Market Analysis

Weekend Charts: Highway to the Danger Zone

Highway to the danger zoneI was inclined to title this weekend’s update “A show about nothing” as markets ever more resembled a famous Seinfeld episode. “Why am I watching it?….Because it’s on TV….Not yet”.

Sadly in this case this show is on our screens and we are forced to watch it if we are to extract value from it. Whether your leanings are bullish or bearish this week indeed amounted to a whole lot of nothing:

As in the previous week new highs were squarely in the realm of overnight levitation action and quick ramp buy programs, especially near the close of each trading day. Yet something was indeed happening under the surface despite the new highs headlines which led me to title this week’s update: Highway to the Danger Zone as the signals to reading this market’s roadmap increasingly look like this:


I recognize that everyone is super bullish into year end and the basic narrative to support such an outlook is well documented: Over 76% of fund managers are lagging the basic indices. Why? Because most stocks are not anywhere near highs, in fact the high/low picture keeps weakening from rally to rally and despite the steady close of the $SPX this week the highs/lows just kept shrinking: USHL

So most stocks are lagging, hence fund managers must play catch-up by chasing into a few select winners, retail holders of funds are frustrated by the lack of performance and are opting to deploy cash into ETFs which then favor those most heavily weighted stocks and as a result you end up with charts like this: AAPL W

Way outside its weekly Bollinger band $AAPL has jumped 20% off of its October low in just 4 weeks right in front of a period that has resulted in weakness for $AAPL in the past years.  Now $AAPL is a great company with cool products that will sell well this season. But what’s a 20% in price jump in 4 weeks for the world’s largest company? A fluffy $134 BILLION in market cap increase. I recognize that perception of value can shift in a world with subjective investors. Still somebody has to explain what has changed fundamentally worth a $134B in 4 weeks for this company. That’s a lot of iPhones to sell.

But we know why. It’s the disproportionate chase I outlined above. Value is no measurement or object when performance must be made up and there is no alternative. But this is the exact type of behavior that creates the danger as it has nothing to do with investing or a measured approach to anything. So we find ourselves in an interesting period of history with warning signs flashing loudly and clearly.

Let’s review the key facts: On the monthly chart the $SPX continues its seemingly ever lasting trend. Yet note the bull/bear ratio is down to 0.08 (close to complete max) while the monthly MACD divergence keeps shrinking. The monthly MACD, while saved from crossing over with the October bounce, remains precariously close to such a cross-over and its not expanding:


This action lends credence to the argument that central banks have successfully delayed stock market pain, but they can’t alter the laws of gravity permanently. This MACD will eventually cross and there is a lot of energy built up to the downside. For now all this energy continues to be channeled into US stocks as the rest of the world seems to be struggling big time.

On a relative basis then the $SPX is exponentially sky rocketing versus everybody else. We saw this again this week when Europe spent one day dropping 1.5%-2.5% but the $SPX closed flat of course. This drastic decoupling has produced this divergent price chart: SPX ROW

What are the consequences of all this? According to the abundant bullish voices there are none. It will just continue as such as people will have to continue to chase and the constant barrage of Fed speakers and accommodative global central banks will keep the game afloat. Fair enough. Given the price action there is nothing to suggest that they are incorrect. Yet.

From my perspective however I feel almost duty bound to at least point out structures and patterns that I keep seeing that potentially tell a very different tale. Here are the key facts: The $DJIA MACD has reached a historic high level that has been reached only 3 times before, all of which have at least produced a sizable pullback:


While certain stocks such as $AAPL or anything transportation related are doing fantastic, the majority of stocks are simply not. The $NYA sends a clear signal here: $NYA

So is the $SOXX:  


Small caps? An ugly weekly candle within a multi-month topping pattern: IWM W

What makes it a topping pattern? The monthly chart makes it abundantly clear:


The 2007 analogy keeps making a persistent appearance which of course seems silly as new record highs keep being made. Yet oddly it is in the $VIX that this analogy seems to have a lot of support. On the daily chart we can observe that the recent trend line has held:


With a turning MACD an imminent cross seems in the works which could produce at least a short spurt of volatility. But it is the monthly $VXO chart that potentially shows something much more sinister on the horizon. I’ve been watching this chart since the October lows when I pointed toward a possible 2007 like new high scenario before the real corrective action could potentially appear. Now that we have indeed seen the new highs what has the $VXO done in relation? In essence repeat the same 2007 like structure:


A repeat would suggest a period of very much heightened volatility over the next 3 months (the white box) which seems very much contrary to the current pervasive bullish narrative. The $SPX chart is nestled at the top range of a now very well defined megaphone pattern:


If the pattern maintains its structure a drop into the next logical target, a renewed touch of the lower trend line, can then not be excluded as a possibility. This would see a revisit of the February lows and previous September 2013 highs. That’s a 15% correction within 6-8 weeks from here. Seems farfetched? No more than a 12% up move in 4 weeks I humbly submit. This is the extreme bearish outlook of course. A more moderate, and more bullish outlook would suggest a repeat of every 2014 V shaped move which is a basic Fib retrace first:


In summary: This rally is very much overbought and on weakening internals with indices held up by a relatively small number of stocks which are vastly overbought as well. Long term overbought signals seem to suggest a sizable pullback ahead. How far such a pullback can go seems to squarely still depend on how successfully central banks can still jawbone this market into the danger zone. The larger $WLSH monthly chart still seems to suggest that the jig is up already: 


What’s the trigger then? As I like to say: it’s unknowable in advance, but obvious in hindsight. For now my mantra is: Let’s fill some gaps: 

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Categories: Market Analysis

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3 replies »

  1. Sven, please send me your Email address for paypal. Switching to pounds should be ok after I send the email. g

    Sent from my iPad



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