Typo in Morning Post

October 16, 2014

2:00pm CST

I posted the wave 5 target this morning as 1785 and it should have been ~1820. I accidentally used the 93 points of wave A instead of the 53 of wave 1. So wave 5= wave 1 @ 1820 which would essentially be a double bottom testing the low of yesterday. Thus far the S&P 500 has stalled in the 1873-1878 range that I mentioned this morning. Get above 1873-1878 and this count is likely off the table. Definitely off over 1883. Over 1883 I favor that the first leg of the correction is complete and we should see the best rally in quite a while. In other words the S&P 500 will rally more than 55 points and the rally will last longer than a day. The Russell 2000 has already posted its biggest gain since August so that would be an argument that the first leg down is complete. Watching 1878-1883 on the S&P 500 very closely. Seeing lots of positive divergences, particularly in small cap. The S&P 600 has had a positive advance/decline line in every session this week and there were less new 52 week lows on the Wednesday spike to a new low than there were at the previous low which was last Friday.

My thoughts here on the S&P 500:
A= 2019-1926= 93
B= 1926-1978= 52
C as follows
1= 1978-1925=53
2= 1925-1970=45
3= 1970-1821= 149
4= 1821-1873 or 1878 (52-57 points, 1878 would be 38% retrace of 1978-1821 and close the gap down from yesterday, 52 points would be equal to the bounce of wave B above)
5= wave 1 @ 1820

Update on S&P 500

October 16, 2014

9:05am CST

When the rally of last Wednesday failed to follow through on the upside but more meaningfully gave back all of the gains of the previous day it implied to me that we were definitely dealing with a different playbook than we have for the past 2 years or so.

There was a -81 reading on the SPX participation index on Monday. That is the first reading of -80 or worse since June of 2013. Readings below -80 generally produce a meaningful low within days. The problem is that this reading came among a cluster of days in which we had already seen 5 readings of -70 without a reading above +40 heading in between. So my anticipation was that yesterday’s bounce was most of the rally but that it would make a bit more headway up to ~1873-1878 on the S&P 500. Then from there it would roll over for a final leg down.

My thoughts here on the S&P 500:
A= 2019-1926= 93
B= 1926-1978= 52
C as follows
1= 1978-1925=53
2= 1925-1970=45
3= 1970-1821= 149
4= 1821-1873 or 1878 (52-57 points, 1878 would be 38% retrace of 1978-1821 and close the gap down from yesterday, 52 points would be equal to the bounce of wave B above)
5= wave 1 @ 1785

Of course this depends on whether the market can bounce from here into tomorrow. Would provide alternation for waves 2 and 4 of C. The good news at the moment is that the market didn’t just fall apart on the open after the gap down.

There are multiple forces at play here in my view. The first is that I believe many hedge funds became complacent, pulled back on their hedges, and got extremely long. Jumping into a basket of stocks like GPRO, AAPL, GILD, and other high flyers. It is widely known that hedge funds have been under-performing the S&P 500 for 2-3 years and I think the pressure they felt to perform took their eye of the ball in terms of risk management. I heard on CNBC yesterday afternoon just after the close that the past 15 market days were the worst for hedge funds since 2008. Maybe it was 2011 but I could have sworn they said 2008 because I was a bit surprised.

The other force was that there was just so much complacency. Plus, when the market hasn’t had a real correction  in over 2 years when it does crack, it cracks big. That appears to be what we are seeing now.

I had said recently that 1687-1735 were logical targets for this correction. We may get to 1735 a bit faster than I expected. 1875-1925 is now a very key range. In other words the market needs to get down to a range where a retracement of 50-62% will get back up into that range and fail. Yesterday’s low of 1,821 was close enough. A 50% retracement from 2019-1821 would be 1920. But, if the market came down as low as 1738 (the low from February 2014) a 50% retracement would take the index back to 1878 which was the gap down from yesterday. Numerous scenarios to keep an eye on and I remain cautious. Still holding SDS from ~1930 on the S&P 500.

Monster Rally

October 8, 2014

3:15pm CST

To say that today’s rally was bigger than I expected would be an understatement.

It appears at first glance as though this will be the strongest day for market internals since July.

Both the Russell 2000 and S&P 500 closed above the gaps down from yesterday, and above their 62% retracements from the highs of Friday/Monday to today’s low.

Key reversals in all indexes.

Russell 2000 broke below 1,082 but it sure didn’t stay there long. Strong price rejection from lower levels today. Given the sentiment in small caps and all the hoopla over the death cross this may be the start of something.

As mentioned this morning some key levels held. 615 on the S&P 600 and the 150dma on the S&P 500 (closing basis).

Market seemingly had every chance in the world to fall apart today and it didn’t.

The odd thing is that I never sensed any capitulation and I still feel that the majority is quite complacent.

Something else worth noting is that the momentum stocks (momo) never really broke down. AAPL, GILD, CELG, GPRO, TWTR, LOCO, MBLY, etc. never broke down technically. This is seemingly bullish.

Need to look at this some more but today was quite surprising and this sure didn’t feel like a countertrend rally. Did the S&P 500 bottom at the 150dma (which has held all corrections since 2012) and at the same time did we see a bottom in small caps which have been weak for 3 months? Looks possible.

Interesting Juncture

October 8, 2014

10:10am CST

Last week the market initially bounced at two key levels I was watching. 1,077 on the Russell 2000 and ~1,928 on the S&P 500. Bounce didn’t last long and the retest is already on.

S&P 500 is testing its 1,926 low of last week. While the Russell 2000 has broken below key support at 1,082 the S&P 600 is sitting on 615 which has been a key pivot dating back 13 months. If the market doesn’t bounce here the S&P 500 should test the key 1,900 level. 595 and 1,042 would be the next support for the S&P 600 and Russell 2000.

Charts later. Time is tight now.

 

Also Watch 17,151 on the Dow

September 30, 2014

11:45pm CST

17,151 was the high in July. Note that in two of the past 3 trading sessions the Dow has topped out around that level. 17,151 is very similar to 1,986 on the S&P 500. Get above those levels and it puts a dent in the near term bearish case. Keep a close eye on these levels.

dowresistancenew

11:35pm CST

These posts tend to speak for themselves. Here was an interesting breakdown of where the market gains have come from in the past 2 years as I recently suggested that most of it was multiple expansion and financial engineering. According to this data only 15% of earnings growth has come from actual increased sales. 85% has come from P/E multiple expansion and margin expansion.

“That’s a legitimate source of concern for the broader market. In the past two years, SPX is up approximately 45%. About 70% of this gain is from multiple expansion. Another 15% is from margin expansion and the remaining 15% from sales growth. Stagnating margins when multiples are already at a premium leaves the market reliant on only sales growth. If the trend in macro growth continues to be a good barometer for corporate sales growth, then the rate of share appreciation will likely approach 2-3% (real).”

http://www.fat-pitch.blogspot.ca/2014/09/weekly-market-summary_27.html#more

The 4th quarter rally is missing something. This fits in line with what http://www.sentimentrader.com was saying a month ago. Generally when the market does really well into Labor Day, returns over the next 2-3 months tend to not be very favorable. 2012 was the last time this happened. S&P 500 peaked in mid-September around 1,475 and bottomed in mid-November at 1,343.

http://www.fat-pitch.blogspot.ca/2014/09/a-4th-quarter-rally-without-incoming.html#more

11:30pm CST

Unless one is looking at the small caps which were beat up for the majority of the 3rd quarter its hard to look at the current market juncture as a potential bottom. I won’t rule it out but it seems unlikely considering that the Dow, Nasdaq, and S&P 500 just hit fresh new bull market highs on 9/19/14.

See the link below. I have observed over the years that volatility occurs near market peaks and bottoms. We have obviously seen an increase in volatility of late. In the article below there is an interesting stat. When the market has its two biggest up and 2 biggest down days of the month in a single week the performance going forward wasn’t very good. In the 17 occurrences since 1996, the market was positive two weeks later in only 2 of the 17.

Here is another interesting piece of information from the article below:

“Lastly, while it is probably a stretch to make such a link, we don’t want to fail to mention the fact that a few of these occurrences happened almost immediately prior to some major cyclical tops, including February 1966, December 1972, April 2000 and June 2007.”

http://jlfmi.tumblr.com/post/98740906260/stocks-roller-coaster-week-has-negative-short-term

Here is the graphic showing the 17 times this kind of volatility has occurred since 1996.

volatilityburst

If one wants to try to find a silver lining here it would be the fact that the media has gone crazy with the “death cross” on the Russell 2000. My past observation is that when the media starts talking technicals you generally want to do the opposite.

The key near term resistance for the S&P 500 is 1,986. Key support is ~1,950. Break 1,950 and it opens up a new can of worms. Support then falls to 1,928, 1,900, and 1,890. Get below 1,890 and it opens up the potential for a move down into the 1,687-1,735 range I mentioned the other day.

See the charts below as to why 1,986 is so key. 1,986 is a key regression dating back to the end of 2013. It also happens to be the 62% retracement from 2,000-1,964. 2,000 was the 50% retracement of 2,019-1,979. Now we have 1,986 as the 62% retracement of 2,000-1,964. Note that price has been rejected at 1,986 twice in the past 3 trading sessions. RSI and ADX are both looking bearish.

Daily

SPXregressionnew

60 Minute

SPX60minutebearish'

Here is another key range to watch. $99.98 marks a gap down on the QQQ. There is also a gap up at $97.74. I would argue that whichever gap gets filled first has the odds of seeing the market follow through in that direction. If the QQQ gets over $100 on a closing basis, that would be bullish. If it closes below $97.74, look out below.

As the market was going into the close today it sure looked like fund managers were absolutely desperate to blow out anything that was an under-performer in the quarter. Small caps were one of those asset groups. On the other hand the larger cap stocks held up. So was today a capitulation in the small caps or were the larger caps just being held up into quarter end? We won’t have to wait long to find out.

10:45am CST

In my opinion this has introduced additional risk in the credit and equity markets. Keep in mind that at one point they were managing $2 trillion. Yes, you read that right. As in if all of the assets at PIMCO were 100% liquid today they could hypothetically pay down our national debt by more than 10%.

Most of the investors in PIMCO were there for Gross and Mohammed El-Arian. Now that those two have departed the only person there that I am aware of with a big public profile is Paul McCulley. My point is that if there is an exodus from PIMCO Funds, it could cause some serious disruptions in the credit markets which could leak over to the equity markets.

1,950-1,955 is a key level for the S&P 500. There is a gap at 1,955 and 1,950 represents the uptrend from the June 2013 low of 1,560. On  break through 1,950 I believe we could see a move down to 1,550-1,800. My best guess would be 1,687-1,735. I will go into more depth later. This appears to be one of the most interesting junctures for the market in at least 2 years.

12:20am CST

If you haven’t read the two links that I posted his morning I suggest reading them as I will be pulling some information from both of those posts here.

Let’s start off with sentiment. The CNN Fear and Greed Index is currently at 13, suggesting high levels of fear short term. However, there has hardly been any spike at all in the put/call ratios over the past 3 days so I don’t think the fear is really that extreme. Put/call ratios actually fell today which was quite surprising and indicates complacency among investors.

According to http://www.sentimentrader.com’s update this evening, ever since the inception of the SPY as an ETF, when the VIX has had 9% gains on back to back days, the SPY has rallied the next day 12 of 13 times. The market has been mixed in the days and weeks ahead but 3 months later the market was up all 13 times. The average gain was 6.4%. The market is extremely oversold right now so a bounce tomorrow really wouldn’t surprise me.

I have seen quite a few polls suggesting that the public really isn’t involved in this market. However, this chart from the Fed says otherwise. The only time household equity ownership has been higher than it is now was the 5 quarter span dating through 1999 and into the end of Q1 2000. When everyone is involved, who is left to buy?

householdequityownership

Here is the sentiment chart that really concerns me. The Investor’s Intelligence Survey is only one week removed from its most lopsided bull/bear reading since 1987. It isn’t even that the bullish readings are that extreme. Its more the fact that there are no bears. 13-15% bearish readings that we have seen lately haven’t been seen since 1986-1987. Extreme complacency would be an understatement right now.

investorintelligence

Now I want to move on to equity valuations. If one looks at expected earnings for 2015, the market really isn’t that expensive. The ongoing problem is that earnings estimates are almost always too optimistic. That is why it is best to use a smoothing mechanism. Enter the 10 year Schiller P/E. This smooths out earnings over a 10 year period. See the link below for more information on why this is better to focus on than just the standard P/E range.

http://www.gurufocus.com/shiller-PE.php

Based on this measure stocks have only been more expensive than they are now at the top in October 2007, the top in 1929 just before the crash, and then the bubble period from 1997-2000 (a solid 3 years). The majority of the rally over the past 3 years has come from a combination of big time P/E multiple expansion combined with financial engineering (stock buybacks, issuing debt at extremely low interest rates to buy back stock). So if the market is really going to move materially higher from here we are either going to have to see a big surge in earnings or the market will have to go into a another full fledged bubble.

schillerpe

The next valuation measure worth noting is total market cap relative to GDP. Essentially this is how much earnings power the market is pulling from the actual economy. Once it gets over the 100% mark it means that productivity (profit margins) and P/E ratios are accounting for more of the gains than actual earnings growth. This doesn’t date back prior to 1980 so we don’t have as much data to view as we did with the Schiller P/E. Regardless, the only time the ratio was higher than it is now was the beginning of 1998 into the bubble peak in March 2000.

http://www.gurufocus.com/stock-market-valuations.php

marketcaprelativetogdp

The next two valuation metrics are coming from the link I posted this morning. On an EV/sales basis the index has only been more overvalued twice. In both 1998 and 2000. Both times the index fell 30%. If the same happened again it would take the index back to about 850 or so which is roughly the same level as the peak of 2007. This is interesting because if the Russell 2000 fails to hold support at 1,080 it isn’t hard at all to come up with downside targets in the 900-1000 range.

R2Kevsales

The next valuation metric I want to look at is Tobin’s Q. In over 100 years the only time valuations were higher than they are today was the bubble of the late 90’s.

tobinsq

Based on the sentiment and valuation metrics presented above I definitely see this as a time to be cautious. I got bullish in early August but then I began to waver about two weeks ago due to the extreme weakness in the smallcap and microcap sectors. Over the past 3 days we have seen some pretty ugly action in the markets. The odds likely favor a market bounce in the next day or two. I just question how sustainable it would be. One scenario I have also come up with would have the Russell 2000 completing an irregular flat at 1,077 in the month of October. I guess the question is whether the Russell 2000 can fall another 4% or so without technically breaking the Dow, Nasdaq, or S&P 500. That would be the bullish scenario in my eyes. Bottom in October and a 4 year cycle low at that. However, if the Russell 2000 were to bottom at 1,077 it would still be an awfully shallow 4 year cycle low. As mentioned previously, there has been an 8% correction in the S&P 500 every second year (the 4 year cycle low) of the Presidential Cycle dating back to 1962. 8% from the recent high would be ~1850.

Two Very Good Reads

September 23, 2014

8:15am CST

I highly suggest reading these two blog posts. Just came across this blogger recently. Very informative stuff. Will provide further commentary on these two posts when I have the time.

http://www.fat-pitch.blogspot.ca/2014/09/weekly-market-summary_20.html

http://www.fat-pitch.blogspot.ca/2014/09/why-late-90s-euphoria-is-not-coming-back.html

 

Follow

Get every new post delivered to your Inbox.