Market Recap – 17 February 2016

The Markets gapped open and we strong form RISK ON most of the day. The Nasdaq and the Russell out performed and helped lift the markets to back into the 1928-1921 support structure. Oil continues to be buoyant and is approaching the $31.50 resistance level as I write this (6:25pm EST). The 2pm FOMC minutes revealed that the FED is may need to put a hold on additional rates increases with a slowing economy China’s weakening growth and increased market volatility.

Where does the market go from here? Let’s examine the current state of the S&P 500 and the breadth and sentiment internals which can yield some clarity going forward. I have marked several buy and sell windows on the chart that have occurred over the last few months using my short term breadth (McClellan Oscillator) and sentiment indicators (Put/Call Ratio). These internals have given some good entry and exit signals when the market was in an overbought conditions in recent months.

Keep in mind the markets has rolled over and prospects of making new highs are unlikely in this environment. Look to sell into rallies to de-risk long term holdings until a clearer long term picture emerges.

The last warning reading was on February 1 which did lead to a pullback from the 1950 area as predicted in the Market recap post that day. In that post I discussed how a hold above 1950 was possible but in the end the breadth and sentiment gauges won the argument. After the pullback which began February 2 $SPX ended up making a double bottom and hammer candlestick which was a good swing entry (Disclosure: I went long inverse bonds TBT and continue to hold XBI I have closed my VIAB position today with a nice swing profit.)

Currently the $SPX has bounced and gapped 3 straight days heading back into the 1928-1921 resistance structure. The Breadth internal is reaching an overbought level but sentiment has not turned overly bullish yet. There is likely a little more blood to be squeezed from this stone but if you are long swing positions tighten up your stops.

A quick look at the relationship with Bonds and equities continues the thesis of more room to go. Long term bonds went parabolic last week and has since come back down to earth with more room to go lower in the short term.

The bond versus equity relationship went way outside of normal parameters as indicated by the regression channel of the two instruments. Long term bonds TLT was more than 2 standard deviations away from its normal relationship with stocks and therefore extremely dislocated and expensive at that time. This lined up well with the double bottom in the markets and I was able to go long the inverse bond ETF symbol TBT on February 11 based on the regression analysis I just layed out for you.

Summary: