Markets – Macro – Technicals

Weekend Charts: The Greatest Show on Earth

greatest_showThis past week was a seeming coup d’etat for bulls and bears got hit by their own version of the 4 horsemen of the apocalypse: $VIX futures roll-over, Mario Draghi all but promising new QE for December, China’s PBOC cutting rates and key tech monopolies $GOOG $AMZN and $MSFT reporting stellar earnings. In the process currencies went wild and markets returned to the scene of the crime from August and not only reconnected with their larger MA structures and price levels, but also closed the week above their daily 200MA.

Indeed this was a criteria for success we discussed in early October in “Hanging by a Thread“:

Bears:  You now need to break $SPX 1900 & the neckline and STAY broken below October 2014 lows (that’s about 130 handles lower from here).

Bulls: You absolutely need an October magic show and get back above the daily 200MA (currently 2063) and the monthly 20MA (currently 2003) or the jig is up for a long time to come.

Magic show indeed and bears basically rolled over and it’s been a straight rocket upwards very much like the four October case studies we had outlined in the same article ( 2003, 2006, 2010 & 2011):

SPXD

Yes markets are the greatest show on earth and central banks once again have a key hand in pushing prices with their usual overnight levitation magic. But the show is not over and both the FOMC and BOJ will have another opportunity to take influence over markets next week.

It is no wonder then that the combination of price levitation, central bank puts and massive price acceleration for mega cap stocks such as $AMZN, $GOOG, $FB, and $MSFT has gotten everyone bullish again and many are already talking about new highs. Markets are after all very much replaying October 2014 when the Fed’s Bullard talked about QE4 and stocks rallied nonstop throughout all of October.

So on the surface it all looks as if the standard script of the past few years is back: We had a quick correction, price levitates back, central banks keep intervening on any sign of trouble. Even the August correction was saved by circuit breakers. See, nothing bad ever happens, it is the greatest show on earth.

Not so fast.

Let me walk you through some discussion points that indicate things are a bit more complex than they appear.

Firstly, let’s observe that the ECB and PBOC actions are not a sign of strength, but of weakness. All are fighting the ever increasing pressures of a weakening global economy. And while it is true that the above mentioned companies have shown stellar earnings it is also masking several major structural issues:

First consider this little factoid:

Five of the best-known executives in tech, Jeffrey Bezos of Amazon (AMZN), Larry Page and Sergey Brin of Alphabet (GOOGL), Bill Gates of Microsoft (MSFT) and Mark Zuckerberg of Facebook (FB) all together hauled in more than $10 billion in gains Friday from their stocks following astounding earnings reports.

Steve Ballmer may have added another $1B to his portfolio as well. The structural schism is getting ever pronounced: We live in a world where 5 individuals can gain $10B in personal wealth in one day. Not to expand further into the much discussed ever widening gap of wealth inequality, but the fact that child poverty continues to increase and not decrease makes this obscene amount wealth increase for the benefit of the very few a hair raising obscenity. At least to me.

You laugh at the ineptness of Greece? In terms of results is the US really all that different with a child poverty rate hovering now near 30%? And debt? Well expect another debt ceiling increase in November. The greatest show must go on.

But wealth inequality is expanding into the corporate sector as well. Think this recent rally was broad based? Not even close. It was led by the big monopolies, the mega caps that have a dominant hold on their markets. The rest? Not so much:

RSP

As is clearly evident many stocks are not recovering, not even close. In fact, for small caps the trend remains the same: Down

IWM

And even the all mighty tech sector shows a significant schism between winners and losers:

NDX

And why wouldn’t it be? Has anything really changed since the price breakdown in August? Not on the earnings front:

eps

In context:

These are all signs that things are not as well as they appear.

So how to explain the recent rally? Simply the structural technical reconnect we have observed with every major corrective move.

Recall this chart calling for a move toward the weekly 50MA:

SPX 100

Also recall Mella’s fork chart:

SPX F

In essence all we have seen is a return to the scene of the crime, filled some gaps and this was mostly driven by a few select mega cap stocks and 2 major central banks intervening and many stocks alleviating heavily oversold conditions.

But the close above the daily 200MA? It may actually be a warning sign. Consider that every major correction in recent years has seen a revisit toward the daily 200MA before breaking lower yet again:

SPX D LT

Let’s zoom in on a few.

2011 produced a .618 fib retrace:

2011

1998 produced a new low after testing its 200MA the first time:

1998

2010 danced with its 200MA for months:

2010

In 2007/08 the 200MA proved to be a key pivot several times on the way down before the real decline:

2007:8

The consistent message: Expect some retrace action before we have real clarity of whether new highs are coming or whether we will see a more serious correction into 2016.

It is in this context that the weekly DJIA futures chart should raise some eyebrows:

YM F

…especially in combination with the $VIX which has been pounded into the ground yet again. Complacency is back in a big way after all:

VIX

And the $NYSI stochastic is back to max overbought. First time, long time:

NYSI

Market history shows we can expect a sizable retrace in the weeks to come. But seasonality and activist central banks likely favor that any retrace is likely buyable for a year end rally. Next week brings month end, Janet and the BOJ and the FOMO is strong.

So from my perspective all we have so far is a technical retrace in context of a deteriorating earnings and revenue picture while lay-offs are starting to pick up. A blow-off top remains a distinct possibility given the price acceleration in select mega cap stocks and continued activist central banks. The underlying data however suggests caution is warranted.

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6 Responses »

  1. Imo, the greatest show on earth will continue till TINA retires. Central Banks keep on pushing those in search for a decent return on investment towards the stock markets. Whats the alternative ?

  2. Thanks for the great charts!

  3. Extremely well done! You’re a wise man and I’m really enjoying your commentary. I’m looking to be long volatility again. . Like you, I think volatility will come back. I noticed that Vix didn’t drop further on Friday despite a surging market. I actually made money in a VXX position taken early on Friday morn. euphoria. I sold at the close. I’d like to pick it up again on any more euphoria. This would be to partially hedge my long positions. Can’t hold VXX too long though.

  4. Terrific stuff, as always.

  5. Bad data, employment etc-if they ever come-brings more QE, which means new highs. The analysis is more than great,which brings us to a conclusion: only when an central bank uncontrollable event comes up will we see a top. Keep your eyes on Greece next few weeks, things here are worse than ever..

  6. Awesome work! Precise to the point. Best Regards

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