Selling Exhaustion Signs

The first day of decent selling…. but exhaustion signals appear.

Yesterday was the highest downside volume day since March 2012. It ended the longest streak of no >2% up or down day on the SP500 since May 2012. It was the 8th largest daily percentage move in the Vix of all time, at >30%.

Equity put/call hit an extreme in fear. Here is the indicator’s history:

30junn5

Source: Stockcharts

Now here is a zoom on those previous instances of prints >0.90:

30junn2 30junn3 30junn4

Typically they marked lows or were a precursor to a low within a few sessions.

Next is bullish percent as a ratio to total put/call. I’ve previously highlighted the divergence in this indicator with the market since January 2014. However, because it has been in decline, yesterday’s selling took it to the kind of deep level associated with previous bottoms.

30junn13I also previously highlighted the divergent breadth in stocks above the 50MA. Again, because it has been in decline, yesterday’s selling has now put it in a zone that could spell a bottom, particularly if we combine it with the reading on Tick. The most similar such pairing from recent times would have been last August’s low.

30junn9

The picture from stocks above the 200MA isn’t dissimilar.

30junn15Source: Charlie Bilello

Lastly, here is Vix to Vxv. It too has spiked to the kind of level associated with previous lows, with the exception of the 2011 falls.

30junn12Here is a zoom on recent incidences of this indicator spiking over 1:

30junn40

We can see that a bottom occurred within several sessions of Vix:Vxv coming off its spike high.

Drawing all these indicators together, odds are that we see a rally from a low within a few sessions. Thursday’s full moon would fit with this too. As per my note yesterday I entered short RUT and IBB early and took a chance. They and the Dow positions are all in profit but in light of the above indicator readings I will be looking to cut back again later this week, anticipating a lower low from here within the next several of days but then a rally back up in July, perhaps to the mid-July new moon.

 

 

 

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58 thoughts on “Selling Exhaustion Signs

  1. John, you highlight a handful of instances where put/call readings >0.90 were precursors to lows. However, there have been 139 such instances going back to January 1997. Some 61% of these gave way to gains within a week and 69% to gains within 20 days. The average gain within a week was just 0.53% and 1.3% within 20 days. What is obvious to the chartist’s naked eye often fails to live up to statistical scrutiny.

  2. Thanks very much John for keeping us aware of the possibilities of a bottom. Certainly the weekend and yesterday’s move looked like too much too soon.

    However when fear sets in all indicators take a back seat, so I certainly wouldn’t want to ‘trade’ this bounce. However I’d be happy to add more to the down side if it occurs.

  3. The most important thing is whether or not it is a bull or a bear market. Follow buy signals in a bull and ignore sell signals. Short sell signals and ignore buy signals in a bear market. A good example is the gold bull mkt from 1998 to 2011, and the bear market since 2011. Every oversold, touching of 200 day moving average, triangle formation worked beautifully until the top triangle on the 200 day ma broke down on an oversold situation. I read a lot of the goldbug commentaries. They have pointed out multiple buy signals for the last 4 years, they have not worked except for maybe day traders. If yesterday was not a break down, we are still wrong about thinking a bear mkt should have begun. I also like that the mkt is up preopening. I still remember the 1973-4 bear market. Everyday seemed to open up (have we finally hit the low), only to fade away before the close.

    1. Kent, I guess it depends how you define “in a bull market.”

      Looking at episodes where put/call has been above 0.9 and where the S&P was above its 200-day average – of which there were 39 since 1997 – gives a slightly better average subsequent weekly gain of 0.6% but still only a gain 62% of the time.

      Over 20 days, the return rises to 2.1% and with a “hit rate” of 77%. So, yes, being in a “bull market” does produce some improvement in this strategy, although I’m still not sure I’d risk real money on it.

  4. Kent

    Thanks for this, I guess it as always depends on timeframes. Over the past few weeks most of the exchanges DAX and SPX etc are in a downtrend now within the larger bull trend which is intact imho. In terms of trading it, I generally have to be patient now because I will follow the latest established trend with light positions – i.e. I will wait for retests to the upside and if they look like they will fail I add there on the short side. I can’t go long on this situation unless there is a breakout to the upside. And vice versa ofc. These are my rules though, not for everyone ofc.

    J

  5. Hi all ! Hi Valley ! I maintain this is still a bull market. The ECB said yesterday they are ready to increase QE if needed, the chinese central banks cut rates and is willing to support the stock market. In addition, this morning we have a big deal between Celgene and Juno which should drive IBB higher.
    So, I’m not worried at all. I’m looking forward to new all time highs shortly.
    regards.

    1. Tick tock Nick. Buy those dips.
      I am waiting for a (perhaps final) mini plunge in gold, within weeks, to buy some more physical gold.
      I haven’t done fib level studies yet, but expecting somewhere around $1,050.
      Still holding gilts, expecting sub 1% on 10 year yields over the bear market cycle.

      1. I have reduced my gold, which usually means it will rally, and yet it doesn’t rally. I don’t know what it means. I am sure many know this, but it is frustrating that it is down on Greece good news and down on Greece bad news.

        1. In the short term gold will probably dip on liquidity crunches (i.e. it will be an easy asset to sell to raise cash to cover other losses).
          That will settle down as more buyers step in.
          Then a new bull should commence as risk off takes hold.

    2. Given my correction below, yes it is entirely possible IBB makes ATH while the rest of the market lags, but I won’t think it is a good bet right now. Once IBB tops, it will lag the market for many years.

    3. The recent correction in IBB and BTK were nice ABC 4’s. Now they have a nice 5 waves up. That shoild be it, unless you are right about an ongoing bull market. I agree with John that it is the bubble within the big bubble. In the fullness of time.

  6. I am writing to correct my previous comments on 1973 Nifty vs the stock market.

    http://www.aaii.com/journal/article/valuing-growth-stocks-revisiting-the-nifty-fifty

    Figure 1 which I had referred to seems to be badly created. The data started from 12/1970, so it seems that I read everything off by one year.

    This means that Nifty peaked mid-1973, after Dow peaked 1/1973. I had previously said mid-1972.

    It also means Nifty bottomed mid-1977, which is after the solar minimum, even though the Dow has bottomed late-1974.

    1. I am so old I remember the Nifty Fifty, and Chemical Fund a mutual fund invested in them. The nifty fifty peaked with the market in Dec,1968/Jan, 1969. They were smashed by the 40% down bear market into Mar 1970. They fully recovered into the bull market top Dec,1972/Jan,1973. Then, they really got smashed into the Oct/Dec 1974 bear mkt bottomed. Their out performance was over for years even though they continued producing increased earnings. Due to the very high inflation of the 1970’s, the real top was in the Dec 68/Jan 69 top. The chart of these stocks looked very much like the 2000 top (1968) 2003 bottom (1970), 2008 top (1973), and 2009 bottom (1974). They did not recover to new highs nearly so quickly as the market has since 2009.

      1. Thank you for this. It is very hard to find good data from 1970s, and yet I see the similarity between IBB and Nifty today.

  7. Bond bear market. Look at a 5 year chart of 30, 10, and 5 year treasuries as well as rates. Massive double bottom since the July, 2012 low for rates, high for bonds. The 30 year made a blow out type top this year as the others double bottomed. The topping/bottoming process is almost 3 years old, the same time frame as the bottoming/topping process in 1980/82. Even in the 1980 to 2012 bond bull market saw a significant rise in rates for at least a year after the blowout. Yesterday’s drop in rates (rally in bonds)was well contained within the uptrend from a golden cross breakout. Short term rates are up sharply today and eurodollars (not € euros) appear to be breaking down which means higher rates in Europe. I think this will be bearish for stocks and commodities, but bullish for the $. Are we finally at the tipping point?

    1. yep ftse is doing really bad. So much for those prediction of 7500 for this year! Was overly optimistic. will be impressed if the ftse reaches ATH’s again this year. I still remain bullish on the dax though.

  8. Nicolas:
    “Hi all ! Hi Valley ! I maintain this is still a bull market. The ECB said yesterday they are ready to increase QE if needed, the chinese central banks cut rates and is willing to support the stock market. In addition, this morning we have a big deal between Celgene and Juno which should drive IBB higher.
    So, I’m not worried at all. I’m looking forward to new all time highs shortly.
    regards.”
    ————————————————————————
    Hi Nicolas

    I tried a few times over the past year to explain why this is a useless post, but I am going to do it again since you persist in posting here…

    Your reasons for being bullish are your own, so if you think a few paltry tens of billions of euros per month can prop up the markets on their own, that is your choice.

    However, my point is this. If your post is to have any relevance or meaning whatsoever you need to be a bit more transparent. Of course there are people here who admire your “track record” (in these very vague terms) – which I simply do not understand but that is a point to take up with them – not with you. In this case, so what you are saying is that you have today added to AAPL, IBB and QQQ so that I can make a note of your new additional positions in order to see your progress with these reckless (but bizarrely vague) calls. All I know right now is that you are about 3.5% down on AMZN, and that for the last long period your positions have gone nowhere. Of course you do not have the balls to give stop levels or any targets so the rest is just hot air.

    I will take it that you added positions at 125.45, 364.50 and 107.05 respectively with no stops, and then we can revisit this from time to time for congratulations or discussions etc.

    That way, we just keep you a bit honest – even though you know that I know what you are…:)

    Good luck all

    J

  9. Hi Jeggersmart ! Well, I started buying AAPL, IBB, GILD, QQQ in 2013. I’ve been recommending them for a long time on this board, you can do a research if you wish. I can tell you I obviously did very well with these positions. I see no need to provide exact figures on my net worth or portfolio.
    However, you’re right that I am down slightly on my AMZN purchase. On the other hand, a while back I recommended IBB to a poster at 338. This position is already up 10% as of today (even though I was mocked at the time).
    I think my track record on this board speaks for itself.

    1. Nicolas

      Please don’t start with the “deliberately misunderstanding and hoping no one will notice” posts. At no point have I asked or insinuated that I am interested in your net worth or size of positions. You know this, I know this and so does everyone else here. You and I at least know which game you are playing. Hopefully others will see as well before too long. I give it 6-12 months max before it becomes obvious.

      😀
      J

    2. Nicolas, your recommendations have been profitable. You are now recommending to remain long QQQ, IBB. They are very pricey. I would only trade them not own them as an investment because “buy low and sell high” is best and they are very high at moment not to mention they have taken on lots of debt to buy back their shares, which has to be repaid out of future earnings.

  10. Biggest development not being discussed anywhere is that the Yuan broke out today. Currency pegs cannot be maintained. Yuan is no different. Probably will be major repurcussions perhaps surpassing the greek and puerto rico situations.

        1. Thanks, I will read those later.
          The chart is the Dow?
          Last time I looked at the yuan, it was floating, the peg went years ago.
          I’m sure the Chinese will abandon the trading bands if need be.

  11. that’s pretty funny

    the stock charts link i posted was to a 5 year chart of CNY – the yuan etf

    now it shows the dow

  12. The weakness in Gold is telling.

    Look for “The Top” in stocks to be in 2025/2026 with the next SC high combined with the 19 year cycle high just like in 1929. This SC only effected Crude and no other markets. Now is a Bull market in stocks to the new SC high due, on average, 11 years from SC 24’s top in 2014 which means 2025.

      1. I agree with that, but we are going to get there in five cycle waves. Still waiting for the first cycle to end next year, then we’ll see a nice cycle 2 pullback. there will be plenty of great intermediate term short opportunities. perhaps we’ve entered one in primary wave [4] of cycle wave 1.

  13. HI Richard

    How are you trading/investing this? Just pumping in all you can until 2024 and then selling? Buy and hold? Or is is about predictions and being right? By the number of predictions I see on here, someone must be right at some stage:D

    Be careful out there.

    J

    1. Took profit and went short just days before current ATH. Now, taking profits and going long. I was looking for a stock crash but now I am not until 2025/2026. The Great Depression was a stock crash of the SC and 19 year cycle together and that has not happened ever since but now looks to happen again in 2025/2026.

      I have concluded that the effect of SCs is more “narrowly construed” (an American legal term) than is currently recognized. As I posted several days ago I believe that Silver was what the SC took up in 1980 and not Gold. In 2000 I now believe that the NASDAQ is what the SC took up and not the DOW or S+P 500. I now think that Gold and Platinum went along for the ride in 1980 and that the DOW and S+P 500 did the same in 2000. I now think that SC 24 took Crude up even though not to a new all time high. I think that the crash side of any SC is as or more important than the rally side. This means that Crude was the object of SC 24 and not stocks.

      1. Hi Richard

        Thanks for the hindsight “trading”, which as you know is worthless. What I am struggling to understand is that you apparently shorted for a 60-70 point SPX play, and now going long when you are looking at a 10 year horizon. Doesn’t sound plausible to me, so next time let us know at the time?

        Cheers
        J

  14. I meant to give a shout out to Gary who identified a ‘Gartley’ wave count….. 2 JH posts away. Boy did ‘THAT’ work out great.

    Congrats.

  15. Lunar Chord and US equities swing trade:

    Distance: bullish perigee next week
    Declination: bullish South to North migration starts today
    Phase: bullish begins next monday into new moon
    Seasonals: bullish Holiday trade in US
    Planetary: Venus falling into the sun (inf conj 8/15)

    Shorts rule until Greece vote this weekend. Lunar chord is uber bullish next week subject to Venus falling into the sun which has the natives restless.

  16. Here is a new and profound thought: In both SC 23 and SC 24 the DOW and S+P 500 were not the object of those SCs but in each case they only went along for the ride. The object of SC 23 was the NASDAQ and the object of SC 24 was Crude; however, the object of SC 25 will be more broadly construed stocks like the DOW and S+P 500 just like in 1929.

    I have reached the opinion that SCs are not understood enough and are to broadly viewed in effect. I think that 1929 was an exception to the rule of SCs being narrow in their effect and that exception will occur again in 2025/2026 with the aid of the 19 year cycle making the SC effect broadly on stocks just like in 1929.

    These are new Principles of the Effect of Solar Cycles that needs to be looked into in greater detail.

    1. In all SCs the effect is always narrow and only one market is effected. For the effect of a SC to be broad there must be something else to magnify the “narrow effect of SCs” to a “broad effect”. In 1929 it was the 19 year cycle and in 2025 it looks to be the same 19 year cycle that will cause the “narrow effect” of SC 25 to be broad.

      I now hold that a broad effect of SC 24 upon stocks was not that great of an effect as is believed by most on this board. The “effect” includes both up and down. There wasn’t that much effect up on stocks so there isn’t that much effect down either. I expect SC 25’s “effect” on stocks to be great both up and down just like in 1929.

      It is the believe that SCs produce a “broad effect” on markets that is the biggest problem to over come for most on this board.

    2. Certainly a new thought Richard (and you’ve had so many in recent months). Anyone that calls their own idea profound results in my eyes rolling I’m afraid.

  17. Mr. Bubble (Nicolas), may be entirely correct in his long term assessment of CB intention to create the asset mania later in this decade. Shemitah cycle of 7 years bottom to bottom was 2002, 2008, next bottom due in 5 or 6 months. Then CB will step in and inflate, avarice will take over, and all assets may catch a bid ($5000 gold, GDX a ten bagger). So, short term his prognostications may be lacking, but IF the market plays out in a mania, he will have been correct.

    1. The central banks have already inflated valley, haven’t you noticed?
      Currently the bubble is in stocks and bonds.
      Soon, it will spread, as those bubbles burst and the money has to go somewhere.

    2. The QEs make it look like that SC 24 had a “broad effect” upon stocks when in fact SC 24 only acted on Crude. Take away the effect of the QEs and stocks would not have rallied and only Crude would have rallied and fell so that it would be much easier to see that SC 24 had only effected Crude.

      Ironically, “QEs are the gift that keep on giving” is going to be an additional reason for SC 25 to effect stocks, in a serious bubble, and broadly, for all stocks, along with the 19 year cycle.

      It might be better to think that stocks are not topping out but that something is keeping them from taking off and when that something’s effect is gone stocks will be on their way to the Moon. Cycles don’t always effect things in their direction but sometimes only keep things from moving with the Cycle by moving sideways. Something powerful may be acting on stocks keeping them sideways when they actually want to rally. When that “thing’s” downward pressure abates then stocks will likely rally over all again.

      1. Yep, if stocks are being held back right now, it is the lack of further (enough) money entering the market. That is the only thing we know for sure. You sound like you think “stocks” are like living things or organisms that “want to rally”….as if they have a mind of their own. I am not saying you are wrong though in that stocks may rally (and hard), but that we simply do not know. You just have to accept that, instead of spending so much time coming up with new ways to interpret the same data that was wrong last time, and 127 times before that. Of course, every so often every system will be right, just don’t worship it as a result.

        I think unfortunately I need to add another hindsight trading person to the ignore bin – at least for now, and on this type of subject which admittedly don’t know much about, but from your post can see that we have some things in common apparently…..

        All the best

        J

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