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:
MID-TO-LONGER-TERM POSITIONS (Weeks-To-3Months+): We entered this week on the HOLD decision for US and Eurozone Equities, with the caveat being the S&P 500 regains major support (1,880-1,870), and it did in yesterday’s trade. We acknowledged that commodity-laden indices, industrials, and materials (XLB) have gotten relatively expensive and hold no positions in these spaces; especially with respect to the TSX that remains in a down-trend and is dislocated and relatively expensive. Monday Feb 8th, 2016 the S&P 500 broke major support (1,880-1,870) moving us closer to the SELL decision for our mid-to-longer-term holdings.
Friday Feb 12th, 2016 the S&P 500 regained support of 1,850-1,842 moving us closer to HOLD on the expectation of regaining 1,880,1870 into the open of Feb 16th, 2016, and this transpired. We now have confirmation of a macro-market swing-low formation, taking place below major support (1,880-1,870), hence only “played” with shorter-term positions into the open of this week. We remain in DEFENSE mode with respect to our mid-to-longer-term holdings this week (remember long-term up-trends have broken in this market and bullish bounces are plentiful in a bear market and/or topping process).
SHORTER-TERM POSITIONS (Days-To-Weeks): We entered this week with the HOLD decision being employed in US and Eurozone positions (SPY, EFA, FEZ, QQQ, IWM), caveat being the S&P 500 regains support of 1,880-1,870 (major support), and it did. Feb 11th and 12th did provide those of us with a HIGH risk-tolerance an entry opportunity on the long side for SPY, QQQ, IWM, EFA and on the short-side for TLT and Gold. The next entry opportunity for would be upon confirmation of the S&P 500 regaining a foothold above 1,880-1,870 and ideally basing action in Crude Oil. I am “staying-away” from commodity-laden spaces, until WTI Crude Oil regains a foot hold in support of $31.15-$30.50; it attempted to touch said level as expectations were for cuts from the Saudi-Russia meeting yesterday, but they simply “froze” supply at Jan 2016 levels. All short-term trading comes with risk, waiting for confirmation will eat into reward but more importantly minimizes risks.
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