Wednesday Morning Update

Further rally in equities on Tuesday, here’s how things stand today:

1. Volume on the rally still weak:

12fe52. Trend in cyclical sectors still downward:

12fe43. Trend in breadth still downward:

12fe64. Skew still elevated:

12fe35. Put/Call ratio still in complacency zone:

12fe16. Investors Intelligence % Bears spending a 16th week in the historic low extreme zone of sub 20:

12fe27. Further breakout in gold and gold miners:

12fe8

8. Topping process analogs still valid, and likewise if we substitute in the current SP500:

12fe10

In summary, looking under the hood, this rally still has the characteristics of a bull trap, as befitting the second chance. If so, a 5-day almost vertical rally, with superficial echoes of 2013, is the perfect bait to lure in as many as possible before the market tumbles in earnest.  Yes it feels bullish again, but stepping back I remind you that things indeed changed since 2013, that we have a fairly comprehensive cyclical bull topping checklist, that we have a set up for a stock market crash, and that there was a multi-angled case for a turn-of-the-year major market peak that remains in play. I have added to short stock index positions again this morning and I am out the rest of the day.

 

 

 

 

 

 

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24 thoughts on “Wednesday Morning Update

  1. Hi john,

    As you tell that SPX uptrends with weak volume, Could you possibly tell me what level of SPX which you change your mind to be bullish?

    Thanks

  2. John, I truly appreciate what you have created here. Regarding the current analysis, your arguments are compelling and I do believe a breakdown from here will look so obvious in hindsight. Indeed, that is my internal bias. That said, the chart below has done a remarkable job of keeping me from prematurely shorting an uptrending market. Weekly AD making new highs and daily very close. My choice for downside bets are puts or spreads with defined risk rather than outright shorts at this time.

    http://stockcharts.com/freecharts/gallery.html?$NYAD

  3. John, I have been reading your comments for few weeks now, and I must say I am truly impressed with quality and depth of your analysis.

    I want to clarify something John. You wrote “perfect bait to lure in as many as possible before the market tumbles in earnest”-doesn’t the influx of the those newcomers increase the demand and thus drive the market up?

    1. Up to a point, Kasi. I think what John is suggesting is that the “dumb” money is lured in, while the “smart” money (the big boys) pull the rug from under their feet and the market tanks.

      1. Thanks. Yes more specifically the dumb money, plus some idea of ‘all in’: when there is no-one left to buy the market will fall, and we can get some measure of this through sentiment surveys, margin debt, fund allocations etc. Pre the Jan falls, these were all at historic extremes, and if the declines dampened them, the rally back up will likely have emboldened the return to nearer to ‘all in’, enabling subsequent bigger falls. In the bigger picture we don’t have the demographic tailwind to significantly increase the pool of buyers, and the leverage measures reveal the existing pool to be fairly maxed out.

    1. There was no specific trigger. It was a combination of extremes in valuation, sentiment and leverage together with a parabolic blow-off topping process, built along the flat-top of a solar maximum which inspires such a speculative excess. Waterfall declines can occur under forced liquidations, which come from excess leverage. A glance at margin debt reveals that is what we have now.

  4. Thanks for all your work John. The miners reversed hard today from a 7 week run and overbought conditions. I do not expect the 200DMA to hold in the GDX or GDXJ. Per your indicators, the markets seem ripe for a rush into bonds and an “ALL” stocks correction, perhaps even with gold up. But that being said, gold may have trouble breaking 1300. I encountered difficulty selling some of my smaller caps todays…just not that many buyers. It “knows”. I feel you are correct …the market has changed this year. It’s just that the retail investor doesn’t know it yet. I’m mostly in cash now with a few shorts ($RUT,TZA) just waiting.

  5. John, would like your thoughts on China…The $SSEC topped in July 2009 and has been down ever since, even though they have had a boom in RE, construction, etc. Even the FXI has basically been sideways during this time. However, when you look at some of the China IPOs in the US over the last 1-1/years they have gone crazy!! Is this a case of investors just looking for something to buy? Do you think it could be China’s turn to enter a bull market? Just following the money has to go somewhere theme…

  6. John great site. Love your approach. Just a few of things from myself.
    Bearish candle on the FTSE:

    http://stockcharts.com/h-sc/ui?s=$FTSE&p=D&b=5&g=0&id=p59294573483

    A gap down on the DAX today would mean an island reversal:

    http://stockcharts.com/h-sc/ui?s=$DAX&p=D&b=5&g=0&id=p87871900523

    Trannies failing to provide signifcant follow through and in fact traced out a bearish flag on diminishing volume:

    http://stockcharts.com/h-sc/ui?s=$TRAN&p=D&b=5&g=0&id=p74374866795

    Cheers

  7. Re China, maybe a short term rally, not sure. But the credit issues, the structural imbalances, the demographics – no way I would be long China. Repo rate still elevated – more trouble likely ahead.

    1. If that’s shorting the energy sector, then my concern would be the evidence is currently suggesting commodities are starting to make their run up as late cyclicals, which could put some support under commodity-related shares compared to other sectors

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