March 18, 2015
Global money manager US equity allocation the lowest since 2008 as per the link below.
Sentiment was quite frothy at the end of February/beginning of March so the retracement wasn’t that surprising.
Market appears to be kicking off to the upside again here on the Fed news.
January 28, 2015
Time to re-visit the market performance relative to the size of the Fed Balance Sheet.
Fast forward 7 months and what do we have?
Treasuries and bonds have been soaring. Commodities have been decimated. Stocks have gone nowhere. The S&P 500 hit a peak of 1991 back in July 2014. Today it closed at 2002. Through all the gyrations of the past 7 months the market has gone absolutely nowhere. Keep in mind that the Fed Balance Sheet leveled out in October 2014 (not shown in the chart from 6/28/14). In that context it shouldn’t be that shocking. What was really shocking (at least to me) was how modest the correction into October ended up being. Then on top of it the magnitude of the ensuing rally that lasted all the way into the end of 2014. My previous expectation (based on the Fed balance sheet, internal deterioration, and my 9 month cycles) was that the market would see a peak in July and a bottom in October. Size of the correction I was anticipating was 10-25%. When it was all said and done it was a shade under 10%.
Is the market falling vicitim to a flattening of the Fed balance sheet again? Each time the Fed tried to pull out of QE back in 2010 and 2011 the equity market anticipated it months in advance. The result was increased volatlity and market corrections of 10-20%. Somehow this time was different. The S&P 500 continued to make new highs into the end of 2014 but since the calendar flipped to 2015 the market has just been an absolute mess. The first two trading days of the year were a huge warning.
Is this just a delayed reaction to the Fed ending QE in October 2014? Sure seems like that is the case at the moment. In this light, the Presidential Election Cycle study that I posted earlier this month suggesting that 2014 likely took performance from 2015 makes a lot of sense. Will this be 3 in a row? 2006-2007, 2010-2011, 2014-2015? Sure is looking like it.
January 28, 2015
I have mentioned the 34 year cycle here and there in recent years but since we are coming into a key timeframe (2014-2017) I believe it is time to elaborate.
Why the number 34? Good question. It is a fibonacci number and its also the approximate length of a typical interest rate cycle. For instance the 30 year bond yield bottomed in 1949 around 2.2% and it happened to peak in 1981 at over 14%. Coincidentally the stock market put in a major low in 1949 and another major low in 1982. Awfully close to the same dates I just gave on the yield of the 30 year bond.
Its also important to be clear that one has to be flexible as the number of years won’t always be exactly 34. A bit like there being more sunlight during the day in the summer and less sunlight during the day in the winter. From my observation the cycle can be anywhere from 32-35 years. Considering that the equity market put in a major low in 1982 (which began the epic secular bull market that lasted until 2000) if one looks forward 32-35 years that takes us to 2014-2017. Since the market has been rising since March 2009 and we are near the higher end of the valuation spectrum I tend to lean towards a market peak in 2015-2016. It just seems a lot more logical at this point to see a major peak in stocks in this 32-35 year cycle as opposed to a bottom. To say this bull market (from 2009) is long in the tooth would be an understatement and from a cycle perspective there are some reasons to believe that the market will see its secular bear market (from 2000) valuation low in 2017-2018.
Why 2017-2018 for a bear market low? Let me first be clear that historically speaking secular bear markets have had two lows. Their nominal (price) lows and then their valuation lows. See the chart below and follow along with me.
There have been 3 secular bear markets since 1920. The first two lasted 16 and 20 years. Current is to be determined. Prior secular bears would be 1929-1949, 1966-1982, and 2000-present. During those periods of time the market has difficulty making upside progress as it works out the excesses of the preceding secular bull market.
A secular bear market period is defined from the final market peak to the final valuation low (low P/E and high dividend yield) before the market goes on to make new highs.
1929-1949- The market absolutely cratered into 1932 and that represented the nominal (price) low of this secular bear. After this the market began to move higher but it didn’t put in the final valuation low and really begin to take off until 1949. The peak of 1929 wasn’t taken out for good (as in above it, never going back below it) until 1954.
Valuation lows occurred in 1938, 1942, and 1949.
1966-1982- After a huge run from 1932-1966 (34 years….) the market once again went nowhere for the next 16 years. The Dow peaked around 1000 in 1966 and didn’t take the 1000 level out for good until 1982. During this cycle the nominal low came in 1974 and the valuation low came in 1982.
2000-Present- Maybe I’m crazy but I just don’t buy into the fact that everything is rosy and that the entire secular bear was over in less than 13 years. I have a hard time believing that the S&P 500 is never going back below its 2000 and 2007 peaks of 1554 and 1576. Even if I assume that the nominal low came in 2002-2003 its hard for me to see 2009 or 2011 as the valuation low. At prior secular bear market valuation lows P/E’s were in the single digits and dividend yields were above 6%. We came nowhere close to that in 2009 or 2011. See the chart above.
Note that in the prior 2 secular bear markets the valuation low had a tendency to come ~8-10 years after the nominal low. Nominal low 1932, valuation low 1942 (10 years). The nominal low for the second secular bear came at the halfway mark in 1974 (1966-1982). Then the valuation low came 8 years later.
8-10 years from the 2009 low would be 2017-2019. 2017-2018 just so happens to be the first and second years of the Presidential Cycle (discussed in my previous post). So if the cycle is going to begin its reversion to the mean the next two first and second years aren’t likely to be as good as the last two.
Also note that if this bear market is similar to 1966-1982 and the nominal low came at the halfway point that would imply 2009 as the nominal low and would peg the final valuation low as 2018.
So on to examples of the 34 year cycle at work.
1896-1929- Major low to major peak (33 years)
1907-1942- Major low to major low (35 years)
1932-1966- Nominal bear low to secular bull market peak.
1942-1974- Major valuation low for 1929-1949 secular bear to nominal low of the next secular bear in 1974.
1949-1982- Final valuation low of the 1929-1942 secular bear to the valuation low and end of the 1966-1982 secular bear.
1966-2000- Secular bull market peak (1932-1966) to the next secular bull peak (1966-2000).
1974-2007/2008- Nominal low of secular bear market to major peak/crash.
1987- (2019-2022)- ???
Right now I’m of the belief that this current 34 year cycle is much more likely to be a peak as oppoed to a bottom. If the market had been going down for the past two years and valuations were more reasonable I would say the opposite.
Keep in mind that I am just trying to put the cycle into perspective. This doesn’t mean that the market falls apart tomrorrow. Its possible that the market could go up into 2016 and then fall into 2017-2018. This 34 year cycle is obviously no coincidence so keep in mind that from the major low in 1982 we are currently in the very important window of 2014-2017.
January 13, 2015
Very good question to ask here. Did 2014 borrow performance from 2015? From my point of view I believe the answer is yes.
When I first started my market studies in the late 1990’s I learned the basics of cycles and seasonality. The January Barometer, sell in May and go away come back after Labor Day, etc. When it comes to the Presidential Cycle on a historic basis the strongest years (in order) are the 3rd year, 4th year, 1st year, and then the worst is normally the 2nd year (see data below).
Many investors came into 2015 bullish because its the 3rd year of the Presidential Cycle. Let me be the first to say that relying upon the Presidential Cycle to be accurate has been horrible since 2006. Prior to that it actually worked pretty well. I’m not sure exactly why it hasn’t acted as it has in the past but if you look below you can see what I am talkikng about here. 2006 should have been a weak/down year. It was up double digits. The normally strong 3rd and 4th years that followed were horrible. Then we have the first two years of the next cycle (2009-2010). Both were solid up years. Then came the supposedly strong 3rd year in 2011 and it ended flat. 2012 ended up double digits which was in line with normal historical precendents. 2013 was another first year that historically should have been weak but was a barn burner. 2014 was a second year and it was supposed to be weak but ended the year up 11.4%
Since 2006 the script has actually flipped. Strongest to weakest have been the 1st year, 2nd year, 3rd year, and 4th year. 4th year would move into third if one considers 2008 to be an outlier. Completely backwards of the way it has traditionally worked dating back to 1960.
When looking at 2014 I want to clarify what I mean when I say it was “supposed to be” down”. This is based on the Presidential Cycle (2014 was a second year which is historically the worst performing and still is by far even after 3 straight performances of positive double digit returns) and the January Barometer. The January Barometer is known as “so goes January, so goes the year”. January was down last year. Yet the market finished up. A lot of this seasonality was why I anticipated a much larger correction in 2014 which would have set the market up for a stronger 2015/2016. On top of it 2014 was supposed to be a 4 year cycle low. However, by having these stronger than normal 2nd years it is my view that the lows that are supposed to occur in the 2nd year are instead coming in the 3rd or 4th years as seen in 1987, 2007/2008, and 2011.
Below is a graphic of the January Barometer and its accuracy. Since 1993 it has been correct 14/22 years for ~64%. Bolded were the times that it was wrong due to key trend changes. In 2001 the bear market was till in its early stages. 2003 marked the first secular bear market low. Then 2009 marked the next bear market low.
I have discussed this in the past but its time to bring it up again. Note that almost every 3rd year is up double digits. Look at the ones that weren’t. They were 1987, 2007, and 2011 (all bolded). What did every one of those have in common? Every single one of those instances saw a stronger than normal second year return which in turn pulled performance from the normally strong 3rd year. Since 2014 was much stronger than anticipated I think there is a very good chance that we may see a third consecutive 3rd year that is weaker than expected.
A while back I ran across this piece from Sy Harding discussing the presidential cycle and found his observations quite interesting.
His observation is that these weak 3rd/4th years normally come with second term presidents. This actually makes a lot of sense. Instead of going through a normal corrective phase in the 1st or 2nd year of the cycle, these presidents are trying to keep the economy strong all the way through. Once they get to the third year of their second term the bull market is generally long in the tooth. Therefore continuing to find ways to goose both the economy and stock market higher become much more difficult. I had never thought of it that way but it lines up with my own work and it makes a lot of sense.
Coming into this year my anticipation was that the market would be up into April. After that it would run into trouble over the summer. In particular from May-July. I have 9 month cycles hitting in April and July this year and on top of it “sell in May and go away” hasn’t worked since 2011. After being wrong/not working well 3 years in a row it seems to me that it is overdue to work here in 2015.
My view wasn’t just built on these seasonalities though. The market seemingly had every chance in the world to really fall apart last September/October and yet the S&P 500 only fell 9.8%. In large caps this only corrected the move from the June 2013 lows. In small caps they saw much more damage but still only corrected ~62% of the rally from the June 2013 lows and 38% of rally from the November 20123 lows. Following both the October and December bottoms there were breadth thrusts to the upside which indicated more upside to come. More importantly when all of the major indexes hit new highs going into the end of the year the cumulative advance/decline lines confirmed in every index aside from the Nasdaq Composite. From past experience the cumulative advance/decline line on the Nasdaq Composite hasn’t tended to work very well so I wasn’t too concerned. There was also a surge of new 52 week highs at the end of the year to confrirm the new highs. On top of it semiconductors and financials were leading the charge higher which is a key ingredient in a healthy bull market. Lastly, small cap stocks broke out of a year long range to the upside at the end of the year which makes 2014 simply look like a year of consolidation prior to the next leg higher.
The biggest risks coming into 2015 with regard to my view of a higher market into April and weakness over the summer (likely similar to 2011) were sentiment, valuation, the continued weakness in oil, and continued strength in U.S. Treasuries (particularly 10 and 30 year).
Sentiment got way too bullish in the second half of December as measured by multiple indicators (Investor’s Intelligence, AAII, NAAIM, and dumb money on http://www.sentimentrader.com which hit a new all-time high. According to one source the last two weeks of December saw the highest weekly inflows into index weighted mutual funds/ETF’s since the data has been tracked by Lipper.
With regard to valuation I would just be re-hashing things I have already gone over before. See my prior posts from September on the subject. My view was that the market could remain irrational for a long period of time. I still don’t believe we have seen the true greed phase of this bull market unless it was the first 3 months of 2014. Q1 2014 in biotech, marijuana, the cloud, etc. was somewhat reminiscent of 1999-2000. It would just seem that 3 months is too short to consider it the greed phase of the bull market.
The continued weakness in oil leads to margin calls, selling begets more selling, that portion (energy) of the indexes posting earnings aren’t that great, and then on top of it there is the argument over whether the weakness in price is over-supply or just weak demand. I think we are seeing a bit of both. Outside of the US I think the biggest problem is definitely weaker demand.
With regard to Treasuries I have to say I’m quite surprised at how strong they have been so far this year. This isn’t good for equities from two points of view. If money is flowing into Treasuries it is likely because of concerns regarding future economic growth. From another standpoint any money going into the Treasury market is capital that isn’t going into the equity market.
So in closing I do think that 2014 stole performance from what many were expecting to be a strong 3rd year for stocks in 2015. In some way I think this will turn out similar to 1986-1987, 2006-2007, or 2010-2011. My initial view was that the market would go up into April and then run into trouble over the summer as described above. So maybe up to ~2200 on the S&P 500 followed by a decline to 1700-1800 followed by a rally for the rest of the year that would somewhat make up for the summer losses.
Based on some observations to begin the year I’m getting a bit concerned about the way the market is acting right now. Very unusual activity for January but I will touch on this in another post.
December 18, 2014
You guys have no idea how many times I have said this in the past 6+ years. Starting with this post I am starting a tag of “I have never seen anything like this”.
My market experience began around 1998 and I always felt like I had a pretty good feel for the market up until about 2007-2008. That was when everything changed. Why did it change? I touched on this a bit in my last post but I would have to say that more than anything it is the intervention of Global Central Banks (specifically the US Federal Reserve) and algorithmic trading. Believe it or not the market used to actually trade on fundamentals and not just central bank policy.
Here are a few interesting charts that show just how different the markets of today are vs. the way they were prior to 2007. Note how much lower and infrequent the breadth volatility was prior to 2007. Back then one signal could last for 6+ months. Now a signal is good for maybe 1-3 months.
Chart Courtesy of http://www.sentimentrader.com
Here was another “I have never seen this before”. With this time there is good reason. The S&P 500 has now closed above its 5 month moving average for 29 straight months (and this chart is from November). In a few weeks it should be up to 30 months. In other words we haven’t seen a real market correction in over 2 years. When I say I have never seen this before it is because it has never happened in the history of the market dating back to 1900. The previous record for months above the 5 month moving average was 24 back in the mid-1950’s. See the chart below:
Chart Courtesy of http://www.sentimentrader.com
So what does all of this mean? Good question. Right now you will hear that the stock market is cheap but it isn’t. Its just that the Fed has basically made it to where there is no other alternative and it has been that way (rates at 0%) for going on 6 years now. I still remember getting ~5% on funds that were sitting in cash back in 2006-2007. Do you think the stock market would be where it is right now if short term rates were 5%? Absolutely not. I have no idea how long this lasts and after yesterday I frankly don’t think the Fed does either. I can guarantee that they were going to remove the “considerable time” language all together until oil crashed which then had ripple effects across the globe. The fact that they decided not to remove that language yesterday despite multiple sources leaking ahead of time that they would was no surprise to me. Market had just become too volatile for the Fed just to leave them on their own and remove the phrase. So they may raise rates around the middle of next year or it could be 2016, who knows? I will tell you right now that they haven’t a clue so if they don’t know, how are we supposed to know?
I will say this. The longer this market stays artificially elevated by low interest rates via the US Fed (as in 30+ months and counting with no real market correction) the uglier this is going to be when it finally ends. The 32-35 year cycle from 1982 is in the relevant zone here from 2014-2017. Since 2014 is almost over it would suggest that we are going to see either a very important market turning point (or possibly two) in the 2015-2017 range. Given that we are almost 6 years into this bull market and we really haven’t seen a correction in 30 months I have to say that the market is getting a lot closer to a top as opposed to a bottom.
Now that I have the “I have never seen this before” out of the way I will now move onto some actual market observations/thoughts in my next post.
December 18, 2014
Haven’t been posting because it was clear to me by the end of October that the market was heading higher. Everything else was just noise. That -80/+70 reading I mentioned in my last post was VERY compelling and seems to be playing out just as it indicated. In other words the market should be higher 3 months later. So around mid-late January the SPX should be higher than ~1940 which is where it was when the signal was given.
I have spent a lot of time focusing on individual ideas and I have some that I really like heading into 2014. These are stock specific ideas, not sector specific.
A lot has happened here in the month of December so time to play a little catch up on my blogging.
October 26, 2014
Well I woke up early this morning to do this update and it just so turns out that the data feed on http://www.stockcharts.com is down. I can access the home page and the historical charts but I can’t access any charts or indicators. Therefore all of the charts and indicators that I wanted to show are currently unavailable.
Given that I can’t show the charts you will get an abbreviated version of my observations. Or at least no pictures.
The huge rally off of the lows over the past few weeks is highly unusual. Heart attack patients don’t get up and run marathons. Yet, the stock market had a heart attack a few weeks ago which broke the uptrend from November 2012 and it has jumped right off the gurney and run a marathon. Very unusual. Looking back through history the only period of time I could find that was similar to this at all was August 2007. What I was looking for was a period in which the S&P 500 had been above its 200 day moving average, fallen decisively below it (by at least 3%), then put in a V-bottom and rallied big. This rally has now run for 8 sessions and the S&P 500 is up 7.9% from trough to peak (1821-1965). Back in August 2007 the index rallied from a low of 1371 to 1479 in just 7 trading sessions. Coincidentally that rally was also 7.9%. If this analog holds true the index should retrace ~50% of its gains next week before ultimately heading higher. Assuming that the index makes no further upside progress on Monday that would imply a move down to ~1890-1905 on the S&P 500. The bad news about the August 2007 analog is that the bull market peak came only 6-8 weeks later. Back then small and microcap stocks were lagging badly and breadth was quite narrow. We are seeing the same today so that is definitely something to keep an eye on.
Regarding the heart attack analogy I was honestly expecting some choppy action coming into this past week. The big resistance zones I had for the S&P 500 were 1900-1905 and 1925-1933. I thought the index would chop higher but run out of gas around one of those two resistance zones, then roll over for some kind of a retest of the lows. That would have been normal. Instead we got what thus far has been a V-bottom. To give an idea of how unusual these V-bottoms are the only ones I recall in the past 13 years or so were September 2001, March 2009, and August 2007. The first two came within the context of bear markets so they wouldn’t apply to the current scenario. The first led to a huge 3 month rally before rolling over again and the second one of course began the bull market we are currently in today. I described what happened in August 2007 above. After the pullback I described above (which should happen this week if the analog holds true) the S&P 500 basically formed an inverse head & shoulders bottom as there was a pause and bounce at the 200dma on the first test. This time it was straight down from 1970 right through the 200dma without hesitation to 1821. Then straight back up to 1965 with virtually no more than a 20 point pullback along the way. VERY unusual.
As I was looking over the charts this weekend I noticed that a lot of indexes are nearing key resistance levels. 50 day moving averages, 20 week moving averages, 62% retracements, key gaps, re-testing broken trendlines, etc. Given how much this market has run to the upside already and the August 2007 analogy I’m personally expecting some weakness next week. 1966-1978 or so is really big resistance for the S&P 500. In that range is the 20 week moving average, 50 day moving average, a gap down from 1969 (the gap down after the huge fake out rally on 10/8/14), and then 1978 which was a bottom in September and also capped the early-October rally.
Before everyone thinks I’m all doom and gloom here is another interesting observation. I watch the Participation Index on the S&P 500 for breadth thrusts in either direction. Usually readings of -80 or worse signal that a market bottom is due within days (in bull markets). Readings of +80 or better are usually initiation thrusts to the upside.
On Monday October 13th the Participation Index posted a reading of -81. Thus a low was expected within days. We got it on October 15th. What really shocked me was the reading the following Tuesday. +70. It was actually +69.4% but let’s just say it was close enough for me to realize that this was highly unusual to see such polar opposite readings in such a short period of time. In just 6 trading sessions it went from -81 to +70. So I went back through the history of the indicator to find other periods of similar readings in such a short period of time.
First of all this indicator only goes back to January 1999 so that only gives me 15.5 years to work with but it is still interesting. The only times there was a -80 reading followed by a +70 reading in less than 6 trading sessions were October and November/December 2011. October was 5 days, November was 4 days. Obviously those were major lows.
Other occurrences were July 2010 (9 days, major bottom), October 2009 (8 days, led to 3 month rally), March 2009 (13 days, major bottom), March 2007 (13 days, led to big rally over the next 3-4 months).
There were 2 instances that didn’t quite fit the bill because the reading on the downside fell just shy of -80. They were February 2010 (7 days, led to 3 month rally before flash crash) and June 2010 (6 days, it was a fake out and market made marginal new low).
So based on the observation of the Participation Index the odds would highly favor that the market will be higher than where it was at the time of the signal (1941) in 3 months time. Or, this was a major low.
So why was there only one -80/+70 reading within 15 a 15 day span from January 1999-January 2009? My best guesses are high frequency/algorithmic trading and/or increased Central Bank intervention in the markets. Take your pick. I just know that the markets of today are nothing like they were prior to 2008. I remember the days of February/March 2007 very well. Market had a very nasty day at the end of February and then in mid-March the index was seemingly off to the races again. At the time I thought that was highly unusual and now in hindsight, it was. But it isn’t anymore. As you can see above there have been a total of 6 of these extreme readings since January 1999 with 5 of them coming since January 2009 (not including the signal on Tuesday since we don’t know the outcome yet). Every single one of them has produced a major low or at least a 3 month rally.
So how do I summarize all of this? Conflicting signals. I just don’t see this V-bottom action holding. There will have to be some backing and filling. If the August 2007 analog holds up Monday and Tuesday would be down in sharp fashion. To maybe ~1900 on the S&P 500. Wednesday is the Fed Meeting. I’m guessing that they end QE but are quite clear that they don’t plan to raise interest rates any time soon. Is that a sell on the news scenario? We shall see. With so many indexes approaching key resistance levels after such a massive and unusual rally the odds would seem to heavily favor weakness in the coming week, possibly even longer. The market could seemingly move sideways between say 1900-1970 for the next 3 weeks just to work off the current overbought condition.
So the big question is whether this weakness is just backing and filling or the start of another big leg down? Its hard to say. What I will say is that with this big of a run in the market in such a short period of time we aren’t going to get something run of the mill like a double bottom (retest) of 1821. In my eyes that scenario went out the window once the S&P 500 got above 1925-1933. If the S&P 500 gets down to ~1900 and puts in hard reversal to the upside the odds would seemingly favor a bullish outcome which is what the Participation Index reading is telling me. If it falls much below 1900 it would seemingly be increasing the odds of a bearish outcome. Recall that there was a huge sucker rally in June/July 2011 that turned over and got ugly in a hurry once August rolled around. The big differences I see between now vs. August 2007 and June/July 2011 were that the declines had started months before (as opposed to this decline which just started about a month ago) and the 50 day moving averages were sloping down at a pretty nice clip. Unlike now where the 50 day moving average is sloping down but after the recent rally it is beginning to flatten out. I would also point out that we are now in what is seasonally a bullish time period vs. those other two periods which came over the summer months which are typically weak.
So I am watching 1966-1978 as resistance on the S&P 500 going into next week. I’m thinking this range should cap this initial rally. A retracement down to 1900 or so would be quite normal. Get much below that and it would start raising red flags. Also watching the weakness in small caps. If they can’t begin to get something going it may be setting up a situation similar to August 2007 where the big caps make new highs but the small caps lag which puts in an important top. If the markets were to stay weak (as in make new lows below 1821 on the S&P 500) into December or January the risk of a bear market would seemingly increase quite a bit.
October 24, 2014
Organizing my thoughts for an update. October has no doubt been a wild ride and I doubt the volatility is over yet.
October 16, 2014
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
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
October 16, 2014
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.