The Big Rotation

The recent rebound in the S&P 500 index is approaching a first area of resistance now. If it continues to roughly follow the 1962 analog which we have previously discussed (here is the chart), it should briefly back off, and then move slightly higher before rolling over again (we picked the analog because it featured a weak January open, and was preceded by a distribution phase in 1961 that looked very similar to the 2015 trading range; there is no other reason than pattern similarity, which has to be taken with a grain of salt).

 

nasdaq-cartel-calle

 

We have actually been remiss in that we have failed to mention that Frank Roellinger informed us that the Modified Ned Davis Model has covered its Russell 2000 short position on Friday Feb. 26, and has switched back to a 100% long stance – however, readers hopefully caught our remarks published on the very same day:

 

“[W]e believe that the current market rebound could easily go further. Not only are there a number of historical patterns which suggest that market weakness in January is usually followed by a multi-week recovery, but the current positioning and sentiment backdrop also indicates that stocks should manage to trade firmer for a while.”

 

Now that the rebound has actually gone a bit further, we want to discuss its quality. There has been an improvement in market internals – mainly because previously beaten down sectors (such as transportation, industrial and commodity stocks) have begun to outperform the broader market. We have already briefly discussed some of the suspected reasons for this at the end of last week (stronger money supply and credit growth in China, and the cheapness of commodities in relative and absolute terms, regardless of still weak fundamental conditions).

 

1-SPX dailyThe S&P 500 index is approaching a lateral resistance area – click to enlarge.

 

Improving internals have gone hand in hand with rotation: this time, previously strong sectors are actually weak and lagging, especially technology stocks (including biotech stocks). When the market began to turn down in late December/ early January, the main beneficiaries were initially defensive sectors like utilities and consumer staples. A little later, a further shift in preferences has taken hold, with buyers rotating into the previously biggest losers, many of which have been beaten down to prices that are historically quite low. Here is a chart that is illustrating this theme nicely – it shows the ratio of XME to PNQI, i.e., the ratio of base metal mining stocks to internet stocks.

 

2-XME-PNQI ratioXME-PNQI ratio – mining stocks have outperformed technology stocks strongly since mid January – click to enlarge.

 

We could have shown similar looking charts comparing e.g. steel stocks, energy stocks or transportation stocks to big cap tech stocks. The main point we want to make is that the recent improvement in internals is this time not supported by a revival in the formerly leading momentum stocks in the technology sector (the bull market upside leader that has held up the longest). Even compared to the S&P 500 index, big cap techs have begun to lag:

 

3-NDX-SPXNDX-SPX ratio: big cap tech stocks are suddenly underperforming vs. the broader market instead of leading it – click to enlarge.

 

Considering the valuations of the so-called “unicorns” trading in private markets in conjunction with the valuations accorded many of the leading Nasdaq stocks, we think it is fair to say that there has been another major technology bubble. This bubble may actually be bursting now. Its previously strongest sub-sector biotechnology has already become a downside leader, which is rarely a good sign.

The improvement in internals is in fact a bit uneven as well. For instance, the recovery in the new highs/new lows percentage has been weak, while the NYSE A/D line has been very strong of late. The number of S&P 500 stocks exceeding their 50-dma has jumped quite a bit (in fact, it looks now “overbought”), but far fewer stocks have managed to regain their 200 dma, creating a short term divergence in the process:

 

4-InternalsA few market internals: SPX NH/NL percentage, the NYSE a/d line, the percentage of SPX stocks above the 200 dma, the percentage of SPX stocks above the 50 dma – click to enlarge.

 

Taking a look at XME itself (which we use here as a proxy for all the beaten down sectors that have come up for air in the recent rebound), we can see that it is by now strenuously overbought and has experienced a blow-off in trading volume just as it crossed above its 200 dma line – in conjunction with a potential reversal candle (confirmation/ follow-through is still required to declare it one):

 

5-XME, dailyXME seems ripe to at least correct a bit soon – click to enlarge.

 

For all we know, this rotation may be the start of a new medium to longer term trend, regardless of what near term gyrations occur – it is difficult to tell at this juncture (commodities e.g. tend to bottom while their fundamentals still look lousy, so one cannot come to firm conclusions from their current fundamentals).

However, per experience it cannot be good for the big cap-weighted indexes in the medium to longer term when the largest tech momentum stocks are underperforming. Note that financial stocks, in spite of joining the bounce recently, still aren’t much to write home about either.

We remain therefore on “rally failure watch”. If the recently stronger sectors begin to correct and the technology sector concurrently remains weak, broader-based indexes will turn down again – though it might not happen right away.

 

A Mixed Sentiment Backdrop

It is difficult to come to conclusions about short term direction from assorted sentiment and positioning data. Some of them would suggest a likely continuation of the rally (such as e.g. futures positioning and small trader buying of put options), whereas others have reached neutral positions and yet others are already indicating that complacency has returned. One of the latter is e.g. the CBOE equity volume put-call ratio:

 

6-$CPCECBOE equity volume put-call ratio declines back to the 50’s level – click to enlarge.

 

How to best interpret a batch of mixed sentiment data depends mainly on one thing: whether the primary trend is up or down. Can the direction of the primary trend be discerned with certainty from what has happened recently? Probably not yet – similar to recent deliberations about the likelihood or timing of a recession, there is quite a bit of evidence that suggests the larger trend has changed, but there can be no apodictic certainty yet (from the perspective of the price trend, this would require all the indexes that haven’t broken below their previous reaction lows to do so).

There are many longer-term sentiment indicators that show the market remains at a dangerous juncture though. We have previously discussed margin debt, mutual fund cash and retail money fund assets in this context (the links lead to the respective charts), but want to look at something different today, namely the total Rydex bull/bear asset ratio. The important thing about this ratio is that it has indicated a never before seen surge in trader optimism in 2014/2015. Such extreme values often have long term implications.

 

7-Rydex bull-bearRydex traders have never been as enamored of stocks as in the 2014-2015 period, during which an enormous burst in optimism was recorded – click to enlarge.

 

Here is one more sentiment indicator published by sentimentrader that illustrates why sentiment data often work slightly differently depending on whether a trend is changing or depending on what type of overarching trend is underway. This one is the so-called smart/dumb money confidence spread, which compares an amalgamation of indicators that are traditionally associated with good, resp. bad market timers (mainly this involves hard data rather than opinions). We have picked a longer term chart and highlighted a few areas on it:

 

8-Smart-dumb money confidence spread-1As can be seen here, when “bad” market timers were excessively pessimistic in 2007/early 2008 and excessively optimistic following the 2009 low, they were actually correct. In other words, speculators were correctly betting on the overarching new trends, while hedgers were providing the liquidity to accommodate their bets. Hedgers are usually not betting on direction: they are hedged with the underlying instruments and are merely making money on spreads. It’s just that speculators are as group often wrong when they are predominantly betting on the same outcome – evidently though, this is not the case after major trend changes – click to enlarge.

We would conclude that if the market turns down again from resistance amid “mixed” sentiment data, it would be another negative signal increasing the chance that a major trend change has occurred.

 

Conclusion

It will be interesting to see if the market continues to follow the analogs we have discussed earlier this year (other occasions when stock markets were exceptionally weak during the normally seasonally strong period in January). We have so far no reason to believe that it won’t – very likely the current rebound will simply go as far as it needs to go to look sufficiently convincing. Obviously, this idea would have to be abandoned if previous highs are exceeded.

Here is one last chart that continues to suggest to us that an overarching longer term trend change remains more likely than a resumption of the previous valuation expansion:

 

9-Junk bondsJunk bond yields are currently correcting their recent advance as well, but remain extremely elevated – and are confirming the increasing deterioration in outstanding bank loans – click to enlarge.

 

Charts by: StockCharts, SentimenTrader, St. Louis Federal Reserve Research

 

 
 

Emigrate While You Can... Learn More

 
 

 
 

Dear Readers!

It is that time of the year again – our semi-annual funding drive begins today. Give us a little hand in offsetting the costs of running this blog, as advertising revenue alone is insufficient. You can help us reach our modest funding goal by donating either via paypal or bitcoin. Those of you who have made a ton of money based on some of the things we have said in these pages (we actually made a few good calls lately!), please feel free to up your donations accordingly (we are sorry if you have followed one of our bad calls. This is of course your own fault). Other than that, we can only repeat that donations to this site are apt to secure many benefits. These range from sound sleep, to children including you in their songs, to the potential of obtaining privileges in the afterlife (the latter cannot be guaranteed, but it seems highly likely). As always, we are greatly honored by your readership and hope that our special mixture of entertainment and education is adding a little value to your life!

   

Bitcoin address: 1DRkVzUmkGaz9xAP81us86zzxh5VMEhNke

   
 

One Response to “US Stock Market Rebound – Closing in on Resistance”

  • Readers please note: at the time I write this, the first chart shows the DJIA of 1962 by mistake – it will shortly be swapped for the correct one showing the SPX of today with the resistance level highlighted (if you already see an SPX daily chart by the time you read this, simply ignore this message).

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • snake-charmerGold Price Skyrockets in India after Currency Ban – Part III
      When Money Dies In part-I of the dispatch we talked about what happened during the first two days after Indian Prime Minister, Narendra Modi banned Rs 500 and Rs 1000 banknotes, comprising of 88% of the monetary value of cash in circulation. In part-II, we talked about the scenes, chaos, desperation, and massive loss of productive capacity that this ban had led to over the next few days.   Indian prime minister Narendra Modi – another finger-wagger, as can be seen in this...
  • wads-of-cashGold Price Skyrockets in India after Currency Ban – Part II
      Chaos in the Wake of the Ban Here is a link to Part 1, about what happened in the first two days after India's government made Rs 500 (~$7.50) and Rs 1,000 (~$15) banknotes illegal. They can now only be converted to Rs 100 (~$1.50) or lower denomination notes, at bank branches or post offices. Banks were closed the first day after the decision. What follows is the crux of what has happened over the subsequent four days.     India's prime minister Nahendra Modi, author of the...
  • shopGold Price Skyrockets in India after Currency Ban – Part IV
      A Market Gripped by Fear The Indian Prime Minister announced on 8th November 2016 that Rs 500 and Rs 1,000 banknotes would no longer be legal tender. Linked are Part-I, Part-II and Part-III updates on the rapidly encroaching police state. The economic and social mess that Modi has created is unprecedented. It will go down in history as an epitome of naivety and arrogance due to Modi’s self-centered desire to increase tax-collection at any cost.   Indian jewelry...
  • very-bad-boyA Note on Gold and India – What is Driving the Gold Price?
      Hidden Motives It is well-known that India's government wants to coerce its population into “modernizing” its financial behavior and abandoning its traditions. The recent ban on large-denomination banknotes was not only meant to fight corruption.   Obviously, this very bad Indian has way too much cash. Just look at him, he looks suspicious! Photo via thenewsminute.com   In fact, as our friend Jayant Bhandari has pointed out, fresh avenues for corruption ...
  • sittingWill Trump Do What Reagan Couldn’t?
      Depravity and Degeneration BALTIMORE – Finally, it’s over. We were both delighted and appalled by the news. A smile spread over our face... and our steps lightened... as we looked ahead to four years without Hillary Clinton’s know-it-all mug in the news.   Praise be! This mug will be largely missing from the airwaves and the intertubes in coming years. And your caption scribbler PT won't have to look for a fall-out shelter! We thank the Lord and the American public for...
  • gold-pm-fixIndia's Currency Debacle – An Interview with Jayant Bhandari
      A Major Crisis Last week Jayant Bhandari related the story of the overnight ban of certain banknotes in India under cover of “stamping out corruption” (see Gold Price Skyrockets In India after Currency Ban Part 1 and Part 2 for the details).   Banned 500 rupee banknotes   The problem is inter alia that the sudden ban of these banknotes has hit the Indian economy quite hard, given that 97% of all transactions in the country are cash-based. Not only that, it has...
  • winInflation Expectations Rise Sharply
      Mini-Panic Over Inflation After Trump's Election Victory We have witnessed truly astonishing short term market conniptions following the Donald Trump's election victory. In this post we want to focus on one aspect that seems to be exercising people quite a bit at present, namely the recent surge in  inflation expectations reflected in the markets. Will we have to get those WIN buttons out again?   A 1970s “whip inflation now” button. The only thing that was actually needed...
  • santorinigreeceThere Are Two Types of Credit — One of Them Leads to Booms and Busts
      Stumped by the Bust In the slump of a cycle, businesses that were thriving begin to experience difficulties or go under. They do so not because of firm-specific entrepreneurial errors but rather in tandem with whole sectors of the economy. People who were wealthy yesterday have become poor today. Factories that were busy yesterday are shut down today, and workers are out of jobs.   What has caused the bust? The modern-day economic orthodoxy continues to be unable to provide...
  • vigilantesWill the Swamp Swallow Trump?
      Permanently Skewed TRUMP HOTEL, New York – Trump’s rambling army – professionals, amateurs, camp followers, and profiteers – is marching south, down the I-95 corridor. There, on the banks of the Potomac, it will fight its next big battle.   Lieutenants in Trump's army: Bannon, Flynn & Sessions Photo credit: Drew Angerer / AFP   Here at the Diary, we do not like to get involved in politics. But this is a special time in the history of our planet – a...
  • yellen_duct_tape_7-16-2014_largeGold Bull Market Remains Intact – Long Term Fundamentals Outweigh Short Term Market Gyrations
      A Strong First Half of the Year, Followed by Another Retreat In early 2016 gold had a big bull run. The precious metal rose close to 25% this year, pushed higher in a summer rally that peaked on July 10th. Gold experienced a bumpy ride over the remainder of the summer though, as investors became increasingly concerned about a potential rate hike by the Federal Reserve. Uncertainty returned to gold market and has intensified further since then.   Initially, gold rallied sharply...
  • david_stockman_0Too Early for “Inflation Bets”?
      The Trump Trade After 35 years of waiting... so many false signals... so often deceived... so often disappointed... bond bears gathered on rooftops as though awaiting the Second Coming. Many times, investors have said to themselves, “This is it! This is the end of the Great Bull Market in Bonds!”   The long bond's long cycle – red rectangles indicate when the post 1980 bull market was held to be “over” or “over for sure” or “100% over”, etc.  We have...
  • train-to-hellAll Aboard! Trump’s Express Train to the Future
      Free Money! BALTIMORE – Last week, the Dow punched up above 19,000 – a new all-time record. And on Monday, the Dow, the S&P 500, the Nasdaq, and the small-cap Russell 2000 each hit new all-time highs. The last time that happened was on the last day of December 1999.   Ironically, two events that were almost universally expected to trigger large stock market declines were followed by quite rapid and strong gains. Would the market have fallen if Hillary Clinton had won...

Austrian Theory and Investment

Support Acting Man

Own physical gold and silver outside a bank

Archive

j9TJzzN

350x200

Realtime Charts

 

Gold in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Gold in EUR:

[Most Recent Quotes from www.kitco.com]

 


 

Silver in USD:

[Most Recent Quotes from www.kitco.com]

 


 

Platinum in USD:

[Most Recent Quotes from www.kitco.com]

 


 

USD - Index:

[Most Recent USD from www.kitco.com]

 

THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com