Markets – Macro – Technicals

Inversion

inversionIn meteorology, an inversion is a deviation from the normal change of an atmospheric property with altitude.

Nothing normal about this week and inversions are all over the place rendering a very unusual picture. Specifically we are now observing the largest invergence in underlying strength since the 2007/2008 timeframe. I’ll illustrate this further below. Yet we have a relentless march higher, mostly with overnight action accompanied by exponential melt-ups in select individual mega cap stocks. Specifically tech has gone completely vertical, but also big indices are seemingly trading like small cap speculative stocks.

Leave it to this market to make one feel foolish for having locked in the biggest trade gain achieved in only a few days. We bought #DAX last week for 10661 and closed this week for an 833 point gain. Biggest trade of the year, massive gain. Fantastic. What did the #DAX do? It just kept going up another 300 points with no pause for a 10.7% move in one week:

DAX

Tech? Ghosts of 2000 are starting to make their presence felt. Here’s the $NQ with so many consecutive green 5 hour candles I can’t be bothered to count them all:

NQ

So yes, we were bullish last week and even talked about a move toward new highs, but this nonstop push, to me anyways, is a red flag.

But it should be no surprise to get all the trend lines tagged in time for OPEX, Draghi adding liquidity to Greece, and Yellen spinning her usual non committal blather.

But let’s review a bit what’s happening here underneath.

Firstly for some comedic relief here’s Yellen telling the world that biotech valuations are extremely stretched in July of 2014:

IBB

Nailed it.

The biggest hit on Wall Street? $NFLX, because, you know, they grow subscribers. What they are not growing is pretty obvious:

NFLX

Maybe I’m missing something, but at the end of the day $NFLX’s business model is based on getting millions of subs to pay $9.95 per month (the equivalent of going to Starbucks once a month). So lose money per customer and make it up in volume. Ok.

But hey, we’ve seen this game work for years. Look at $AMZN:

AMZN

$GOOGL reported great earnings last night and its chart could look very similar today. So in short: We have vastly overbought conditions in a number of tech stocks.

Is any of this unusual? You bet it is. The data supports this notion as the last 5 days have produced the largest 5 day drop in the $VIX in all of history:

vix

So $VIX back to the lows of the year and $SPY jammed right into its upper trend line on declining volume:

SPY

So big bull market breakout, massive rally to come? I can’t exclude this scenario and as you know last week I kept talking about a run toward 2175-2200 being a possibility.

But frankly it’s not the price levels that leave me concerned here it’s the how. Specifically how these prices are achieved. And this is where we have the biggest red flag.

Agains stocks above their 200MA versus price:

AR 200

This deteriorating picture is truly bizarre. But it is not unprecedented. We’ve seen it before, check the 2006-2008 timeframe:

2006

That same inversion was taking place in the 2007 and was a major warning sign. It took months, even a year to be reflected in price, but when it finally did, the floodgates opened up.

A similar warning is found in the $BPSPX:

BPSPX

But it doesn’t mean prices can’t go higher. The big concern here is that we may see another complete tech melt going into the stratosphere.

The final ascent in 2000 was brutal after all:

NDXM

So the next few days, even hours, will be key as we are now pushed right against a key trend line:

SPXRM

Besides the weak internals we have several arguments that appeal to the reasonable (but perhaps not to an unreasonable market):

3 unfilled gaps below and a market now on 4 days of 5EMA disconnect (as of the weekend it’s 4 unfilled gaps and 5 days of 5EMA disconnect):

NDX

As I showed on stream last night even the 2000 move did not see this type of disconnect action.

So my principle view remains that we will see a reconnect and some gap filling into next week.

And if we do, bulls actually risk major chart failure and with key stocks to massively overbought ($NFLX has a weekly RSI of 86!) this could all turn bearish in a single day.

If it does then my target for the 1945 area is still very much in play. The weekly 100MA remains my key buy zone for this summer:

SPX 100

But bears, who have been 100% MIA this week, need to conduct a surprise raid and soon.

But it’s OPEX and we will get pinned.

Weekend update:

Amazing stats from Friday’s close, especially considering that the Nasdaq just concluded its largest and most vertical rally since 2009:

NQ

On Friday the NDX 100 closed up 1.47% with only 36 stocks advancing. Most of it being $GOOGL of course. The $SPX? Up slightly on the day, but only 137 in the green. This rally is thin, thin, thin. As thin as just prior to the peak of 2000.

Doesn’t mean the highs are in, but it’s not a healthy, broad based advance. Let’s call a spade a spade: It’s an extremely narrow rally driven by some select  high P/E stocks accompanied by the biggest $VIX collapse in history.

How high are these P/E’s? Here’s a taste:

For latest charts please refer to Technical Charts.

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Categorised in: Daily Market Brief, Market Analysis

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