Weekend Review of the Markets: Choose Your Fighter Edition

We have arrived at one of those special places in the market where two possible outcomes present. Accounting for structure alone, we have either passed through a large pattern of distribution, or we have generated a large bullish consolidation in an uptrend that is not yet complete:

SPX

This can either be interpreted as a head & shoulders topping process, or a huge bull flag. To make matters even more difficult, if it’s a head & shoulders pattern, we have returned to the neckline and we rejected that on Friday, at least initially. But if it is a bull flag, we rallied this week back inside parallel rails, and the pullback on Friday can be seen as a retest of the lower rail from above.

The market is either extremely bearish here or it is extremely bullish here. I find both of these scenarios possible. My view this year has been that we were in a bear market rally that would top, and that lag effects from all the Fed hikes would (finally) catch up with us and smack us in the face, leading to a very bearish decline in the market. But on the other hand, the rally that we endured was stupendously large, proving to us that the bulls had enormous strength—despite the harsh monetary policy—and so it can be dangerously unwise to underestimate them, even here.

For the time being, I am reluctant to pick either of these scenarios with a high degree of confidence. 50% of market participants are about to be destroyed, and we’re just going to have to try to tread carefully so as to end up among the survivors. Over the summer, I thought it would be more appropriate for the market to make a partial rally before a big turn, and we ended up almost making a double top instead (though we did then get a big turn).

That extra strength has at least alerted me to the possibility that the bulls still have more gas. We’re in a bubble, no one should be questioning that. Whether that bubble has finally popped with absolute certainty—that part is debatable.

But, those lag effects should be here and if those are broadly felt in the economy, stocks are not going to survive. If there’s ever a reason for the bubble to pop, the fastest hiking cycle in history is a great reason.


It would be nice for my tarnished reputation from this summer to be able to insist on one of these outcomes over the other and to also be right about that, but I’m just going to play things as we go along, and do the best that I can instead. That may not improve my reputation very much either because people tend to prefer conviction, and I’m about to come across as someone who might change his mind every two days until these structures finally resolve. One reason for that is the possibility of bull and bear traps that can unfold in and around these structures (we had a little one on Friday morning) and I will spend the rest of today’s article suggesting where some of those can happen ahead of us. So, as we get to places like these, I may have to flip flop around like a convictionless fish, but my goal here is to hold no allegiances until I am sure the bear is back or not.

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So, you can see how difficult this may remain for some time still. The point here is to show that I don’t think it’s going to be easy to conclude that anything we do going forward will tell us much of anything. We start going up? That doesn’t have to mean anything. We start going down? Doesn’t have to mean anything either. I think it might suck for a minute. I will try to play along, but I will not be very loyal. We start going up and I will try some longs. We start to show weakness, I will divorce her in an instant lol—even if I have to turn right back around and beg her back into my life two hours later. We start falling, sell that shit. Market firms up, I’m back with the bulls—but even that may not last. I’ll use stops where I think I can place them safely.

So, let’s do the best we can, and hopefully we come out the other side alive and the better for it.

Now, in the very short term, I have this:

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Things are also strange here for other reasons. It feels like sentiment is good and bearish here. But the equity-only put-to-call ratio only got as high 0.94, and that’s not too high:

SPX

If that had gotten up to say, 1.2 (or even higher) or something, I’d feel like we’re more secure. That’s why we can’t rule out a steep plunge to the 200-day (maybe even through it) to get people to put more money behind their bearishness. The VIX got nice and high (I know “almost 20” doesn’t seem that high historically, but here locally that’s good and high). But all that tells us is that people paid a premium on the puts they did take.

Anyhow, we’ll see how things go. I’m going to be irritating and a little untrusting of moves we may see ahead of us, either direction.

I hope everyone has a fine weekend, and I look forward to seeing you next week.


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