kit’ that is the main and continuing blight on the system as it not only rewards asset owners and speculators, but punishes those least able to speculate due to limited funds.
Please review this chart again and behold the rigged market. Anyone arguing that the bull market in US stocks is normal is being intellectually dishonest. Yet like agent Mulder I want to believe in the healthy bull story*, but I have to believe the data that has drawn the lines on the chart above.
Many people would consider a drop in the S&P 500 to the 1550-1600 area to be a bad thing. But if the bull is real, and if a secular bull market truly has been created out of manipulation of the T bond market (QE’s bond buying and ZIRP’s 0% rates) then a pullback to test that zone would be normal, would it not? It would feel bad but in reality a successful test of the big breakout would launch the grand new bull. SPX has to drop down to test support sooner or later, doesn’t it?
Well no, it doesn’t because the other side of the coin in the post’s title is ‘When Good is Bad’, meaning that an upside blow off in markets – if that is what is fomenting – would be very bad, as in ‘Silver 2011’ bad, for the stock market with a successful test of support unlikely. That is because a manic blow off would be a terminal event.
It is a mixed messages market. With all the bearish indicators, we have had some fairly severe downside in several momentum related indexes. This begs the question ‘was that it?’ with regard to ‘the correction’?
We have talked about what is negative for the US stock market. From the signal in the banks vs. S&P 500 to a young uptrend in long-term T bonds vs. the S&P 500. Here is the 2011-2014 market leading BKX-SPX in breakdown mode.
Throw in a bearish divergence in the Equity Put/Call ratio, an elevated Gold-Silver ratio right at resistance and Junk bond vs. Treasury/Investment Grade and the signs of a bearish market are not only there, they have manifested in some pretty good downside in the growth and momentum areas.
But aside from the Dow and Tranny already noted, there are other things that bears should pay attention to, starting as we often do with the Semiconductor index.
Today was quite impressive for the bulls. A public post at the site showed the SOX coming right to its trend line. I day traded LSCC for a good profit today and would you believe I actually had to remind myself to take the profit? Seeing the SOX at the trend line helped get me going, after letting some profits turn to losses by not being decisive in this market.
*Note, I am going to post NFTRH+ dry runs at the site using the password for the week, but will not send a direct email, so as not to clutter the in boxes of those who are not interested.
Along with the highly publicized loss of leadership from big tech, the US stock market is now in danger of losing another, and possibly more important leader, the piggies or banking sector.
While the weekly chart of BKX has not yet broken down, it is very close to doing so after sporting a negative RSI divergence for the better part of the last year. We should not jump the gun with bearish scenarios, but as always we want to be among those looking forward and ready, just like in 2007, which was the last time BKX-SPX began to roll over in earnest.
Non-traders or those not interested in this type of trade please disregard!
Continuing the idea of dry running and refining NFTRH+, here is an interesting chart I came across for French Pharmaceutical company Sanofi (SNY).
Ukraine war hype, China demand drop, GOFO mysteries… these are the short term noise inputs on the gold sector.
US Treasury bond yield spreads, gold vs. commodities (i.e. the ‘real’ price of gold), gold vs. the stock market… these are some of the fundamental considerations that actually matter and they have taken a hit since January.
It is easy to say ‘I am bullish in the big picture’ (measured in years) but it is not so easy to actively manage in the smaller pictures (measured in days, weeks and months) with all of the above noise inputs and more bombarding the poor individual player.
We use shorter term charts to manage the shorter time frames. Daily charts have most recently indicated a bearish set up as bear flags formed across the precious metals complex (with the exception of silver, which never got going to begin with) last week. Weekly charts continue to indicate that an extended and oh so grinding bottom may be forming, but that includes the potential for ups and downs, also known as volatility.
There is also a lot of noise lately in the stock market. The US stock bull celebrated its 5th birthday last month. The last 2 cycles (the manic phase of the secular bull ended 2000 and the cyclical bull ended 2007) were each approximately 5 years long. Today let’s retreat to the calm of the long term monthly charts and get a snapshot of the big picture.
The S&P 500 has a measured target of around 2190 that we have had open as a possibility since the big breakout occurred in early 2013. A measured target is just that, a measurement; simple math. It is not a directive and therefore 2190 is not hype, it is just a possibility.
