Well, I have held a short position against the SPY for weeks and weeks now. It flashed profitable once or twice but has mostly sat there at a loss. It is a straight out short with no leverage, so it has been easy to hold. Today it’s actually pushing its way nicely into the green.
After discussing the potential that the Dow and S&P 500 bounces were just breakdown tests in a mid-day update on Friday, I decided to leverage up and buy the 3x inverse fund SPXS. I am now taking profit on that because the market has taught me that gains from the short side, especially when using leverage and they come on hype-filled events, should be respected, cherished and taken! I’ll continue to hold SPY short, however.
Here is the ugly SPY chart at a point that could be considered minor support. But we have better support for the S&P 500, which would still not threaten the bull, significantly lower. This chart says SPY 200 is doable if the current level is lost. But again, I don’t really trust this Greece hype as a bear motivator.
And it’s all Greek to the financial media as well. MarketWatch‘s lead:
US stocks were in need of a correction of some sort and on Friday at mid-day we had an NFTRH update showing the degrading state of US stocks (including the Dow rising hard to test a breakdown while leadership indexes signaled short-term bearish). The Greek Debt Theater is a good accelerant, but that is all it is.
I’ll just ask you to remember that these inflammatory news events never but never have lasting impact. They may be a trigger event, but they are not the reason for anything other than temporary emotional turmoil. The media love that stuff because the media have to print something eye catching every day.
The US market is not bearish at this time*, but it was in need of getting bonked. Well, bonk – either mini or maxi – in progress.
* Subject to change, as is everything in the macro markets.
I am not here to promote the merits of Biotech or to claim it is or is not in a bubble. I am just a dumb macro fundamentals and technical guy. As such, I know that the macro has burped up all kinds of cheap, easy money that has flowed into speculative areas like the Biotech sector. There are solid entities in this space, like Gilead for one (ref. April 21 NFTRH+ highlight), which are real companies transforming real qualities of lives, and then there are a lot of hopes, dreams and promotions.
There is also a secular bull market in Biotech vs. the balance of the Tech sector. However, the post-2011 up cycle has now reached levels of leadership (and distance from the EMA 30) that have capped previous expressions of greed and momentum.
But it is not so clear as to just say ‘Bio’s are due for a correction’. Bloomberg is noting that the bears are gathering against the sector (IBB iShares), but the stock market has other leaders with higher measured targets and one of our ongoing scenarios is for a classic manic stock market blow off.
Look, I have been thinking a market correction could start by now and this correction has not yet come about. Most recently, market sentiment took a real lurch toward over bearish and as usual, that proved supportive. Now Bloomberg is highlighting the bubble in Biotech and the sharks are circling.
What’s a poor schlep to do? Keep an open mind and respect the charts. The monthly above shows that Biotech leadership is at a point that has triggered reversals, historically. The daily chart shows the iShares (IBB) above initial support and filling a little gap. Better support exists down to 360 or so. MACD and RSI are each constructive.
Below are charts of some US market leaders; some simply because of their price and momentum and others for those things and also fundamental reasons (like for example, the Banks w/ respect to interest rates and the Semi’s w/ respect to a booming ‘bookings’ situation’ in the Equipment segment).
A long-standing target for RUT is 1350-1375. That goes back about 2 years using monthly charts. Now the daily is pretty much in agreement as the pattern measures 1340 (assuming the breakout holds).
Unlike the RUT, BKX is nowhere near blue sky. But it has recently worked its way into a leadership role.
This is odd, but not illogical, given the dynamics in play for the gold and silver CoT data and a possible counter-trend setup we have been watching for in the ‘inflation trade’.
Here is the CoT chart for silver that was used in NFTRH 348. Not so bad is it? The extreme was set at the first set of arrows, but Silver CoT has improved greatly over the last couple of weeks.
Silver would likely lead gold if a bounce in commodities and certain global markets were to take place. Meanwhile, the actual bullish stuff is elsewhere as the US stock market has re-found its momentum leaders and Europe declines to the upper end of its buy range.
(This post is an excerpt from a recent TSI commentary.)
The stock market is not a machine that assigns prices based on a calm and objective assessment of value. In fact, when it comes to value the stock market is totally clueless.
This reality is contrary to the way that many analysts portray the market. They talk about the stock market as if it were an all-seeing, all-knowing oracle, but if that were true then dramatic price adjustments would never occur. That such price adjustments occur quite often reflects the reality that the stock market is a manic-depressive mob that spends a lot of its time being either far too optimistic or far too pessimistic.
The stock market can aptly be viewed as an emotion pendulum — the further it swings in one direction the closer it comes to swinging back in the other direction. Unfortunately, there are no rigid benchmarks and we can never be sure in real time that the pendulum has swung as far in one direction as it is going to go. There’s always the possibility that it will swing a bit further.
Also, the swings in the pendulum are greatly amplified by the actions of the central bank. Due to the central bank’s manipulation of the money supply and interest rates, valuations are able to go much higher during the up-swings than would otherwise be possible. Since the size of the bust is usually proportional to the size of the preceding boom, this sets the stage for larger down-swings than would otherwise be possible.
The following monthly chart of the Dow/Gold ratio (from Sharelynx.com) clearly shows the increasing magnitude of the swings since the 1913 birth of the US Federal Reserve.
In the previous post Tom McClellan highlights Peter Eliades’ work on the cyclical top due in the S&P 500 this year. To add some color to it, here is the chart I produced for NFTRH subscribers several weeks ago after purchasing and reading an Eliades report myself. His work came to my attention by way of Robert Prechter.
Bear in mind that this big picture cycle is a blunt tool, much like market sentiment or other indicators that show risk, but for extended periods, little risk discovery. So as McClellan mentions, it takes much finer detail management to gauge a topping process. That is what makes market management interesting and sometimes even fun; adding details and color to big picture theses.
We should not look at one chart and its message without cross referencing other charts, data and indicators. The best risk vs. reward scenarios come about when multiple data points come to similar conclusions.
Anyway, staying on the big picture, here is another monthly chart of the S&P 500 we have been using in NFTRH that shows yes indeed, a top (of some kind) is indicated by the monthly MACD signal, but…
…that each of the last two major tops included a bearish MACD signal that preceded a drop to the monthly EMA 20, which turned out to be a pause to refresh prior to ultimate bull market highs in both cases.
Will it be different this time? Very possibly, but also very possibly not. The stock market cycle indicates that it will be different because the S&P is supposedly due for a major top. But the color and detail can only be painted in by doing the shorter-term work each week. Especially since this cycle has had a certain ‘rule breaker’ aspect to it, due in my opinion to historically aggressive policy maker inputs (and resulting distortions) from its birth in Q4 2008/Q1 2009 to today.
In a recent article featured in our twice monthly McClellan Market Report newsletter, we featured the chart shown this week. It was inspired by some work done recently by famed technical analyst Peter Eliades, who has been a newsletter writer for many years and is the proprietor of www.stockmarketcycles.com.