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Markets – Macro – Stocks – Charts – Alerts

The Unexpected

NOTE: Below is the Daily Brief published for clients before market open August 14 outlining our strategy for OPEX week along with some broader market influencing considerations. These briefs are sent out daily and give background as to how we approach markets/trade direction and may include macro, economic, policy and/or political considerations. We augment these briefs with intra-day updates in our Dashboard.


On Thursday nuclear tensions with North Korea were on the world’s mind. Friday evening suddenly President Trump suggested military action against Venezuela as an option. By Saturday the president’s half hearted response to Neo Nazi demonstrations resulting/involving the death of 3 people left even Republicans wondering and demanding: Why Won’t Trump denounce white supremacists?

I’ll leave those discussions aside other than to make this point: Expect the unexpected. The news flow is fast and furious these days and in our ongoing search for a trigger that challenges this market construct the intensity of the social unrest and online outrage may be symptomatic of deeper problems in US society. After all:

I think it’s a fair question and highlights a deeper risk factor: History shows that often completely unexpected social events trigger a massive change in the status quo. You can all think of many examples. Social tensions, underlying problems are often masked until something sparks a change.

I can’t obviously project that this particular event will be such a trigger. After all America is not majority NeoNazis, far from it, they are a fringe hate group that however feel emboldened to come out in the current political climate. But it fits within a long string of events that seems to build opposition to Donald Trump, this one with the added caveat that many Republicans clearly felt uncomfortable with his response. Again.

For someone craving popularity Donald Trump surely seems to forgo the low hanging fruit. What is easier than to condemn Neo Nazis? Beats me, but this will not make the legislative agenda any easier, especially as the president has been beating up on Mitch McConnell harder than white supremacists. So he has major repair work to do and, who knows, we may see more firings in his staff. After all the blame is always elsewhere.

But these are political side shows that capture the headlines. The main point: We have to keep watching the news flow for events that may serve as trigger and could change things fast. After all North Korea is still there, so is Russia, so is health care, taxes, debt ceiling, etc.

None have been a trigger, and hopefully some of them never will. But in aggregate they gnaw on the sense of optimism that was the original reason given for the rally.

We live in an age of relative peace and prosperity, but we can’t forget that all this calm has been bought and borrowed for. And this particular cycle more borrowed than ever. And things always look calm when unemployment is low and markets are high.

For now it appears we’re getting a relief rally across the world as no rockets flew over the weekend and US intelligence officials indicated there is no immediate risk of war. Asia really bounced overnight and that speaks to the gap event I suggested last week:

“Honestly I think we either gap up 20+ handles on Monday or we gap down 50+:

Gap, ramp & camp?

Well either way good for us and anyone that bought calls or longed the $RUT with us is sitting on nice gains on those. As we had scaled out of our shorts majorly we’re pleased we listened to the signals, i.e. $NYMO.

So, for now, this all could look like the standard program that has been running for months. 2% dip and then rip.

We shall see, it’s OPEX week and the temptation is there to crush the $VIX again as long as nothing happens on the North Korea front.

Either way we’ve booked a scale on $RUT this morning and are looking to approach this week quietly and letting things bounce until a set up emerges.

Let’s go through charts:

Last week we saw outside reversal weeks in both $DJIA & $SPX:

That’s bearish full stop.

But as you know from last week we also had oversold readings on many charts within a couple of days of selling:

The main message I want to highlight for everyone here is this: Technicals are working again nicely and kept us on the right side of the trade/

Take the $SPX:

The consolidation patterns had shown breaks to the downside. Last week’s spike to our risk zone hence was a classic fake out and subsequent reversal again went into the 50MA.

MAs, trend lines, etc. are working as key pivots and we have seen them work on many charts.

And on this note I again I want to highlight the $VIX. As frustrating as the compression has been these trend lines have been amazingly consistent:

The tag took forever, but it finally happened. And now I would view the 50 and 200MAs as being key support. After all this is the first time in 2017 we not only have seen a higher high on the $VIX but also a solid close above the 200MA. This “may” be indicative of a shift in the volatility regime.

Indeed the gap is still open above and as you know I’ve been keeping an eye on that key weekly MA:

Note even in 2006 we got that spike to it and then a rejection which then resulted in another year of rally.

I can’t say whether this happens or not. But know the initial spike to there will likely be a buy.

What is clear is central bankers are flailing again and rate hikes are over. I’ve added all the macro charts for August and the emerging picture continues to be concerning.

Much about these markets is about confidence which brings me back to the earlier trigger search discussion. As far as I can see the growth data has already turned.

Congress will come back from recess and they still have health care, taxes and debt ceiling to contend with. Tensions are clearly rising and not ebbing, and with a president now not only unpopular but also now apparently vulnerable to losing Republican support Donald Trump himself may become the trigger. And don’t forget Mueller remains active and is now looking to interview White House staff directly.

Expect the unexpected.

So now how to position for the unexpected.

Frankly the easiest move this week would simply to see an oversold rally into OPEX to fill the open gaps from last week:

It would help alleviate oversold conditions, bring dip buyers back and hopefully trap them again and give us an opportunity to re-add to short positions.

Our signal indicators keep saying lower before a solid swing bottom is in place:

Looking at some index charts I see broken pieces of glass:

So bottom line: We are too low and oversold to add short here and rather want to see a rally into OPEX to resell (i.e. 2470-2475 $SPX per the earlier chart).

The larger charts suggest much more pain ahead for these markets into later August/September:

For example I still like to see at least one of these quarterly MA’s tagged before the quarter is out:

This would potentially match up with maximum drama about the debt ceiling, create oversold conditions and then offer potential for a larger relief rally into year end (data dependent).

Until then I expect the unexpected, cause you never what happens.

For example today, out of the blue, Nadya of Russian Pussy Riot fame followed me on twitter:

Hey why not? Cause what is more rebellious than being bearish this market? 🙂

Expect the unexpected.

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