THE PRIMARY LEADER FOR THE CURRENT BULL RUN HAS BROKEN DOWN
While there is continuing reason to believe that the foundation remains in place for further upside to this bull market, cracks are beginning to emerge in the underlying technical foundation. Earlier in the week I highlighted the primary Trumps trades being in the beginning stages of unwinding. Now there are very obvious signs that primary leadership for the market, at the very least, needs a prolonged period of rest. Below is the chart for the SOX (Semiconductor Index), which has been a bastion of absolute strength and leadership for the entirety of the ascent from the February 2016 lows. The trajectory off those lows, for the first time, has been compromised on a weekly basis. click chart to enlarge When you look at the current market, it's becoming obvious that investors are having a difficult time rectifying increased exposure with a near non-stop symphony of scary headlines. Whether increasing geopolitical risk on virtually all fronts or increased domestic fiscal policy risk, the reasons to sell are numerous, while the reasons to buy are scant. That very dynamic, however, could end up being the bulls best hope. Fear remains too high for any substantial pullback, UNLESS a geopolitical event or overwhelming signals of an economic slowdown interfere with the sentiment dynamic. That sentiment dynamic is best illustrated by the long-term moving averages of the combined put/call, which are telling a story of absolute disbelief in a market at record highs. Whether further upside awaits or a breakdown is imminent, the markets are no longer on the solid ground that allowed for studies like this to emerge in Q4 of last year. It's a coin flip going forward. Disclaimer This website is for informational purposes only and does not constitute a complete description of our investment advisory services. No information contained on this website constitutes investment advice. This website should not be considered a solicitation, offer or recommendation for the purchase or sale of any securities or other financial products and services discussed herein. Viewers of this website will not be considered clients of T11 Capital Management LLC just by virtue of access to this website. T11 Capital Management LLC only conducts business in jurisdictions where licensed, registered, or where an applicable registration exemption or exclusion exists. Information contained herein is not intended for persons in any jurisdiction where such distribution or use would be contrary to the laws or regulations of that jurisdiction, or which would subject T11 Capital Management LLC to any unintended registration requirements. Visitors to this site should not construe any discussion or information contained herein as personalized advice from T11 Capital Management...
WHAT TO EXPECT GOING INTO MID-YEAR FROM THE MARKETS
The last time I posted any kind of chart here was on October 30th, in a posting titled," An Unorthodox Long-Term Indicator Is About To Scream Buy." The general premise, in a nutshell, was that the market was about to embark on a 20% rally over the next 12 months with very little chance for a drawdown from that point. This was at SPX 2100. Now that the SPX is closing in on 2400, it's time for an update to see exactly where we should see an intermediate term top that will interrupt the current sense of nirvana. click to enlarge Given the current trajectory of this run, it is not unreasonable to expect 2500-2550 on the S&P 500 by June or July. Depending on how the market responds to this important trajectory point will determine what happens from that point forward. There remains little reason to bring in long exposure presently, other than obtrusive contrarian indicators and valuation markers that are inherently prone to range expansions during secular bull markets....
AN UNORTHODOX LONG-TERM INDICATOR IS ABOUT TO SCREAM BUY
The combined put/call ratio is a useful tool to measure sentiment, yielding contrarian driven results that are beneficial to an investor more often than not. There are other ways to use the put/call, however, beyond your simple when the put/call moves up to X level then the market should be bought as pessimism is excessive and when it moves down to X it should be sold as optimism is excessive. Some pretty impressive results can be had from examining two very long-term moving averages of the put/call ratio, in this case the 260 and 600 day simple moving average, with the intent of studying what happens to the markets when these moving average cross. Think about what it means for just a second when these two long-term moving averages cross. It's a pretty important indicator of comfort or discomfort with a market, not in a contrarian sense, in that comfort equates to complacency. But, rather, in a very real sense, as in this case it equates to comfort that has evolved from some very pessimistic conditions prior. With that frame of thinking in mind, when the 260 day moving average crosses below the 600 day moving average, it represents capital becoming comfortable moving back into the markets following a pronounced period of pessimism. The 260 day moving average is above the 600 day moving average exclusively during recessions and panics. It represents an investor class that basically hates the market. The 260 day moving average going back below the 600 day moving average represents an investor class that is warming up to the market again, with capital moving into risk assets. Here's a look at what happens to the S&P 500 12 months following capital becoming comfortable with the market as reflected by the put/call ratio: click chart to enlarge The most impressive part of this study is not the average gain of 16.87% in the 12 months following the sentiment shift, but rather the fact that the maximum drawdown once the cross takes place averages 2.2% when the signal is taken at month end once triggered. Essentially, once this sentiment shift takes place, the markets simply take off, without much in the way of looking back over the next 12 months. A slice of apple pie amidst the chronic pessimism and indecision investors face at this juncture....
TWO IMPORTANT AVERAGES ARE SUBTLY DELIVERING A BULLISH SIGNAL
It's the subtle indications in the market that give investors the greatest advantages. Otherwise, you are basically knee deep in information that everybody else is keying off of in an attempt to gain an edge that often times doesn't exist. The latest subtle technical clue that the market is delivering to those who choose to listen is in two important leading averages - SOX (Semiconductor Index) & RUT (Russell 2000). When both of these averages are working together to provide leadership, magical bull runs can and often times do develop. What is important to understand in this circumstance is that this may be the beginning of their leadership exerting itself, with several more months of a carving out process taking place before the markets begin their run higher. All signs continue to point to late Q3 or Q4 as the point when the market gains its legs back. For the time being, this is the type of foundation bulls want to continue to build throughout the summer trading months: (click chart to...
WE ARE EXPERIENCING MANIPULATION OF MARKET PARTICIPANTS AT ITS GRANDEST
There is a certain repugnance attached to the current market that is being expressed in price action almost perfectly. Contrary to popular wisdom, the act of being disgusted with the financial markets doesn't necessarily have to be expressed through the outright liquidation of a stock portfolio. It can arguably be better expressed through frustrating price action that leaves both sides of the market furious at their inability to cope with current conditions. Welcome to the market of 2016. This dynamic is nowhere better expressed than a look at the Nasdaq Composite, which is a symphony of degradation in psychology expressed with red and green bars. There is no glory in battling such a colossal miscreation, only pain and regret. Fortunately, it seems that market participants have grasped this concept as the long-term put/call ratio is nearing points of fear only seen during severe economic contagion of one form or another in the past. What is important to realize is that given both of the dynamics expressed above it will be impossible for market participants to correctly surmise when it is appropriate to become aggressively bullish again and stick to that position. The psychology of defeat expressed through complete frustration as revealed in the current price action will be looking to sell rallies just at the time they should be bought. When it comes to the essence of what the markets are attempting to accomplish at this juncture this may be it. Positioning participants to consistently make the wrong move (sell stocks) during what will be a period of time when making that move will prove extremely costly due to the persistence of the uptrend that forms after this prolonged consolidation for the major market averages. It is impossible to pinpoint when that move up will begin. I don't think it will be anytime between now and September. Sometime in Q4, possibly Q1 of 2017. In the meantime, there is more work to do in manipulating those easily manipulated so that the supply exists on the way up to satisfy the voracious appetite for stocks that is sure to...
AVOID THE SLOSH
The sloshing around of the S&P 500, led by a gallantly mediocre tech sector, shouldn't come as a surprise to investors after the run we have had since the recent lows. This is simply a function of the markets reacting to a convenient stopping point to assess what comes next. click chart to enlarge There is a distinct possibility that technology will underperform from this point into late summer, which sets the stage for continued sloppy behavior for the various indices. Too many tech names have either hit important resistance points and are now reversing or are in no man's land in terms of price. Given some type of massive risk on movement by asset managers the sector will likely be thin on the bid side. It is by no means a death knell for the market as there should be continued rolling movement with a general upside bias for the S&P 500, led by financials. If there was ever a summer to take off in order to avoid the psychosis inducing gaze of the market during a time when it will be searching for victims of all stripes, it will be June-September of 2016. Below is a musical reminder of the best course moving forward to be played as frequently as necessary to avoid monetary calamity....
FRONT RUNNING SELL IN MAY
Sell in May and go away is a long lived axiom on Wall Street that encompasses investor skepticism regarding what are typically volatile, low volume trading months of June-August. It is then understandable, especially in today's environment of deeply-rooted bearish sentiment, why investors and traders would attempt to front run such a poetic use of words in a single compact phrase. The front running of sell in May comes just as investor sentiment according to AAII has gone from a little bullish to somewhat bearish to simply throwing up hands and shrugging shoulders in disgust, with the ultimate conclusion being that investors just don't know what will happen from here. Bearish sentiment is again spiking as neutral sentiment shoots through the roof. It is only natural then, all things considered, that investors would be falling over one another to get a jump on the sell in May trade. Unfortunately, markets are rarely so accommodating and not easily impressed by poetic meter. The more investors piling into this trade over the next week or two, the more the chances of a rebellion by the market to challenge the conventional wisdom. While selling in May and going away might prove to have been the correct move given 20/20 hindsight, the trade will be a difficult one to execute with any confidence given the preponderance of bearish participants causing waves to appear due to their piling on in one direction. June - July may ultimately prove a more suitable environment for bearish positioning, avoiding the chop to come....
THE ULTRA LONG-TERM PERSPECTIVE
Let's put aside the the multi-month time frame for the market just for a second and focus on the really big picture. This is a good exercise for the simple purpose of maintaining focus, which is a sorely needed attribute among modern market participants. I presented the chart below in January as a means of assuaging the then persuasive fears of a secular bear market. According to the very simple chart below going back nearly 100 years, the markets are in a powerful secular bull market that really just started recently. With that said, there are going to be numerous corrections (you can even call them cyclical bear markets) between 10 to 20 percent that convince market participants of an impending secular bear market that is both long-lasting and deeper than 25% from peak to trough. We, in fact, just had one. And it worked perfectly in that it completely threw market participants for a loop, causing all varieties of sordid analysis of the septic variety that were more or less a product of fear rather than facts. click chart to enlarge What is important to note about the evolving ecology of the markets over the past 100 years is that secular bears have become progressively shorter in duration while secular bull markets have become progressively longer in duration. There are probably multiple reasons for this, most of which has to do with the involvement of central banks and evolving liquidity experiments. Given this evolving pattern is it too far off to believe that this secular bull may last longer than anybody expects? The last secular bull market lasted about 17 years give or take. The one before that about 10 years. Is it unfair to assume that the unintended consequences of what is really the first global concerted effort at providing liquidity at any cost will be a progression of asset prices along both time and scope of returns? According to the chart above, it is not out of the realm of possibility and is in fact, very...
THE MARKET HAS HIT ITS INITIAL UPSIDE TARGET, NOW WHAT?
After pretty much pinpointing the recent market bottom while the rest of those on Wall Street were running around with their faces melting off screaming bear market, we are now at a point in this upside cycle where things will become tricky enough that further analysis is warranted. When we last left off on March 6th, I pointed to the trajectory sitting around 2100 as the ultimate destination over the next few weeks for the current move up. We are now sitting at this minor trajectory as pictured in the chart below for the S&P 500: click chart to enlarge At the same time, the put/call ratio is hitting levels of conviction, expressed through the purchase of calls, not seen since May/June of last year. This very simply tells market participants that bullish conviction has returned to the markets for the first time during this recent uptrend: The minor trajectory pictured in the first chart paired up with excessive bullish sentiment, as expressed through the put/call ratio, more than likely translates to increased sideways volatility moving forward. It certainly doesn't translate into an imminent decline. The upside just becomes more difficult from here. It is similar to a cyclist who has been traveling on flat ground for ten miles and is then met by a two mile climb uphill. He doesn't stop peddling, his peddling just slows a bit. There is enough momentum in this move up that we could indeed chop up towards 2150 before a top of any significance is seen. My feeling towards this rally continues to be one where I feel it necessary to remind myself that the greatest danger is in becoming bearish too quickly. Despite the put/call ratio, there is a general skepticism regarding the prospects for continued upside among market participants. While somewhat anecdotal in nature, a bearish attitude is certainly pervasive among a majority of market participants to take notice. If you're bearish on the market here you have a very distinct problem in that two factors are working against you: The economic data is not bearish enough to warrant an overwhelming of market dynamics to the downside. In other words, earnings aren't terrible, economic growth is decent, the Fed is slowly removing itself from the picture, emerging markets are improving and commodities have firmed up. Market participants are generally looking to sell at the first sign of trouble. Further, they remain prone to imagining trouble being present in places where it does not exist. When market participants become bearish too quickly, taking down exposure and/or shorting the market at the first sign of trouble, while...
THE FINISHING KILL MOVE FOR THE MARKET STILL LIES AHEAD
For those of you who haven't looked over my study from January 16th, it is a good place to start. What we have seen since January 16th is test and minor retest of the trajectory, which has predictably resulted in a convincing rally for all major market averages. Below is my opinion on the S&P 500 going forward: click chart to enlarge The restest of the lows that should occur somewhere in the summer/early fall is a high probability event given both technical, seasonal and macro factors. It should also be noted that the retest has an outside possibility of turning into something more than a retest, which would ultimately resolve around the 1760-1800 level. The situation has the potential to be perilous enough that I have been reviewing various ways to hedge our long exposure coming April/May for the first time in years. I will likely put together a combination of hedges that I will be posting here when I decide to initiate them. I have always been a believer in markets having an inherent tendency towards devious intention. It is rare that a market will witness an open wound among an influential, highly-publicized group in the market without rubbing salt in that wound, while ultimately seeking complete amputation of the limb as the end punishment. Given the fact the market now has its foot on the neck of so many prominent hedge fund managers through devastating results in 2015 followed by equally devastating results to start 2016, a devastating kill move likely remains in the offing. There is simply too much of an opportunity for the market to create the type of loathsome, highly publicized respect it seeks on a frequent basis by finishing what it has started in the hedge fund space via systematic violence in the months ahead. ...