REVIEW
2/4/2018 Total market view: "As stated last week, this is the most amount of indexes having the same move from yearly levels that I have seen from early 2016. Thus, likely we just saw a major top. That said, tops tend to stretch out compared to rapidly formed lows and I view this move as the first phase of a transition from trending market to range market for risk assets. After a historic run of massive gains without as much as a -3% drop, I believe buyers will step in in the -4.5% to -7% range and then the next likely move is a rally back towards highs."
Result - Direction correct, magnitude not. Indexes continued waterfall drop with most in -10% area. Still, taking longs off the table 1/29 and 2/1-2, not shifting into bonds, hedging with long volatility has done very well the past two weeks. Getting out of the way of this decline is now significantly outperforming SPX with lower volatility - this is what everyone is trying to do right?
SUM
The consensus view: -20% bear market, -10% correction; bear markets rare without recession. Therefore we are in an area viewed from percentage declines off highs and key technical support levels that we are likely to see professional buying. We saw that twice last week from YP & D200MA test on SPX futures (ES) last week twice and for the session low on Friday with the market rallying 50+ points in minutes. So, is the low in?
Not sure - maybe. There are some indications of a low but not as many as I'd like. I view buys here as aggressive positions that need to be monitored carefully. Regardless, what qualifies as a "buy" depends on your role in the market and how you are utilizing these comments and pivots to trade and/or invest.
Short term (from daytrading to 2+ weeks roughly speaking): fantastic risk-reward buy signal Friday 1:30 & 1:45 15 minute bars, perhaps already out with partial profits.
Medium term position traders (2 to 12 weeks, again roughly speaking): some short covering and partial aggressive longs.
Long term (1 quarter +): Significant cash, likely out of shorts and hedges at this point.
Buy and hold asset allocation (my system): Out of bond allocations, still holding stocks, watching; lifting most hedges if taken.
If you don't know what I mean by hedges then you probably shouldn't be trying to use them. But while I specifically recommended a volatility ETF from late January, there are also inverse ETFs that are directly correlated to longs you may hold, index puts or futures.
I view buy signals other than the short term traders as partial / aggressive because:
1. No VIX confirmation; VIX not likely returning below all pivots anytime soon but I would like to see decent rejection of YR3 near 25 instead of holding that level as support
2. Lows still outside daily Bollinger bands, no divergence yet
3. No days or weeks of mild selling
4. Some indexes still in mixed status, ie, SPX below FebP and Q1P, holding 1HP and YP
(There are others but this is enough to get the point.)
On the plus side:
1. Major long term levels tested and held
2. Rising moving averages tested and held; in fact on daily, weekly, monthly charts
3. Low test of sorts on Friday
4. RSI low on daily chart also adds a reason to take a stab
So we'll see. Bullish scenario would be SPX and NYA/VTI reclaiming Q1Ps. Bearish would be inability for this to happen and back down to lows or lower. I like the SPX YP buy but as it turns out the D200MA on SPX was also there and it seems a bit too easy. Given the nature of the move so far, we may need to see a break on SPX and down to INDU or NDX YP which would imply SPX going lower.
As usual having cash on the sidelines means it is rather comfortable to watch and see what holds up best in the drop. No risk asset classes are above all pivots. Perhaps there are some individual stocks but I don't have the time to monitor things on that level. So this takes us to status on Q1Ps, 1HPs and YPs.
On the USA mains, NDX and INDU are above Q1P but SPX, RUT and NYA/VTI are not. On sectors, XLF and XBI held Q1Ps, SMH is below, and XLE is below all pivots.
Global developed, EFA below Q1P, EWJ above Q1P, EWG below 1HP. Last and not at all least, global emerging, ACWI below Q1P, SHComp below all pivots, FXI below 1HP, KWEB above Q1P by a bit, EEM below Q1P, INDA above Q1P, RSX barely above Q1P, EWZ well above Q1P and still very positive YTD.
So easy buy watch list (or if in partial longs, better to be in one of these vehicles):
NDX/QQQ, INDU/DIA
XBI, XLF
EWJ
INDA, EWZ
PIVOTS
USA main indexes - All 5 USA mains tested and held long term pivots last week; this means the 1HP or YP. If low is in then SPX will reclaim Q1P on Monday. If not then we may need to see NDX or INDU YPs.
Sectors - See list above. Pretty clear that XBI is doing better than SMH this year.
Global - See list above. SHComp below all pivots is a warning sign. Last year I don't think people were expecting much positive out of China, and instead China tech via KWEB (BABA, etc) was the best performing trade other than cryptos and short vol (as called btw). This gave a boost to the popular EEM trade as well. While it is theoretically possible for SHComp and FXI (and thus also likely EEM) to move in different directions they are very correlated. See this tweet for the chart.
Safe havens - Consider the rarity that was 2017 when there was only 1 day that SPX and VIX simultaneously closed below/above a QP respectively. VIX has been above all pivots since 1/29. Bonds are not helping and The Pivotal Perspective has been clear on this point from the beginning of the year. I went out of my way to show even on a long term basis some major bond vehicles were going into seriously negative territory (ie, total return basis below YP and below weekly 50MA). LQD joined TLT and AGG last week in this list, and very short term Treasuries were already there weeks ago. While GLD seems to be doing OK, GDX collapsed last week below all pivots and had very quick trip to YS1.
Currency & commodity - Oil also rejected from YR1 last week. A bit late compared to stocks but down nonetheless. Nag gas via UNG below all pivots.
Cryptos (majors only): Leader ETHUSD tested and held YP, 1HP and Q1P on 2/6. BTC and LTC below all pivots.
OTHER TECHNICALS
Two things are bothering me about the bull case here.
1. New highs new lows has shifted bearish. Previous incidences of re-committing to the bull side happen when the 10 day average of new highs is above that of new lows. This occured 3 times since the 2016 lows so this is a fairly good signal: late Feb 2016, November 2016, and late August 2017. PS, the reverse doesn't really work as a sell signal as it is too late; but it does work well as a buy confirmation.
2. Quarterly charts on USA main indexes. Per recency bias people may have been expecting stocks to go up forever but the fact is that these types of quarterly, monthly and weekly Bollinger band breakouts like what happened in 2017 Q4 are rare. Now prices have fallen back inside the Q and M bands (for most, not even on INDU yet). I think these will act as resistance going forward which implies limited upside on a bounce and/or further declines before the pros are willing to really step in. More on this soon. There are many weeks left in Q1 but at this point NDX is setting up a massive spike which would imply serious trouble in Q2-3.
VALUATION
SPX reached 1 standard deviation above its 25 year avg. Forward P/E was heading towards 20 and in 2 weeks dropped back under 18. Keep in mind that SPX cleared 18 only in 2017 Q4. Like the Bollinger bands, 18X forward earnings may also act as resistance ahead.
SENTIMENT
Put-call reached multi-year lows in January and is now heading up. If time permits I'll review this in more detail soon.
TIMING
Alas no date on the high, however:
Tweet from 1/24: volatility window 1/25-2/2 and perhaps extending through 2/15
Why am I not a strategist at a hedge fund again? Just contacts, marketing and self-promotion skills folks. I'm doing some great stuff here.
Tweet from 2/6: "Since vol extended past 2/2, think instability in general through 2/15, & 2/9 looking like key date. With YPs along with D200MAs testing and holding on both ES and YM near term move most likely furious bounce that then fails and sets up lower or divergence lows into 2/9." Ding! And that was pre-open!
February dates
2/2 - middle of drop
2/9 - added per tweet maybe low
2/12 - ?
2/15 - negative for risk and end of volatility window per tweet above