Markets – Macro – Technicals

On The Verge

VergeThis is why we scale out.  No matter how good set ups are, markets can do the completely unexpected and one needs to lock in profits along the way. That’s why I scale out religiously no matter how well positioned I think I am. Was it reasonable to expect that the market would completely reverse a 50 handle ramp yesterday? No. Why? Because markets haven’t done so since 1999. But they did anyways. So I’m glad I scaled out.

Interesting to note that such a reversal hasn’t happened since 1999. This keeps our 1999/2000 analog at the forefront and keeps it as a viable roadmap for now.

So now what?

It is very clear that markets are very nervous and any rally is being sold. Fear is spreading big time and worries about a Russian default are mounting. People are talking 1998 and previous similar crises.

Some of this talk may be well founded. As crude keeps crashing many countries dependent on oil revenue are in serious trouble. Russia being the largest and most notable.

What would happen during a Russian default? Nobody knows, but in a world filled with massive leverage and derivatives the spectra of contagion is pretty scary.

Add this $WLSH chart and one can plainly see that markets could well be on the verge of a massive drop:

$WLSH

The $VIX also shows massive concerns by pressing above its upper Bollinger band now for 6 days in a row, very rare indeed:

VIX

The flip side now is the argument that we are vast oversold, positive seasonality start today and the ever powerful Janet Yellen will share her manna today. Here too the prospect of a meltdown is there if the Fed were to change the language of their statement. Yet ironically rates have been doing nothing but go down as bonds are the safety haven in an ever uncertain market environment.

The Fed of course is very well aware of all this, so today becomes a very key Fed meeting one week before the holidays. Who wants a 10-20% crash in the next few days? The answer is nobody except shorts of course.

So this makes for a really tricky backdrop. We are too low and oversold to short (shorts got hammered during that ramp yesterday), but uncertainty reigns and the market action is very squishy.

I have continued to buy weakness and using stops religiously even though it has been very annoying to trade on this basis, but yesterday’s huge gains have also shown the strategy to pay off.

Despite the huge reversal the charts tell the tale of a market that could move significantly higher if its concerns of oil, Fed, and Russia can be addressed.

$SPX daily, note the speed and slope of descent now mirrors the latter part of the October decline:

SPX D

The internals show an interesting counterintuitive picture. High/lows have continued to decline:

HL

Yet $NYMO shows a slight improvement over the day before while still being very much oversold (but far from the lows of past major sell-offs):

NYMO

Yet the $NYAD gives us a more clear positive divergence being vastly improved from the day before:

NYAD

This action comes on the heels of a new low in the $DJIA which has given back all of its November and December gains with the index dropping nearly 1,000 points in the past 7 days. Note the RSI readings here too are similar to those of the October lows:

DJIA

In one word: Fugly. Being below September highs reality is suddenly very different from the bullish nirvana spewed relentlessly on twitter and CNBC just over a week ago. In fact, looking at the macro picture the recent rejection in the $NDX may simply serve as a major warning sign as prices were simply pushed to the 2000 highs and one could take this current correction to be a resounding rejection of these levels:

NDX monthly

Yet still we are only seeing a standard 5% correction here and Janet Yellen can right it all. Volumes will drop off hard next week and so a solid Santa rally may commence at any moment and follow the standard script:

SPX W

Yet one thing should be perfectly clear: Even if markets rally from here into year end, 2015 is shaping up to be far from the smooth standard central bank ascent program that it has been in play for the past few years.

Trade plan for today: I’ll continue to favor the long side and am maintaining the buys from last night’s lows with flat stops in place. I’m likely to grab hedge puts into the FOMC announcement. Should I get stopped out of positions I will look to re-enter longs, but the timing would be based on the substance of the announcement and the reaction to them. Given oversold readings I’m not interested in chasing shorts here, but would look for a long entry level.

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4 Responses »

  1. Thanks Northy! i’m sure you don’t want my 2 cents on Russia :), and it will prove completely wrong but here it is anyway. Russia default extremely unlikely. Rouble has likely bottomed. Select Russian corporate bonds might be the most attractive asset class out there right now. Russian equities probably a buy here, and have a good chance of being world’s best performer next year (admittedly not hard when you’re down 50+%). At these levels, you really don’t need to be a fan of Putin or anything. Nobody, but nobody wants to go near it. No sell side strategist dares have anything other than a sell on it. UK financial media like Moneyweek threw in the towel trying to promote Russia as their contrarian idea. Not a bad set up. But Ukraine default practically a given, i guess early next year. Not sure if that’s big enough to impact markets.

  2. the market makes zero sense to me anymore. I would have thought that after the expiration of the QE program in October, fed chairwoman Yellen would have little to no material effect on equities. Today’s 300 pt rally after she spoke was numbing. Numbing that even in a world where nobody is actually doing any QE, a single person can still move markets. It seems that we’re anything but healthy as a financial market.

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