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


Now

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:

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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

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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.