I Ain’t Skeered: Weekend Recap of the Markets

My basic views remain unchanged. That said, until we see a big rally, we have yet to see a big rally. I would have been pleased to see big, fat reversal candles across the board, showing some real institutional support in the markets, but they have no big appetite yet. If they are active in the markets here, they are active only very secretly, buying only to the extent that exactly offsets the supply, keeping prices in a weekly doji candle. If they are here, they are absorbing the selling and not a penny more.

Given the monstrously bearish sentiment I believe has washed over the public, I would like to believe that retail is liquidating here, but until we get a bid, there’s no way for me to know.

In this article, I will simply walk through a lot of charts and other data. Most of them can be interpreted to suit your own expectations here, whether bearish or bullish. That’s how the bastards left us hanging this week, lol. But, I hope the presentation of information is of some help to you.


Local Structure

I didn’t like having to point this out today—the possibility of a triangle—because I remain fairly well convicted about my bullish call, and yet, it does present a threat, and I would feel terrible if I didn’t at least point it out and we puked.

Now, this range we’ve been in this week could absolutely just be a Wyckoff accumulation. If it is, it is harmless:

ES

If it is an expanding triangle, like this:

ES

I have also seen these structures fail, and when they do, it’s very dramatic. I will provide a couple of examples.

Here is $ES from January of this year:

ES

Here is a similar structure on Bitcoin from late last year:

BTC

So, in sum, as far as local structure goes, in isolation from everything else, it’s presently agnostic.

One more technical I would like to point out is about the chatter of the imminent 50-day MA touch/cross of the 200-day MA. I like to use the 60-day EMA and 250-day EMA, and the point is the same on both. Yes, a cross can mean we’re entering a longer-term downtrend, but statistically, it’s more noise than help. There are just as many times it’s crossed that meant nothing, and in fact, more often than not, a cross does not lead to a protracted down trend. Here is the last time we had a cross between these moving averages:

SPX

So this tells us little. If these crossed, then came back up to “uncross” and failed to do so, then we’re in a big down trend (and in fact, we would already have been in one for a long time). But up here this means nothing to us.


Breadth

I was hoping for a big rally that would give me a signal regarding breadth, for instance: did a lot of stocks participate in the rally, or not? No rally, so I can’t say much yet.

One thing I can refer to is the $BPSPX (I’ve discussed it before—if you’re new here, you may read a bit about it in this post). In the March rally, it gave us the signal “bull confirmed,” indicating that the percentage of stocks in the S&P 500 with bullish PnF charts was itself bullish, meaning we could expect that percentage to increase. During the April decline, the signal switched to “Bear Alert,” which means it’s still bullish, but the percent of stocks with bullish PnF charts was falling fast enough that the $BPSPX risked losing its overall bullish status. However, on Tuesday or Wednesday (I can’t remember which one now) it switched to its present status, “Bull Confirmed”:

BPSPX

This is good news. So, even with this shitty price action and the lack of a rally with followthrough, the percentage of stocks with bullish PnF charts (which was falling sharply—this whole second-to-last column with all the zeroes on it was the April slaughter) is expected to rise from here, at least for the time being.

One further thing I can say about breadth is regarding a divergence I see on the Advance/Decline ratio.

While $SPY, from January 24th on, has made lower lows in price:

SPY

The Advance/Decline ratio has been making higher lows:

ADRT

In principle, this should be a sign that we’re bottoming. But, bears will argue: if the structure on the S&P does turn out to be a triangle, and we have a deep plunge from here, this divergence may break. And they would be right. So, we will have to see.


Bonds

First, let’s look at the river of tears that is $TLT (this position is harming me, but I have a lot of duration and I still believe in the trade; I will keep averaging for the time being). I first discussed the multi-year channel it was approaching here. I believed there was a high probability of at least a reaction to the channel. Here is the not-reaction:

TLT

Simply amazing. Not even a bounce.

Now, I discussed this here, but it is also possible that the channel we really need to watch is not the ETF (as it’s a basket), but rather the 10-year yield itself. And we are getting very close. Zoomed out:

10YRYLD

Zoomed in:

10YRYLD

Are we just waiting on this to touch? Is that the game? My goodness, let’s just do it already and get it over with.

Now, I have a very hard time believing this will not get a reaction. But if I’m wrong, we’re in some kind of new world. None of us not-boomers have lived through that scenario. We’ve been in a bond bull market our entire lives. A bond bear market would be a Brave New World for us.

We do know this: tech loves especially two things: low interest rates and a weak dollar (the former more than the latter). So let’s look at the dollar.


The Dollar

It’s a breakout over prior peaks. The one on the far left was January 2017 (remember that date for a minute). The one in the middle was the COVID crash. In both cases, we had bearish divergence on the RSI. We lack that here. That doesn’t mean too much just yet. We could consolidate here for a while, make one small squirt higher and get that divergence without the dollar strengthening a lot. But, this is not helping tech.

DXY

Now, in the peak on the left, it coincided with a period just prior to a big melt up. And the peak in the middle peaked as the COVID crash bottomed.

Now we haven’t peaked, because we haven’t turned down yet. But if they can break this, it should be very bullish for equities.

Let’s discuss the date above. December 2016/January 2017.

I’ve discussed this before (here, here), but I really do like my $JNK/$TLT ratio. I’ve annotated the chart a bit, to highlight some of the events that accompanied the price action of the ratio. Aside from coming out the COVID crash, the last time we had a nice vertical squeeze was just before the 2017 melt up. And you can see how similar the structure was then in comparison to how it looks now:

JNK-TLT

I really do think that if we’re in real trouble here, treasuries would be outperforming junk bonds. In every other time for which we have data, when this is turning up, good things are either happening or are about to happen to equities. Really good things. I see no flight to safety here. It’s a weird way of actually saying there is sort of a flight to risk happening under the surface.

And furthermore, we can actually call it an outright breakout:

JNK-TLT

It is possible that something else is going on here that none of us can explain based on past experience. For instance, everything on this chart so far has been in a bond bull market. What if we’re entering the Brave New World of a bond bear market? Will the signals of this ratio mean something different to us in that world? It’s possible. But since I have no evidence to support any of that yet, I will rely on what it’s meant to us up until now: and this is decidedly not looking like we’re in trouble.


Volatility

Signals are mixed and indecisive on the $VIX. On the one hand, we’re tied up at this green fan line. Would have been better had the breakdown on Wednesday stuck. We’re also forming a large wedge. It’s a symmetrical triangle. The contraction in “price” and the sheer size of the red structure implies that a very big move is coming. Now, it’s symmetrical, and so we need to be agnostic about the direction. (Notice how we can say that about the structure on the S&P noted at the beginning of the article?—could be Wyckoff accumulation presaging a moonshot, or a “B-wave” in a down trend presaging a big drop.)

VIX

$VVIX, on the other hand, seems tame. Institutions hedge in the $VIX far more than you or I do, and it shows up here. It’s actually forming something of a descending triangle, which has a more bearish bias to it. Furthermore, note the higher lows leading to the COVID crash (orange arrow). We lack that behavior here. Also notice the little breach of the green trend line we just had. I’ve discussed what I think this might mean if we get another breach that sticks (see the end of this article).

VVIX


Summary

So when I look at everything as a whole, it’s hard to get too, too bearish. Sentiment is off the chains. I’ve lived through two big bear markets, and in both cases, there was still lots of optimism until the bottom. That’s where the real pessimism set in. Seriously, right before Lehman, most people were like, “Nah, it’ll be fine?” And what I’m seeing here is the vast majority of people saying the world is about to end. I dunno. That feels sort of bottom-like to me. I might be wrong. Granted, judging sentiment based partly on social media is new. It’s hard to know if what we’re seeing here is what we would have seen in other bear markets or not. But the AAII is super bearish and I dunno, I guess people are allowed to get very bearish in bear markets, but this extreme this early? I’m very skeptical about that. So, we will have to see.

Yes, economy is slowing a bit, but the last LEIs were good and they lead recessions by sometimes years. Typically lots of advanced notice. They’re predicting 3% GDP growth for 2022. It’s been decades since we’ve seen this kind of growth. And this is all post-peak “stimmy,” so it’s more genuine. I think it’s premature to expect a recession here. I could be wrong. The growth is slowing, but it could also pick up again, too. Does it need policy shift somewhere? Maybe, maybe not.

I think it’s possible that peak inflation may be behind us and if that’s true, and the market has overreacted (lol the 10-year yield), the inflation trade should see a lot of reversion. And maybe falling prices will be a boon for the consumer, I don’t know. Maybe the long line of Fed speakers this week are intending to communicate that and things chill. There is also the “wealth effect.” If equities pick back up, people will spend more of their discretionary income; maybe that will spur things, too.

At any rate, things are hanging in the balance going into the weekend. But, Apple is still tucked safely in its channel, and I can’t expect indices to plunge while the crown jewel is still safe. She goes, and I will change my mind, but until then, I’m not going to assume she’s taking us all down. I will let my views be governed by evidence first.

Hope you guys (and gals) have a nice weekend.


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