Monday, October 24, 2016

My read on long term sentiment

We have some interesting AAII numbers. Before you get all bulled up on these numbers, remember that in bear markets, there is a consistent lack of bulls and bearish sentiment is persistent.

50 week SMA of AAII Bulls

50 week SMA of AAII Bulls/Bears ratio 

While bearishness in AAII numbers seems to be elevated, it is nowhere near as extreme as the drop in AAII Bulls. This means there are few bulls (buyers) left but also not many bears (shorts) exist.

In fact when we look into Rydex numbers, we can see that there is an extreme case of lack of bears.

5 SMA of inverse Rydex Cumulative Cash Flow Bear and MM funds

We can also see a similar behavior from insiders. Since late 2014, they are not buying

And 40 week SMA of Wall Street Bulls/Bears is about to drop to the level where large corrections / bear  markets began

40 week SMA of Wall Street Bulls/Bears

So my conclusion is: Bullish sentiment numbers dropped significantly over the last year but there is no proportionally extreme bearishness. When we look into Rydex money flows and allocations, we see a contradicting picture, an extreme case of lack of bearishness in actual investments. Are people not bullish but staying excessively long? This is a recipe for a sudden awakening move.

Unlike many blog and article publishers who post a bearish piece then states they are long stocks, I like to finish by saying that my current read on the market is decisively bearish and I am short index futures.

Tuesday, October 4, 2016

Divergences and Intermarket Relations are giving the same message

These charts are self-explanatory and most of the educated investors know what they mean. I will briefly explain;

In bull markets or healthy up trends, certain leaderships and intermarket relations must be maintained because they are a symptom of economic expansion and positive money flow. When the bull market leadership no longer leads and the intermarket relations between certain asset classes are broken, negative divergences show up. These divergences are a direct product of price therefore trend line analysis works on them as good as any other price based technical analysis does.

The first chart below compares SPX to RUT/SPX ratio and RUT/DJI ratio. As you can see there has been a large negative divergence between Russell 2000 small cap index (RUT) and SP500 (SPX). It also shows a similar divergence between RUT and DJI (Dow Jones Industrial). Furthermore both ratio charts are now backtesting long term trendline which suggest a downside reversal for the ratios is imminent. When RUT/SPX ratio or RUT/DJI ratio goes down, the whole market usually goes down. 

The second chart below compares SPX to SPXEW/SPX ratio  (SPXEW=SP500 equal weight index) as well as to SPX/TLT ratio. As the name implies, SP500 Equal Weighted Index  is an equal weight version of the popular S&P 500 Index and  includes the same constituents as the capitalization weighted S&P 500, but each company in the SPXEW is allocated a fixed weight. Therefore its performance is a measure of broad market participation. When SPXEW negatively diverges from SPX, it indicates that SPXEW underperformed SPX and the extra strength in SPX was created by a few over-weighted components while  the rest of the stocks didnt perform as good as the few large components.

Bottom portion of the chart shows the ratio of SPX/TLT.  TLT is an ETF tracking 20+ year T-Bonds. In a bull market or healthy uptrend, SPX outperforms TLT because money prefers stocks (risk) over bonds (safety).

On the chart below, we can see that both SPXEW/SPX and SPX/TLT ratios formed massive negative divergences. Also note that SPX/TLT ratio is sitting near its long term uptrend line despite SPX rallied more than 300 points since its Feb low. If this ratio breaks below the trend line, it will create a sharp move down in the ratio which will mean SPX will sharply drop while TLT rallies.

These charts support the other long term setups and signals we showed you before. They all imply that the bull market is about to end. But the big question is, what FED and other CBs will do when the bear market become apparent to masses. More importantly, will the next administration let FED to target and manipulate the stock market at the expense of our future.

Monday, September 26, 2016

Welcome to the beginning of the end

We have been talking about several long term setups and high probability signals that can possibly lead to a bear market. Entire Europe as well as several US sectors have been in their individual bear markets for more than a year now but we cant see it on major indices because they are engineered to reflect the performance  of a few selective companies. If you want to see the real picture, you should look at this:

I am not going to talk about old setups and signals I showed you in the recent weeks and months, but I want to show you this long term signal that no body knows about. The signal usually shows up before an important market decline or bear market. The indicator is a correlation between Russell 3000 Growth index and Russell 3000 Value index.

As explained on the chart, when the correlation between growth and value drops significantly, it is a strong indication that growth stocks negatively decoupled from value stocks. In other words, there was a period of time money rotation from growth (risk) to value (safety) was intensified.

Trends don't turn on a dime. Whatever was the reason for this long term rotation, will be there tomorrow. That makes the trend.

Another long term signal that usually shows up before a market plunge is seen on this MOVE index. The MOVE index is the bond market’s equivalent of the VIX. 

I am not going to get into deep explanations but as you can see from the chart below , such values near 50 preceded the 91 recession, the Nasdaq Bubble and the credit crisis.

MOVE Index

We shorted this market several times this year and did great overall, we have shorted recently and doing ok so far. We like to trade it on the short side in certain periods because this is a transition period from bull to bear market and next big surprises will come on the downside.

For example, when SPX tested the neckline after the FED, it was a great opportunity to short it because the transitional condition I pointed out above was as alive as it was before the FED


And leaning towards bearish possibilities during down cycles usually pays off very well. For example last Friday near the close, I saw this possibility based on the chart patterns and sent an update to our members:

As we approach the session end, I started watching this Dow chart which I was posting before FED. The index will breakdown eventually but if the index closes the session near the trend line today (some 100 points away from where it is now), there is a possibility that we may see a nasty bloodbath during the overnight/premarket trading on Sunday.

Dow  120m 

and that is exactly what happened

There is no long term directional trend anymore but a new one is well underway. We are still in a  transition period but we might have seen the high for this bull market already. Shorting the bounces despite FED and other CB actions started paying off quicker than ever because their actions or actionlessness don't help this saturated market anymore.

Friday, September 16, 2016

Incubation, birth and development

In late summer of 2014, weeks before the Ebola plunge, something strange happened. Smart money was rapidly turning bearish, insider buying stopped and  internal weakness elevated.

Ratio of OEX PC to Equity PC is an excellent tool to measure the spread between smart money (OEX PC) and dumb money (Equity PC). This ratio skyrocketed at the time:

At the same time , insider buying stopped suddenly.

 For years, I have been using Catalyst Insider Buying Fund (INSAX) to observe insider buying activity. Once I started tweeting the ratio of INSAX/SPX in 2015, it became popular among traders and analysts. The ratio never recovered since the summer of 2014. Insiders showed reluctance to buy based on the fact that earnings were going to nosedive in coming months and years. This was the time incubation period for what seems to be a possible bear market began.

From this point, it took nearly 1 year for the market to form a long term top. In Aug 2015, the bull market was officially ended on the charts as the main trend which was holding the bull market was broken. As I showed in my earlier posts, it was not only on NYSE chart but many other US and world indices had the similar breakdown.

NYSE weekly

As you can see on the chart above, post-brexit rally was nothing but a test of the breakdown level coming from Aug 2015. And the most recent plunge that started last week was the confirmation that the test failed and we will eventually make new lows below NYSE 9000 level.

One way to project the next low is to interpolate the past intermediate term lows. In 2007 and 2008, it worked fine.

NYSE weekly, 2007-2008 top

 NYSE weekly now

So, together with the other data and long term chart setups I have, I want to repeat that;
Aside from short term corrective rallies that are necessary to reset the sentiment from time to time, I think we are in an intermediate term downtrend that will last months and extend beyond your wildest imagination.

Tuesday, September 13, 2016

Doing the most obvious in the most unobvious way

When they ramp the market to test the freshly broken channels yesterday, it would be a shame not to short the close despite how strong it looked at the closing bell. We opened new shorts there but this is going to be a roller coaster ride , not a straight plunge.

Excerpt from yesterdays comments:


As I tweeted late in the session, Russell 2K gave us a perfect chart setup to short

RUT hourly
RUT hourly

The setup is also obvious on SP500 charts

SPY hourly

SPX hourly

We are in the very beginning of a large decline that may last for months. This could be the biggest sell off since March 2009 because we had a perfect long term setup for a bear market , the setup was there, ripening  for nearly 2 years, and now the conditions are suitable.

But it will also be very challenging to play on the short side because of the large irregular and deceptive corrections like yesterday's. Because of the increasing public awareness , the system can get clogged quickly until irregular and bizarre rallies reset the system.

Look at this;

UVXY volume vs SPX

Each time UVXY prints an up day on huge volume, SPX bounces next day. This is because when these inverse leveraged ETFs are in high demand , it is an indication of extreme bearishness which naturally clogs the system and causes a counter-trend move.

Tuesday, August 30, 2016

'Ooh F' pattern

There is this pattern on Russell 2K weekly that beautifully fits in the big picture. I call it "Ohh F' pattern which completes at the point 'F'

We saw it in 2007 before the great recession but it was relatively small in size. Now, considering the CB interventions, understandably it got bigger, and its product will probably be big too if it works.

But the strange thing is, if the current pattern mimics the one from 2007 time-wise, we should see the final high right before the elections in early October or September. In other words we may have one more month of this sleazy choppiness before the fun begins but I doubt if the big money risks it that long

Russell 2K weekly

Wednesday, August 3, 2016

Long Term Megaphone

It's been a while since my last update. With Brexit and other CB related BS behind us, let me give you our perspective as to where we are now.

We have been in an intermediate term uptrend since Feb 2016 low, this uptrend was briefly interrupted by Brexit event which we used to cover all our short positions that we had opened at much higher prices. Our exit was ES 1983 which turned out to be the absolute bottom.

 Since then we have been trading short term moves but we think this whole intermediate term move is coming to an end.
 Since early 2014, major US indices have been forming long term tops. Their long term momentum already turned , price will follow like night follows day.  There are many sectors and sub-sectors that are already in bear market. It is only a few large cap names camouflaging the underlying broad weakness.

Dow Jones Ind. Monthly backtesting the megaphone top

Transportation Index Monthly broke inside the long term channel

 Transportation Index weekly

Investment Banks, Brokers and Dealers weekly, backtesting the broken bull market channel

Russell 2K small cap Index weekly backtesting the broken bull market channel

 Financials weekly backtesting the midline, headed to the channel support

 JPM weekly

Value Line Geo monthly sowing the real picture

 Value Line Geo weekly

And many European and Asian markets are already in bear market

Germany weekly 

China ETF

Europe 600 weekly

France weekly 

It is still early to call for a large intermediate term sell off but we are in a swing down move that may last for a few days. After this short term move, we may see marginal new highs on SPX but that's the best case scenario. The next intermediate term sell off will be worse than anything you have seen since March 2009 because weekly and monthly charts suggest that the next down cycle will be enormous and very powerful especially for those markets and indices  that are broken (C wave).

Friday, April 29, 2016

Bear Market Leadership

In bear markets I watch bear market leadership to spot inflection points.

Small caps

Brokers / Dealers


VIX weekly

Saturday, April 9, 2016

Rats leave the sinking ship first

 these sneaky insiders know exactly when to leave the ship

And of course, we all know what was scaring the markets at the beginning of the year. High yield bonds.


A reliable valuation metric :  Q ratio

Tuesday, April 5, 2016

Thanks for the lift Yellen

If it wasn't for the FED, we wouldn't get the excellent shorting opportunity lately. Without another QE, markets will sink like a cadaver in the water. Rates may stay at zero forever. It will actually make things worse for the financial sector / banks.

This is a kind of bear market no one in this generation has seen. Yes this first sell off may be bought somewhere below the most obvious spot (SPX 2000), but the type of selling climax we will see at the end of the whole intermediate term move will be astonishing imo.

Gold and other PMs are in bull market because there is no place else to hide in for long term and there is not much upside left in USD. Crude and other industrial commodities will stay sluggish because of global slowdown. We may see some upside in agricultural commodities only if El NiƱo helps.

Bloomberg Grains Subindex

Below is yesterdays "Opening Comments" and todays intraday update posted for xTrends Live members who have been on top of everything in this market.


Opening Comments 

I was expecting Monday to be a bigger down day but looks like those who stand against the selling and bought the dip will be run over in overnight session. That is why we hold core short position in a confirmed swing sell off. There is just too much money to make in overnight sessions.

This sell off was telegraphed by a few unique indicators we have been following for more than a week now.

First, this MA crossover indicator derived from short-term RSI of McClellan Summation Index. I had explained this before, it is now in free fall and price is following it with a little or no delay.

Secondly we had this indicator that spots extreme contango overshoots. I had also explained what it is and how it works in conjunction with VIX

And today I want to show you another unique indicator that works like a clock in this bear market. As you know, transportation is the leading sector of this bear market. It leads on the downside and on the upside. It shows relative weakness at the tops and relative strength at the bottoms. This indicator measures the correlation between SP500 and Transportation index. When the correlation between the two drops significantly towards the zero line, this means transportation index wants to move in the opposite direction of SP500. Since Transports lead SP500, we can expect the overall market to reverse its direction to the direction of the transportation index when the two indices decouple. As I was pointing out over the last few trading days, transports were showing extreme relative weakness which caused a sell signal measured by this indicator:

Structurally, Transports failed at the horizontal resistance coming from a previous breakdown point and the index jumped back inside the falling wedge.

Of course there are weekly and monthly bearish setups that can dominantly effect any other setup

TRAN weekly

Russell 2K continues to be my favorite short among all major indices

IWM 120m

RUT weekly

Crude oil may find a temporary support right here but this has nothing to do with stocks as they decoupled long time ago.

USO daily

In addition to our core short positions in ES and TF and long position in VX, I will be looking to short more TF and ES on a rebound as we are about to see the initiating power move which is the most lucrative portion of this corrective swing sell off

We will likely open below the red line tomorrow, that gap should take us to the bottom line quickly. In other words today may be a trend day.

SPX 120m


Intraday Update

Russell 2K is breaking down, I am trying to maximize profits by shorting intraday bounces as I just tweeted another short.

Put/Call ratio for all SP500 constituents is 0.56, this is something you will see at the market tops , not on a down day. Small traders are buying the dip with no fear and that means we will likely see a swoon into the close as they puke.

I will close todays short positions at the close today and keep core shorts.

RUT 30m