A July 2013 See-It-Market post outlined the three steps required for a trend change. The S&P 500 recently broke the downward-sloping trendline below (step 1), made a higher low relative to the previous low (step 2), and went on to print a higher high (step 3). The completion of these three steps tells us the odds of the correction low being in place have improved.
Divergent: It’s Dalio (And Asness) Versus Everyone Else as Money Flows to Europe Stocks (Fed Tightening As ECB Maintains Accommodating?)
Money is following to European stocks as jitters struck the US stock markets and The Federal Reserve continues to slowly normalize its monetary policy.
(Bloomberg) — Billionaire Ray Dalio has $18.45 billion in bets against Europe’s biggest stocks. Most of the rest of the investing world is headed in the other direction.
U.S. stocks lost $9.7 billion in investment so far this month while Eurozone shares have gained $3.2 billion, according to data compiled by Bloomberg. Peers of Dalio’s firm, Bridgewater Associates, are mostly wagering that Eurozone equities will rise.
“I’m surprised. That’s a big bet. Dalio and his team are very confident,” said Rick Herman, managing director of asset allocation who helps oversee about $30 billion at BB&T Institutional Investment Advisors Inc. “That’s definitely out of consensus. European stocks are cheaper, and they also have stronger earnings growth.”
Dalio has always marched to the beat of his own drummer, so his big short position, especially when other hedge funds are betting in the opposite direction, could be seen in that context.
For a market analyst there is an irresistible temptation to seek out one or more historical parallels to the current situation. The idea is that clues about what’s going to happen in the future can be found by looking at what happened following similar price action in the past. Sometimes this method works, sometimes it doesn’t.
Assuming that the decline from the January-2018 peak is a short-term correction that will run its course before the end March (my assumption since the correction’s beginning in late-January), the recent price action probably is akin to what happened in February-March of 2007. In late-February of 2007 the SPX had been grinding its way upward in relentless fashion for many months. The VIX was near an all-time low and there was no sign in the price action that anything untoward was about to happen, even though some cracks had begun to appear in the mortgage-financing and real-estate bubbles. Then, out of the blue, there was a 5% plunge in the SPX. On the following daily chart this plunge is labeled “Warning shot 1″.
If you had asked me a week ago what I thought the probability was that we’d resume the downtrend and take out the lows of early February, I would have probably said 80%. Last week’s action (augmented by this morning’s) takes that down to more like 20%. It seems that, once again, the BTFD crowd was right. It sucks.
Oddly, the big tumble early in this month took place on pretty much no distinguishable news, and the same can be said for the recent lift. Let’s face it, the Dow has gone up thousands of points in just a couple of weeks, and no one can point to any real reason why. It’s pretty much like the “V-dip” didn’t need to take place at all (except to wipe out the unfortunates who owned XIV).
Anyway, we seem to be back in the godawful up-half-a-percent-every-single-day mode that we had been in before all the excitement began, and if we cross above the blue horizontal below, then we’ll just grind out way into the “DMZ” (tinted green) leading up to all the overhead supply. Simply stated, for me, the market has become boring and nauseating once again.
I mentioned in a Tweet on Friday that the low volume on Friday’s rally was a bit concerning. The study below is one I featured in the subscriber letter this weekend. It examined other times substantial rallies occurred during uptrends on very light volume.
Stats here suggest a downside edge. Perhaps not a huge edge, but in my view one that appears strong enough to warrant some consideration when establishing my short-term bias. So traders may want to keep this in mind as we begin a new week. I will also note that I ran the same test, but switched the volume requirement to “NOT the lightest in 20 days”. Of course there were many more instances. With volume not coming in extremely low, the average trade flipped to moderately positive across the board. This suggests the low volume is a factor.
Strengthening bond prices. Surging oil. Strong equities. Grumble. Today is one of those “days to endure” for me. Ah, well. Here’s one idea to share: fallen angel Chipotle, which even with the recent bounce is still 60% off its peak. What we have here is a consistent series of lower lows and lower highs: the very definition of a downtrend.