Market Analysis

Weekend Charts: Messy World

messy-worldDemocracy is so messy, especially when you let the people vote.  Total panic among Great Britain’s political elite now as polls show a tight race ahead of Scotland’s independence vote next week. An all out effort is under way now to convince the locals to keep the status quo. It is no accident then that the larger trend in the world has been to remove any decision making from voters. Europeans have virtually 0 influence over the policy direction of the EU bureaucracy layered over them and of course have no influence over the central bank which now made all their cash a negative return asset class.

Americans are in a similar situation with no control over their unaudited central bank and two political parties that are beholden to corporate interests first. The latest sign of autocratic control: No matter the administration US presidents have now stopped bothering to seek any type of vote or approval for military action across the globe, constitution be damned. Who ‘voted’ to approve the latest bombing & military campaigns in Iraq and Syria, or Libya, Yemen for that matter? The answer is nobody. “Executive action” is the latest buzzword. The last vote of public note was the actual war declaration against Iraq following 9/11. Well here we are, 11 years and trillions of dollars later and heads are literally rolling. But not the heads of those responsible for said policies, but rather the heads of innocent journalists and aid workers as ISIS is the proverbial wrecking ball of unforeseen consequences laying to waste the empty promises of peace, democracy and a successful war on terror.

So the central bank tested policy of fighting symptoms as opposed to root causes continues in the political arena with more bombs being dropped on another Middle East country. But hey, it’s surgical. Winning the hearts and minds of another generation. Where do US policy makers think outfits like ISIS get their recruits? An entire generation of young Muslim men that have known nothing but US military engagements in the Middle East for their entire lives. Kids that were 8-13 years old at the beginning of the 2003 Iraq war are now of fighting age. Radicalization of a sizable minority is the predictable and very unfortunate result.

Syria in particular now looks like another colossal mess in the making. We are fighting Assad by supporting ‘moderate’ Syrian rebels who just made a pact with ISIS who we are also bombing in Syria. So we are fighting two main parties in Syria and just got screwed by our ‘allies’ but are not engaged in a war we are told. What’s the word I’m looking for? Ah yes: Bullshit.

With this global backdrop everything seemed on sale this week, Stocks, bonds, metals, and currencies. Well mostly everything non dollar related. The Yen broke down to levels not seen in years and the Euro reached its most oversold readings ever. Everything metal related got hammered on the ECB induced Euro puking:


Ah the joys of central bankers desperately trying to produce growth. The game continues and traders have been best served to adopt a very flexible trading style.

Reality is markets have been acting very sloppily and everything is a trade. A quick look at the past several weeks shows that one was best served by trading in both directions. On balance though buying and staying long was probably not the best trade as all gap ups got sold and the balance of prices ended lower (select stocks beings the exception). I pointed out the following $SPX chart with the bear flag on the public stream on Friday:

Indeed we ended getting a resolution to the downside:

SPX 15 min

Of course none of this price action is very dramatic as of yet, but we did register closes below some key daily MAs, yet in principle this never ending rally is still very much intact and one could certainly make the case we simply saw a low the Thursday/Friday before OPEX week as we so often do.

In fact, if one then wants to take a bullish slant one could argue that markets simply put in a bull flag and that the underlying weakness is just recharging the energy for a renewed move into the top of the megaphone trend line:

SPX daily

$NYMO is already below -50 after all and is heading toward oversold readings. So a quick touch of the 50MA and off we go. Notice that the Bollinger bands have been contracting tightly and we can observe confluence with the 50MA as well.

So indeed this is a very possible scenario for this coming week. All it requires really is for Janet to tow the line again and stay all happy dovish. Markets certainly went into a frenzy on rates this week and the bond bullish crowd got a rude slap in the face. As the weekly chart shows racing to buy into a previous top can hurt badly:


Weekly MACD crossovers don’t happen that often, so unless Janet calms the waters bond holders may see a race lower similar to 2013.

Next week will also see the mother of all IPOs: $BABA. And here comes another $200 Billion+ market cap behemoth to the market. This supply bonanza comes on the heels of $FB crossing $200B in market cap as well.

I hear the voices that keep telling everyone that valuations are not excessive, that all this value inflation is reasonable and that macro economic data does not really matter. I continue to be one of the few voices left that urges caution in the face of inconvenient facts.

Take this goodie: The top 20 market cap companies now boast a combined market cap of over $5 TRILLION:

TOP 20 Market Cap

At a time when such large numbers no longer compute in our brains I offer this little nugget: The market cap of these 20 companies alone now exceeds 30% of the entire annual GDP of the US:


And their market caps have been growing exponentially in comparison to GDP growth. But I digress, facts are distracting 😉

As it is buyers are lining up for the $BABA event next week and banks certainly will benefit from the enormous fees generated selling shares. The $NDX has held up well in anticipation despite signs of relative weakness cropping in:


So assuming $BABA goes well and Janet will remain dovish what could possibly go wrong next week or in the weeks ahead? A lot actually. As I’ve been pointing out for weeks the internals are weakening and continue to weaken across the board. One could certainly make the case that we have been witnessing a rounding top and the charts continue to outline the risk/reward being vastly to the downside.

Here is the recent trend for advance/decliners:


The weekly $IWM chart seems to continue to follow the 2011 script to the letter and QE is coming to an end in October after all:

IWM weekly

In fact this 2011 script permits for some strength next week before 4 weeks of hell get unleashed. Will it play out this way? Nobody can tell, but someone better explain why it wouldn’t considering that the chart and the end of QE align so perfectly. I’m all ears.

Other signs to watch out for:

The $VIX keeps knocking on its 200MA:

VIX daily

And the biggest red flag of them all, the monthly $WLSH keep signaling that this party may come to a sudden, and possibly rather rude end at anytime here:


So best to continue to adopt a very flexible approach in either direction, but the larger risk/reward remains firmly to the downside. For daily analysis and trade set-ups feel free to join our premium service.

3 replies »

  1. good stuff as always. stunning how unwilling anyone is to contemplate downside of more than 5% or so in light of the evidence from very recent history alone.


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