Tickers discussed: SPY QQQ IWM TLT HYG GLD GDX NYMO NAMO Strategy and Tactics
The Weekend Profit Navigator provides a big picture stock market analysis for the week just past with a look ahead. Key levels and trading locations for the indexes are provided, along with trading plans and timely commentary to keep you on the right side of the trade.
NOTE: Markets are closed Friday April 10 in observance of Good Friday.
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Observations and Miscellaneous Ramblings
- Calm before the Storm I have a feeling that something big is about to happen. As vol drains out and the daily range contracts, traders are regaining a sense of normalcy amidst an economic backdrop that is anything but normal. This isn’t some big market call. It’s just a feeling I have that something is coming our way and we have no idea what it could be and that Vol will come roaring back.
- Where’s Warren? Warren Buffett, if nothing else, is usually good for a “Pep Talk” media tour when times get tough. When the market nose dives he tells Becky Quick, his favorite reporter, that “He’s Buying” that “In 10 years the market will be higher” or ” Buy a slice of America, It’s never failed me”. In 2008 he regularly told us its darkest before the dawn. Not this time. Other than a Friday night disclosure that he dumped his airline stocks, Warren has been no where to be seen or heard. Why?
- VIX Fade. The VIX worked it’s way down below 50 this past week. While a falling VIX should be supportive of equity prices it certainly does not mean prices necessarily have to go higher. VIX in large part measures the put buying intensity and hedging that is going on. If people are already out, they dont need to hedge. It also means equities have an easier path to go down without a massive put wall below. Keep a watch on it, just dontr think it is the be all -end all for equities.
We are in a Bear Market
It may sound idiotic to state for some the obvious, but from what I see and hear, many folks are not acting like it.
This is the AAII retail sentiment index courtesy of Cam Hui. Cash and Stocks are no where near the extremes of 2008 or 2000. Doesn’t look like bear market behavior to me.
Talking Heads sound bullish
Those who regularly circulate on the financial media certainly are not sounding any alarm bells. Variations on these common themes dominate.
“Time to start nibbling”
“Stocks look cheap here”
“Nobody can pick a bottom, start cost averaging in”
“The fiscal and monetary response has been overwhelming; You’ll likely see a rapid recovery coming out of this”
These are not what you’d expect to hear at bear market bottoms.
Bear Market Duration
Bear markets, on average, last 14 months. It took markets 3 years to bottom during the great depression. The GFC 1 market bottom was close to the bear market average.
I know, “It’s different this time”
It should be noted that in most recessionary cycles, it is usually certain countries or regions that are affected. When EM slows, DM is usually ok. and vice versa. When was the last time the whole planet went full economic stop?
Yes it may very well be different this time…..longer than expected.
We just finished the first head fake bounce, but we’ve yet to see the capitulation. That point when despondency overwhelms hope. Bear market bottoms come when collectively bulls give up and throw in the towel. We’ve not seen anything close to that. The dipsters and V-bottom hunters remain vibrant and active. No bottom until these guys go dark. Its not about a certain level on SPX, its about sentiment getting truly washed out. Not there yet.
Market Resiliency: Deserved or Delusional
In recent weeks, we’ve had several horrific data points on new unemployment claims yet the market refuses to go down. It’s possible the market has numbed to bad news and is still clinging to the possibility of favorable outcomes. It also may be that participants simply cannot imagine particular outcomes and therefore cannot price for it.
Example: A couple of weeks ago I shared my experience taking a direct hit from Hurricane Andrew. Examples of not being able to comprehend the unimaginable were many. It’s putting up plywood on your windows but your roof blows off. Its buying 10 gal of gas for your portable generator, but not having power for 4 months. Its putting equipment into your industrial metal building for safe keeping but then seeing your building, contents and all, disappear. None of those realities where priced in; none were imaginable.
Can the market imagine these outcomes?
Will the market be higher or lower if…..
- We experience a 9/11 type Covid death toll every day for 6 straight weeks ( this is the projection IF we do everything right )
- In Vietnam we lost 55,000 lives over 15 or so years; Can you or the market imagine or withstand 4 Vietnam’s over the next 2 months
- If Covid is not heat resistant and the virus persists into the Summer ( Thailand has its hands full with temps in the 90’s right now )
- Companies suspend divvys and buybacks en mass for the next 2 years as a fight for survival unfolds
- unemployment spikes to 25% in April
- unemployment persists at 9-11% through 2021 as projected by the Congressional Budget office
- there is a massive consumer and corporate deleveraging cycle as everyone tries to repair their over-leveraged balance sheets
- The US Deficit tops $30T and the FED balance sheet tops $10T …. we are well on our way. ( pundits cant decide if this means deflationary spiral or runaway inflation )
- When companies begin reporting in a couple weeks not only give zero financial guidance but give dire outlooks instead
- The wave of credit defaults, credit downgrades, and Bankruptcies have not even started yet; what happens when they do
- If 2019 profitability does not return until 2022 as some economists now project
My point here is not to turn you into a Doomsday Prepper. It’s to open your eyes to the fact that these potential outcomes are in no way priced in and to think they are is close-minded. Just look at last week. It took exactly one 4% gap down to kill “the new bull market”.
We are in a bear market. Position and trade that way. Take advantage of “rip your face off” rallies typical of bear markets, then seamlessly fade them. Don’t for a second fall for the hype that the worst is behind us. It’s not different this time and very well may turn out to be worse. Keep your head on a swivel and your eyes open to all potential outcomes. SPX 2000, 1700, and even 1500 are well within technical possibilities.
Be careful out there.
The Oscillators; Middle of the range
Both NYMO and NAMO are in the middle of the range but headed down. In my experience the oscillators only provide actionable info when they are at extremes. Continue to watch them for moves to extreme oversold or overbought levels.
Bonds – TLT
TLT has formed a bullish ascending triangle and is trying to break above $170. As long as price holds $166 the set up remains bullish. See the chart annotations for a detailed explanation of the potentials trades on TLT.
HYG is the high-yield ETF. It has clearly broken down. I think it heads lower. Credit defaults are coming and the FED is steering clear of buying this asset class. Even they do not want the default risk.
$GLD Daily and GDX Daily
We are currently long Gold which continues to look productive. We want to see a breakout of the triangle and see it move toward higher ground.
GDX gold miner ETF has lagged gold since the “sell everything” beat down. The chart annotations pinpoint a good buy location that may be forthcoming. Set an alarm per the notes and be ready.
$SPX Broadening Top
No new technical developments following the rejection of the 38.2% fib level. THis week I will be watching to see if the move continues lower or if the bulls make a push higher.
SPY 2 hour
Price has established a 3 day balance area. Detailed on the 30 min chart are the “balance rules ” to apply in these situations. THe rules apply to any and all balance ares you may encounter. Write them down on a sticky note, then memorize them. You will find the set up over and over again in your trading.
Follow the chart annotations for specific levels and commentary.
$SPY 30 min
My bias is lower but not so much so that I would not get long on a technical breakout. A balance area means just that, equilibrium. Wont take much to pop it higher or for it to drop below. Stay open to either outcome. With sizable gaps both above and below the balance area, there will be a nice payoff if you are on the right side of the trade.
$QQQ 2 hour
Almost identical set up as SPY but note price is above the downtrend line marked as the thick blue line. THis gives the bulls a technical edge.
See the detailed levels on the chart and follow the ideas in the annotations.
$QQQ 30 min
Price closed near the bottom of the balance area but still within it. Nimble traders can trade the $4 range while those in more of a swing trading mode can wait for a range break to establish a position.
Follow the chart annotations.
$IWM 2 hour
Unlike SPy / QQQ , IWM is in full bear mode as it continues lower. It is now within striking distance of back testing the prior low. Traders should look to take advantage if the gap fill begins to unfold. THe gap is $5 wide so it will pay to keep an eye on it.
$IWM 30 min
The downtrend line and gap define the important levels. Follow the annotations as they detail how to trade / position for IWM.
Pulling it all together
I am still favoring a resolution lower from these balance areas, but my conviction is not the highest. I think IWM is the tell. Bearish all the way. Doing my best to stay open to bullish near term outcomes like a gap fill of the overhead gaps then lower. Staying very tactical and nimble with modest position sizing. With the market remaining treacherous I am not going all in. I will take profits as they come off the table and hopefully avoid snap back reversals that can erase nice gains in an hour or two.
Strategically I remain in the camp that we will see lower prices as the market wakes up to the ramifications of a sudden global economic full -stop event as “Wave 2” data stream becomes overwhelming.
Cash remains king. If you have cash you have the privilege of trading. Remain defensive in your trading. Once your cash is gone, you are out. There are very few, if any, ALL-In Moments. Commit yourself to the idea that “if I am 100% wrong, I will still have enough reserves to keep trading”
Trying to keep you in the game guys
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