Markets – Macro – Technicals

Totality

totalityMarkets:

I don’t like this market here. At all. As most of you know I trade long hard when I see the risk/reward (i.e. Door Shut), but I don’t like risk/reward to the long side at the moment. This doesn’t mean we can’t jump higher and as you know price action can defy any logic here.

What I want to do today is outline the totality of all the different factors that make me extremely cautious here. You know some of these as I have been talking about them, but I want to put them all together on one page to show the total picture.

And I’m not talking about a 3%-5% pullback here. I’m talking about something much larger.

But markets just tagged all time highs? Nasdaq is on a tear, Greece is solved and China bailed out its market and QE is running rampant in Europe. Are you mad?

Maybe I am, but I’ll outline the totality of the data and you can be the judge if it’s solid evidence of something amiss or not.

Bulls will say that NONE of this data matters. None of it. And, so far, they have been correct, as nothing has broken.

But I disagree. In my view all this data together means something. There’s a message here and it’s trying to tell us something. To me it’s screaming caution in a big way.

So let me walk you through all the different pieces.

Let’s start at the beginning. Where is this market?

On an annual basis we are looking at a market that hasn’t corrected in years, but maintains a steady up trend, but is vastly disconnected from its annual 5EMA:

SPX A

History plainly suggests that runs like this end up with at least a 5EMA tag eventually and that is 300 handles lower no matter what chart scale you look at. Currently that tag sits near the October 2014 lows.

The larger monthly charts show crossovers in MACD’s and ever rising trend lines that markets have been struggling to distance themselves from with a clear line of resistance just above:

SPX M

Markets will be forced to make a decision very soon. Either break above or break below. No other choice.

Yet while $SPX and $COMPQ have maintained their structural integrity so far others have not. Mainly the $NYSE:

NYSE

And the $WLSH is very close to breaking:

WLSH

The strongest index, the $NDX just put in place a divergence virtually identical to the one placed at its peak in 2000: It made a new high in price while it made a lower high in the BPCOMPQ:

NDX

This divergence is supported on a number of indices and technical signal indicators that show an overall weakening of the market beneath the headline numbers::

200

BP

In other words: There is a broad based weakening taking place in the overall structure of the market. And this weakening has been building over several months.

Yet in recent days we are seeing an acceleration of this broad based weakness. While we see certain individual stocks racing to make new highs day after day, i.e. in $GOOGL and other high tech fliers we see others getting absolutely hammered, i.e. $IBM.

The immediate consequence of this action is we are seeing an imminent and drastic divergence in the cumulative $NYAD versus stocks:

NYAD C

The conclusion: Stocks are being sold hard. But some select stocks are being chased. It’s not a sign of a healthy market.

The next big divergence that has been building over time, but is now taking on a more dramatic form is the divergence in the credit markets, $JNK, $HYG, & IEI shown below:

JNK

HYG

So whether you are a bull or a bear you have to acknowledge that something’s going on here. And none of it is compatible with the notion of a happy, broad based advancing market.

Yet, nobody seems to notice and nobody seems to care:

VIX

Rock bottom $VIX.

And yet, even though financials and tech are rocking to highs the $DJIA, which includes big time financials, just placed a weekly double top as part of a right shoulder:

DJIA W

So I see big time risk everywhere, yet I don’t see it being priced in by the market. Which makes me either very contrarian wrong or very contrarian right.

From a trading perspective this totality of data forces me into patience and discipline mode. My basic view remains to want to sell strength and be very patience about the outcome as I sense that the market’s behavior has changed dramatically versus the past 6 years. This change in behavior cannot be seen in the overall price action yet, but the data clearly shows that it has changed. And my level of caution is informed by the notion that price may suddenly catch up to this change in behavior.

But I’m also cognizant of the fact that we may even make new highs into the 2175-2200 $SPX zone first. Central banks need higher prices after all, BUT and this is a big but, recognize that over 50 rate cuts this year, all central banks on the planet still being in full accommodative mode, and continued ZIRP policies have still produced the totality of the charts above. What central banks may have been successful in so far is prevent price discovery from reflecting the fundamental reality underneath. And what we are witnessing in equity markets right now may be a battle for control.

Frankly the above outlined trends have been slowly building for months in most cases. Even new highs are not going to suddenly change them. They remain in place.

What’s causing this pull on charts away from central banks control? I think I know the answer and it’s structural in nature and I will address that answer in a larger macro article I’ll publish this weekend.

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Categorised in: Daily Market Brief, Market Analysis

1 Response »

  1. I sympathize with your point of view but don’t think there’s no bottom to that market. There’s too much pessimism, measured by speculators on futures. Breath is a bit bad but have some relative measures ok. The overall picture is negative but a very small decline will bring sentiment full blown pessimism and if yields fall a bit in the process, the interest rate environment will be in a bullish mode. Pessimism + bullish yield environment = bull market (or at least an upleg through new high).

    My 2 cents.

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