A “Typical” Correction? A Narrative Fail May Be in Store

Obviously, assorted crash analogs have by now gone out of the window – we already noted that the market was late if it was to continue to mimic them, as the decline would have had to accelerate in the last week of March to remain in compliance with the “official time table”. Of course crashes are always very low probability events – but there are occasions when they have a higher probability than otherwise, and we will certainly point those out when we see them. Anyway, something else is evidently happening. Here is a chart of the SPX that shows the important trend-line which was so far successfully defended:

 

According to the “keep it simple” chart, this was just a run-of the mill correction, very similar to every other correction seen since the 2009 low. But is that really the case?

 

The rebound from the trend-line is accompanied by an over-arching narrative. We are not referring to the news items that are supposedly responsible for jerking the market this way and that on a day-to-day basis (these consist mainly of Trump tweets on trade and military interventions, which he seems to use as part of his negotiating strategy, and the responses of his opponents to the moves he makes in this Twitter war).

These explanations for market moves never make a lick of sense anyway: Donald Trump didn’t just become “unpredictable” this year. The Middle East didn’t turn into a proxy war battlefield brimming with betrayals and disinformation this week. The threat that trade barriers might be erected didn’t just fall unannounced from the sky either. It was a major part of Trump’s policies, frequently stressed during his campaign, reflecting views he has demonstrably held since at least the 1980s, if not longer.

We are actually referring to something else, namely the upcoming earnings season. It is widely held that it will be business as usual, which is to say that nearly every important big cap index constituent will reliably manage to “beat expectations”, which will be followed by the usual gap-up moves into the blue yonder the day after. Hence it will be off to the races for the cap-weighted indexes again. Mind, superficially this isn’t even an unreasonable notion, given that it has worked umpteen times in recent years (i.e., basically every quarter – that’s how one can calculate the precise number represented by the variable “umpteen”).

There may be a problem though this time – in order for expectations to be beat, one first has to have sufficiently low expectations. That becomes increasingly difficult as valuations expand, since the expansion in valuations by itself indicates that expectations are ratcheted up. There is an additional new wrinkle this time around that was apparently introduced by the tax cut. Wall Street earnings estimates have been wildly over-optimistic year after year, but this has now become insanely over-optimistic. Here is a Bloomberg chart illustrating the jump in 2018 estimates. Bloomberg’s chart keepers noticed that analysts upped their estimates sharply just before the beginning of the last bear market:

 

Wall Street earnings estimates and the SPX – the annotations above are by Bloomberg. We actually wanted to point to a specific aspect of the chart: namely the sheer size of the most recent  jump in estimates, which is probably the biggest surge in earnings estimates ever.

 

We are actually not saying that just because something happened last time, it should happen again this time. We are mainly focused on the size of the jump in estimates this year, which is unprecedented as far as we know. In other words, this is an excellent set-up for disappointment, which may well end up derailing the above-mentioned narrative.

Will it happen this quarter already? We cannot be certain, but we certainly do know that the divergent DJIA-NDX peaks in January to March and the accompanying record overbought and bullish sentiment readings would make suitable material for a long term market peak that will not be seen again for many years.

 

GBEB Death Watch Continues – Meet the Fear-Stricken Grizzlies

What about the various indicators we focus on? The SPX NH-NL percentage index currently stands at +2, which is no longer a “sell”, but not really an all clear either – at best we would call it neutral. The important thing in this context remains that it never even came close to getting oversold, which it did in every other major correction (particularly in 2011, 2015 and early 2016, which are the only comparable corrections since the 2009 low in terms of speed and size). It is one of the things that makes us think we should not believe in the most recent turnaround just yet.

 

SPX NH-NL percentage index – it never became oversold

 

The relative strength of Russell 2000 (a result of intra-market rotation) currently looks medium term market-positive, but we are focused on its directional changes in the short term. It gave a short term positive signal at the end of last week and again on Monday, when the market closed right on the trend-line discussed above, but has just issued another short term negative signal again. It continues to work well as a short term indicator (positive when it is up on a down day, negative when it is down on an up day).

What continues to strike us as astonishing in light of the sharp increase in day-to-day volatility is the nonchalance of option traders and the by now almost comical fear of bears that they will get mauled again. The fifteen remaining bears (we probably know most of them personally) seem to be the only group of traders in this market that is genuinely worried. Mind, we are not talking about people who say they are bearish. We are talking about people who are actually betting on a decline in prices with their money.

Here is an update of the CBOE equity put-call volume ratio. All previous corrections since 2009 – both major and minor ones –  generated a modicum of fear, a scrambling for hedges and some downside speculation. In 2018 option traders behaved as though absolutely nothing was happening:

 

In early February the ratio came close to “fear territory”, but fell again before actually getting there.

 

While we see the action in options more as a sign of bullish overconfidence,  Rydex asset levels are mainly indicative of bearish fear and complacency. Amazingly, Rydex bear assets simply failed to get off the mat even in the slightest in the recent correction – a sign that many holders used the minor bounce in bearish funds as an opportunity to get out of their positions. They have never been comparably demoralized in the entire history of these funds (note: despite the small amount of AUM, this fund family continues to provide a representative snapshot of overall market sentiment).

 

The pure Rydex bull-bear ratio remaining at a level of over 26 after the recent shakeout is best adjectivized with “insane”, but we find the level of bear assets even more impressive as signals go. It is not even a hair above the all time low of late January. Clearly, bears are the only group of traders that is actually scared. We are not sure what to compare this to, it simply has never happened to this extent in comparable situations. If one looks at the 2006-2007 time period, back then they massively reduced their exposure at just the wrong moment after first increasing it at the wrong moment in 2002-2003. When the crash finally arrived in 2008, they had already cut their exposure by more than 60%, so their recent reluctance to push their bets should actually worry bulls greatly.

 

Sentimentrader publishes a variant of the Rydex ratio that focuses exclusively on SPX and NDX funds. It shows bull fund allocations as a percentage of total bull and bear fund allocations. It is not just in “excessive optimism” territory, it has in the meantime crossed over into the Negative Zone and is reportedly searching for the recently disappeared Mr. Fantastic. Or of you’re more of a Batman person, it is now in Arkham Asylum to prove to the Joker that there are things out there in this world that are actually crazier than he is.

 

After initially responding to the sell-off, this SPX-NDX focused Rydex ratio is right back near its all time high.

 

Bears in 2018: they’re not what they used to be.

 

SMI Plunge

Readers are probably aware of the so-called “smart money” index. The theory behind the index holds that the “dumb money” primarily trades early in the trading day, while the “smart money” makes decisions close to the end of the trading day. Rallies early in the day (first half hour) are accordingly given a negative value, and so are late day (last half hour) sell-offs. The opposite actions are given positive values, and at the end of each trading day they are summed up and the result is charted. Here is what the chart looks like at the moment:

 

The SMI displays well-developed counter-cyclical behavior. Recently the rise from the August 2015  mini-crash low to the US presidential election and the subsequent – lately accelerating – collapse were quite noteworthy.

 

We are not really sure whether the theory behind the SMI is really sound, but we cannot deny its pronounced counter-cyclical trends, which suggest that the “buy low-sell high” faction really does dominate trading late in the day. We would note that there has never been a comparably sharp and swift collapse in the SMI than the one that started in late 2017, in parallel with the final blow-off move in the market. It has not reversed on account of the downturn after January 26, which contrasts with what happened in August 2015.

 

Conclusion

It looks as though it’s not the bears who should be scared.

 

Charts by: StockCharts, Bloomberg, SentimenTrader

 

 

 

Emigrate While You Can... Learn More

 


 

 
 

Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.

   

Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA

   
 

2 Responses to “US Stock Market: Happy Days Are Here Again? Not so Fast…”

Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • The Gold Sector Remains at an Interesting Juncture
      Technical Divergence Successfully Maintained In an update on gold and gold stocks in mid June, we pointed out that a number of interesting divergences had emerged which traditionally represent a heads-up indicating a trend change is close (see: Divergences Emerge for the details). We did so after a big down day in the gold price, which actually helped set up the bullish divergence; this may have felt counter-intuitive, but these set-ups always do. Consider now the updated chart below...
  • Confronting the Dragon with Peter Navarro
      Of No Real Use A young man might go to business school believing he is obtaining some sort of academic training that will enable him to make a comfortable living.  His degree may gain him entry into a large corporation, where he can work his way up to a good income.  This may even put him on the fast track to what he envisions as success.   Don't knock it: Being useless can lead to unexpected career opportunities... [PT]   But his academic training likely won't...
  • Trouble in Paradise
      Impressive Zeal for Faded Ideals Uncompromising independence, rugged individualism, and limitless personal freedom were once essential to the American character.  According to popular American folklore, they still are.  We have some reservations.   Rugged individualists suffer mid-life identity crisis. [PT]   The principles that gave rise to the American character died long ago.  Freedom.  Liberty.  Independence.  Limited representative government. Sound...
  • The United States of Terror
      Bombs Away! Two recent articles* have again demonstrated that the greatest “terrorist” entity on earth are not the bogymen – Russia, China, Iran, North Korea – so often portrayed by Western presstitutes and the American government, but the United States itself!   This is an old cartoon, but still a good one. It perfectly describes the trigger-happy Western political class and the depth of its “thinking”. By happenstance we recently reviewed the Libya intervention...
  • Gold – Macroeconomic Fundamentals Improve
      A Beginning Shift in Gold Fundamentals A previously outright bearish fundamental backdrop for gold has recently become slightly more favorable. Ironically, the arrival of this somewhat more favorable situation was greeted by a pullback in physical demand and a decline in the gold price, after both had defied bearish fundamentals for many months by remaining stubbornly firm.   The eternal popularity contest...   The list of gold fundamentals that have improved is...
  • Capitulation and Currency Pain - Precious Metals Supply and Demand
      Waving the White Flag The price of gold rose two bucks last week, though the price of silver fell 10 cents. We have seen several analyses recently predicting big price drops, in one case by at least $500 in gold by the end of the year. Is this what capitulation looks like? It’s said they don’t ring a bell at the top, but they don’t ring a bell at the bottom either.   The give-up moment arrives... [PT]   We have also seen technical analysis arguing that...
  • Maurice Jackson Interviews Rick Rule – Investing in Natural Resources
      Contrarian Investment Opportunities in Natural Resources Maurice Jackson of Proven and Probable has recently interviewed Sprott U.S. Holdings CEO Rick Rule, a well known specialist and “old hand” in the natural resource space. This is quite a wide-ranging and interesting interview, so we decided to present it to our readers. Below you find a summary and our comments on the main topics discussed, a video/podcast of the interview,  as well as a download link to a PDF file of the...
  • Black Holes for Capital - Precious Metals Supply and Demand
      Race to the Bottom Last week the price of gold fell $17, and that of silver $0.30. Why? We can tell you about the fundamentals. We can show charts of the basis. But we can’t get into the heads of the sellers.   Other people's fiat: in the global race to the bottom, it was recently the turn of emerging market currencies to tank. [PT]   We can say that in the mainstream view, the dollar is rising. The dollar, in their view, is not measured in gold but in rupees in...
  • The True Sport of MAGA
      Chest Bumps One of the more extraordinary things that investors have seen in living memory is unfolding at this precise moment. This goes for business leaders, money managers, veteran Wall Streeters, value investors, 401(k) holders, momentum traders, FX guys, gold bugs, technical gurus, chartists, pork belly speculators, quants, astrologists, Larry Summers, put option sellers, dweebs and geeks, millennial index fund enthusiasts, and everyone in between.   Pork belly speculators...

Support Acting Man

Item Guides

j9TJzzN

The Review Insider

Dog Blow

Austrian Theory and Investment

Archive

350x200

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

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]

 

Mish Talk

 
Buy Silver Now!
 
Buy Gold Now!
 

Oilprice.com