Well, that was quite the reversal. My highest profit of the day was pretty much the millisecond that the market opened. It was all downhill from there. A glance at XLB, the Materials ETF, shows that the market is having just a bit of trouble making its mind up.
The bulls had two big things in their favor. First, on the whole, the lows of 2/9 didn’t get taken out, and second, the market had come down very far, very fast, recently, leading to an oversold state. We aren’t necessarily out of this oversold state yet, since the price gap is still a fair bit north of present price levels.
A December 2016 post highlighted similarities between late 2016/early 2017 and the 1994-1995 period. The analogy proved useful in 2017 with stocks posting a rare low-volatility year that featured a strong bullish trend, which compared very favorably with the strong-gains/low-volatility year of 1995.
EASIER MARKETS AND HARDER MARKETS
Since we know easier markets are typically followed by harder markets, it is not particularly surprising 1996 was not as easy as 1995. Nor is it particularly surprising 2018 has been harder than 2017. Price action in 1996 featured several bullet points investors in 2018 should easily identify with:
1996 started with a gain of 10.58%
Stocks then dropped 11.04% and went into negative territory YTD
The S&P 500 dropped below an upward-sloping 200-day moving average.
The shift from bullish to bearish since January 26th has been delightfully insidious. [Monday’s] market action created some more progress for the bears, although the breaks of February 9th lows were not across the board. Indeed, looking at some of the big indexes, you can see that we’re getting to the point of “challenging” those important lows, but not yet piercing them:
The Quantifiable Edges Capitulative Breadth Indicator (CBI) is a tool I have spoken about quite a bit lately, since we have seen a few recent spikes in the CBI. In the Quantifiable Edges CBI Research Paper I published last month (download information here) I examined the CBI a multitude of ways. Below is an excerpt from a section of the paper where I looked at 50-day lows and different CBI levels.
By combining CBI readings with a market that is hitting new lows, the results are often even more interesting. Let’s consider some studies that examine how the market has performed after hitting new lows, and break down those returns by CBI readings. The first one looks at performance following 50-day low closes when the CBI is 0.
For the last five years the S&P 500 has been dancing up its ascending 200-day moving average (200-DMA), bouncing higher repeatedly whenever the dip-buyers did their thing. Only twice did the index actually break below this seeming Maginot Line: In August 2015, after the China stock crash, and in February 2016, when the shale patch/energy sector hit the wall.
As is evident below, since the frenzied peak of 2873 on January 26, the index has fallen hard twice—on February 8 (2581) and March 23 (2588). Self-evidently, both times the momo traders and robo-machines came roaring back with a stick-save which was smack upon the 200-DMA.
But here’s the thing. The blue line below ain’t no Maginot Line; it’s just the place where the Pavlovian dogs of Bubble Finance have “marked” the charts. And something is starting to smell.
Earlier this month, the technical analysis community mourned the passing of Richard Arms, the creator of the eponymous Arms Index. You can read an obituary by Jonathan Arter here. I met him a few years ago and had corresponded with him, and I can tell you that he was not only a brilliant chartist, he was also a really nice guy. He was happy to share his insights with others.
The Arms Index is sometimes referred to as “TRIN”, short for TRading INdex. TRIN was the old Reuters screen code, and it is the symbol many quote systems use to this day. But professional technical analysts like to give credit where it is due, and so we call it the Arms Index.
The Quantifiable Edges Capitulative Breadth Indicator (CBI) has been in play lately, but todays Holy Thursday rally is taking it down from 7 yesterday to likely 0 at the close this afternoon.
After alerting followers of the move to zero, I received a few questions asking about SPX performance following such drops in the CBI. I looked at it a number of ways. Results are pretty much what I expected, but some of you might find them disappointing. Below is an example of one test I ran looking for an edge.
I don’t find the numbers here to be compelling for either the bulls or the bears. This is not terribly surprising, since 0 is considered “neutral”. This does not mean that there is no edge to be found in the market at the moment. It does mean that traders will need to use tools other than the CBI to identify an edge. Capitulative selling that was evident a few days ago has been exhausted. We’ll need to wait a while until the CBI comes back into focus. In the meantime, I’m sure we will find hints elsewhere.
The Bureau of Economic Analysis (BEA) revised upward fourth quarter 2017 Real GDP. The second estimate had been revised lower to 2.50458% (continuously compounded annual rate of change) from the advanced estimate. The third and final calculation raises the quarterly increase to 2.84707%. None of the changes are substantial.
Accompanying these revisions are the BEA’s first assessments for Corporate Profits and Net Cash Flow during the quarter. The latter being one of the more descriptive and illuminating of data points over the past decade, Corporate Net Cash Flow plummeted 36% in Q4. From $2.2 trillion (SAAR) in Q3, the current estimate of $1.4 trillion indicated a radical departure.
The March data for the State Street Investor Confidence was released this week and showed some very interesting patterns across institutional investors. The global index was up +4.7pts to 111.9 (contrasts to a reading of 95.7 back in December 2017), Across the regions, the North America index was up the most +5.8pts to 109.8, followed by Europe up 1.6pts to 102.1 and Asia up +1.3pts to 109.6. At a high level, basically what it appears to show is global institutional investors are “buying the dip”, or at least actively rebalancing into equities.
“It measures investor confidence or risk appetite quantitatively by analyzing the actual buying and selling patterns of institutional investors. The index assigns a precise meaning to changes in investor risk appetite: the greater the percentage allocation to equities, the higher risk appetite or confidence. A reading of 100 is neutral; it is the level at which investors are neither increasing nor decreasing their long-term allocations to risky assets. The index differs from survey-based measures in that it is based on the actual trades, as opposed to opinions, of institutional investors.”
The key points on global institutional investor sentiment are:
-Global institutional investors appear to be buying the dip.
-Institutional investor confidence improved across regions, particularly in Asia and North America.
-It seems these investors are looking through the noise/news and taking the opportunity to build allocations to risky assets as the correction provides a reset of sorts
1. Global Institutional Investor Confidence Index: The latest reading of the global institutional investor confidence index reached the highest level since March 2016. My first impression of this chart (shows the indicator vs global equities) is that I can’t help but think of the phrase “buy the dip” (which sometimes includes an F in there). So the main interpretation would be that institutional investors are buying the dip, or certainly at least actively rebalancing into equities as the correction provides a reset of sorts.
I was going to write about this last night, but I didn’t have the balls. Shame on me! But the first stock-market-brag tweet in a while was a very clear signal. I took this screenshot before the close, so the drop was even more dramatic – – – but you get the idea.
U.S. Treasury Secretary Steven Mnuchin indicated Sunday the U.S. is hopeful to strike a deal with China, which means the tariffs would never go into effect. However, if a deal cannot be reached, how significant are the tariffs relative to the big picture? From CNBC:
Jeremy Zirin, head of investment strategy at UBS Wealth Management Research, told CNBC that President Trump’s announcement Thursday on tariffs on up to $60 billion in Chinese imports didn’t seem that bad.
“The economic impact of [the tariffs] is less than one-tenth of 1 percent,” Zirin told “Squawk Box.”
“It’s actually pretty bullish what we heard yesterday,” he added. “If you look at the steel and aluminum tariffs as a template, things got watered down and then scaled back. So, if you look at the whole economic backdrop, still a very good profit momentum.”
From a bigger picture perspective, the economy does not appear to be on the brink of a recession and the 20-year breakout in the Value Line Geometric Index is still in play.
Too many market participants believe rising stock market volatility can only occur in down markets. It might be true that rising volatility is considerably more likely to occur in times of market stress, but it’s nowhere near as certain as most pundits believe.
While there can be no denying that stock markets often take the escalator up and the elevator down, this generalization is far from a law of nature. Volatility is the measure of the variability of price returns. There is nothing written in the finance books saying that stocks cannot go up just as quickly as they go down.