Market Analysis


So we got the Dirty Rally I alluded to before Christmas. The imbalances I highlighted on December 23 called for a reconnect to moving averages off of the 2340 $ES zone and the 2001 analog structure suggested a 10% rally into late January. And a 10%+ rally we got, a rally even more aggressive than anticipated courtesy a suddenly dovish sounding Fed (see also The Ugly Truth.)

Example $NDX futures reconnected with their 50MA yesterday:

All good and well? Correction over? Get a China deal and all is well? Perhaps.

But there’s a signal chart that may suggest an intrigue to come. As I outlined in 2018 Market Lessons extremes become more extreme and we saw some of this in the signal charts. In my 2019 Market Outlook I highlighted the $BPSPX chart showing oversold readings in December as extreme as during the financial crisis. But it’s not the only chart that’s acting extreme.

$NYMO has gotten a lot of attention in the past few days as its extreme oversold readings reached extreme overbought readings within just 11 days.

How extreme? Well, the only other reference point again is the 2008/09 financial crisis:

+117. It’s a sample size of 1, but let’s dig a bit deeper here. What happens when $NYMO goes from over -100 to over +100 in a matter of days as it just has?

The only history we have to go by says this happens:

People may forget, but that rally from Nov 2008 into January 2009 that produced that big fat $NYMO read was an intermittent top before markets dropped 30% into 666 on $SPX by March. Except this time the $NYMO read has come much faster, but both $NYMO reads occurred in early January following a late year correction.

With a sample size of one it’s not a large enough statistical sample to give this correlation any solid predictive weight, but it is worth pointing out and something to be aware of. After all big corrections often see the initial strong counter rally fail and produce a retest with new lows:

There’s one other difference perhaps of note. In 2008 and 2009 Q1 served as the basis for the ultimate market low. Bailouts, QE, mark to market suspension, you name it, it was all part of the active measures.

All we’ve had so far is talk. QT is still happening. So for all the dovish talk by the Fed there hasn’t been any dovish action that we know of anyways. And why should there be? We’re not in a recession yet.

Which makes for an intriguing question: Where is the crisis? But if there is no crisis, why did Treasury Secretary Mnuchin hold emergency calls around Christmas? Why did Fed Chair Powell cave last week and kick this technical reconnect rally into vertical overdrive?

If there is no crisis why are they acting like there is one? One wonders. We have no overt crisis reminiscent of 2008/2009, but we have several technical signals that are acting like they did back then. And perhaps that is something worth paying attention to in the days and weeks ahead.

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Categories: Market Analysis

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