NYSE and the status of world markets

[DaveTrade]

How Ukraine and Russia Could "Spike" Stocks Lower

The market’s closed this morning in observance of President’s Day, but that doesn’t mean traders are completely tuned out. The Russia/Ukraine situation, which has completely stolen the Fed’s thunder as a rate hike approaches in March, went from bad to worse following an alleged clash at the border.

Russia says five Ukrainian “saboteurs” were killed by border guards today as they attempted to breach Russian lines. The Ukrainian government refuted the claims, saying that not only did no such attack occur, but that there weren’t even any Ukrainian military assets operating in the area.

Russia then doubled down on its allegations, adding that one Ukrainian prisoner of war was taken in the skirmish and several armored vehicles were destroyed.

Shortly thereafter, leaders of the two pro-Russian separatist factions – the Donetsk People’s Republic (DPR) and Luhansk People’s Republic (LPR) – asked Russian President Vladimir Putin to formally recognize the independence of both territories (Donetsk and Luhansk).

Members of the Russian Security Council called upon Putin to do so as well in a meeting televised by the Russian state media.

Putin responded that he would reach a decision on the matter by the end of the day.

But less than an hour later, an official from Russia’s state media network said that Putin had already made up his mind to recognize both Donetsk and Luhansk as independent territories.

We mentioned in Friday’s commentary that Putin’s endgame likely involved absorbing Donetsk and Luhansk as part of a “peacekeeping” strategy. Nobody really knows whether Ukrainian forces actually attempted to cross the Russian border this morning. From Ukraine’s point of view, such a move would be a fruitless endeavor. Ukraine would have little reason to cross Russian lines at the moment.

In all likelihood, it was a “false flag” attack orchestrated by either pro-Russia forces (at the direction of the Kremlin) or NATO-allied intelligence in an attempt to spark a conflict between Russia and Ukraine. The former would potentially give Putin a casus belli (or "just cause") to carve off Ukraine's Donbas region for himself. The latter would warrant a major Western military presence right alongside the Russian border, which the US seems very interested in.

Oanda strategist Edward Moya stated the obvious in a Friday note to clients.

“Investors are having a hard time holding onto risk as the likelihood that the standoff between the West and Russia will ultimately lead to some ground conflict,” Moya said.

“Wall Street will remain jittery until we see a major de-escalation.”

Instead, the threat of war has only escalated since Moya’s note went out.

Richard Bernstein Advisors CEO Rich Bernstein was one of the few analysts over the last few days that managed to keep his eye on the ball.

“Whether it’s geopolitics, whether it’s the labor market, whether it’s supply disruptions — no matter what you look at, everything is pointing to inflation being front and center,” Bernstein said.

A Russian incursion in southeastern Ukraine (but not a full-scale invasion of the country) would likely serve as the bearish “appetizer” to a “main course” crash if the Fed hike rates more than expected next month. Fed Chairman Jerome Powell wants to get inflation under control, but to do so, he’d have to take rates to prohibitively high levels.

Powell might actually do it, but there’s a far better chance that he won't. Investors are more likely to see a few small rate hikes followed by a capitulation once things go bad. Stocks would continue to march higher in this situation, but probably not as fast as inflation, resulting in only nominal gains (and real losses) for long-term holders.

It’s a grim future to think about, but one that the market arguably deserves after almost 14 years of uber-dovishness. And should Russia cross the border this week, starting a minor conflict in Ukraine, the next short-term (bear) market cycle may begin as well.

 

[DaveTrade]

Just to show how we're tracking in the $SPX so far this year;

 

[DaveTrade]

Putin Just "Shocked the Market" Again

Stocks opened flat this morning following a tumultuous premarket trading session. Last night, after Russian military forces entered Ukraine, equity futures plunged while oil skyrocketed alongside gold.

This morning, however, stocks recovered all their premarket losses as gold gave up most of its gains. Investors were hopeful that Russia would go no further than the Donbas region of Ukraine, which it breached last evening, where pro-Russia separatist factions welcomed Russian forces with open arms.

Then, shortly before noon, stocks dove lower once again after Russian President Vladimir Putin requested Russian Parliament’s permission to use the country’s military forces abroad.

CNN reported last night that “the US is still seeing preparations for a potential broad invasion including loading amphibious ships and loading equipment for airborne units.”

Russian Parliament has yet to reach a decision on Putin’s request, but the Russian media said that it "has been already weighed by the Senate’s committees” according to the Speaker of the Russian Federation Council, Valentina Matvienko.

NATO Secretary Jens Stoltenberg called the request "the most dangerous moment in [European] security in a generation.”

Mainstream media outlets took Stoltenberg’s remarks and ran with them, claiming that Putin’s request is likely the precursor to a full-scale invasion of Ukraine.

Ukrainian President Volodymyr Zelensky went one step further this morning, saying that the “first step of invasion has happened.”

The question now is whether the West interprets Russia’s incursion into eastern Ukraine as a true invasion. If the US does, major sanctions (which would have a significant impact on the global economy) could be coming for “Putin & Co.”

Already high oil prices could potentially soar further, making January’s surge seem relatively small in the process. UK lawmakers got things going early yesterday when it slapped five Russian banks with economic sanctions along with three wealthy Russian oligarchs. Each bank and individual has been barred from doing business in the UK.

“We will not give up,” UK Prime Minister Boris Johnson said.

“We will continue to seek a diplomatic solution until the last possible moment but we have to face the possibility that none of our messages have been heeded and that Putin is implacably determined to go further in subjugating and tormenting Ukraine.”

Johnson then went on to “torment” bulls, adding:

"This the first tranche, the first barrage of what we are prepared to do and we hold further sanctions at readiness to be deployed alongside the United States and the European Union if the situation escalates still further.”

Johnson’s saying that if Russia heads further west into Ukraine, NATO’s prepared to wage a full-scale economic war. And they may still do that even if Russia stays put in Donbas.

“The Russia/Ukraine situation remains very fluid, and tensions remain high, and in the short term that will remain a headwind on stocks,” said Tom Essaye, founder of Sevens Report.

Essaye’s right in that the mere potential for additional sanctions should, at the very least, limit the market until Russia orders its troops to stand down. And with the S&P now very close to key support at the January lows, stocks are well within range of a major bearish breakout should Putin “press his luck” in the coming days.

 

[DaveTrade]

It Never Pays to Trade the Headlines​

By Mike ReillyFebruary 22, 2022


It’s always something…

Today Putin, last week it was the Fed and inflation, and for so long before that, it was COVID… the headlines du jour.

Most of it is baked into the price of stocks, bonds, or commodities by the time journalists turn your attention to it anyway.

So please tell me, when has it ever paid you to trade based on headlines?

Putin is still hellbent on advancing mother Russia’s position on the world stage beginning with Ukraine, inflation remains at a 40-year high, and the Fed still intends to raise rates in 2022.

It’s mind-boggling… but when you get right down to it, the big question investors should be asking themselves is: Is now the right time to invest, or is it time to be more defensive?

Is the market signaling opportunity or risk? You won’t find the answer in the headlines.

What you want to focus on discovering is if investors, both institutional and retail, are seeking the relative safety of consumer staples, or are they leaning into growth assets.

Two charts we track as a means to visualize these relationships are the relationship between Consumer Staples and the S&P 500 and Consumer Staples vs. Consumer Discretionaries.

Think of them as Opportunity and Growth vs. Defense and Preservation.

Here is a ratio chart comparing the S&P 500 relative to Consumer Staples (SPY/XLP): Growth vs. Defense.

In November of ‘21, this risk-appetite ratio hit its highest level in over 20-years. But in the months since, it has collapsed and flipped from bullish to bearish or risk-on to risk-off.

This didn’t happen last night because of Putin – this has been in play for months, giving investors an opportunity to reallocate part of their investable assets away from growth to more value-centric assets.

What to know: As long as we’re stuck beneath the 2021 first-half highs of 6.10, this signals we’ll remain in a risk-off environment.

It’s too early to tell if SPY/XLP is forming a legitimate trend reversal, but the ratio continues to look more and more like a large topping pattern, which would signify a risk-off environment for investors.

We’re monitoring this one closely for signs of further deterioration.

Another one of our favorite risk appetite ratios is the Equal Weight Consumer Discretionary versus Equal Weight Consumer Staples:

Here, I’m using the equally weighted sector proxies (RCD/RHS). This helps to eliminate the “Amazon effect” as Amazon makes up over 20% of the Consumer Discretionary sector XLY and I want to mute their impact on the direction of the ratio.

Much like SPY/XLP, the Equally weighted RCD/RHS ratio sits just slightly below what I’ll qualify as our long-term risk level of 0.890.

Investors want to see a sustained move above the 0.890 level before we can say risk-on over risk-off.

On a shorter-term basis, RCD/RHS has been a sideways mess for the past year.

What we’re seeing isn’t new. This isn’t something that snuck up on investors in the dark of night.

More often than not, rotation like this isn’t an event, it’s more of a process. A process that has been in the works for months.

So until the broader market (S&P 500) and specifically Consumer Discretionary stocks can regain control, this market will remain mixed at best, with an emphasis on a defensive investment posture.

 

[DaveTrade]

U.S. Stock Indices Tumble Amid Russian Aggression​

By Tim FortierFebruary 25, 2022

“There are decades when nothing happens and there are weeks when decades happen.”
–Vladimir Lenin

As the world now knows, Russian president Vladimir Putin announced the start of a “military operation” in Ukraine, attacking several cities in the Eastern European country after months of amassing troops at its borders.

This act of aggression will likely reinforce global macro trends already in place – namely that of rising inflation and soaring commodity prices.

Even before tensions between the Ukraine and Russia escalated, the Dow Jones, S&P 500, and Nasdaq saw major declines across the board.

By February 23, the day before Russia’s military started its operations on Ukrainian territory, the Nasdaq had declined 16.7% this year, while the S&P 500 and Dow Jones Industrial Average had lost 11.3% and 8.9% compared to the end of 2021, respectively.

The impact of soaring inflation and rising interest rates was already having an impact on the markets.

iShares 20+ year Treasury Bond (TLT) is also negative, as I warned previously that bonds would not provide the safe haven as they have in the past. Here’s your evidence.

With Russia and Ukraine being some of the largest exporters of commodities like oil, gas, wheat, copper, and nickel, the ongoing conflict will most likely result in price hikes as well as a further exacerbation of supply chain disruptions.

The reaction to the Ukrainian invasion is as expected. Impacted commodities (EU natural gas, oil, palladium, wheat) initially ripped higher.

Year-to-date, there’s been a significant performance differential between U.S. stocks and commodities.

This trend is likely to persist.

Sanctions against Russia are designed to severely restrict Russia from selling oil and other essential commodities in the international markets. Without an emergency supply response by OPEC, oil could surge beyond $150 per barrel.

Other commodities are vulnerable too. Russia is now by far the largest supplier of natural gas to Europe. It is also the world’s largest supplier of palladium and the second-largest producer of cobalt (EVs).

A surging oil price has caused almost every recession in the US since 1945. Global growth could be reduced by 75% this year if oil jumps to $135 per barrel.

It is almost certain that the result of all of this will be stagflation. Personal disposable income has recently weakened and it is almost certain that higher energy costs will continue to put pressure on the consumer.

Strategy

One of the most important points to understand is how economic regimes dictate asset mix. My fear is that too many investors will be slow to recognize this important distinction.

Investors have not had to deal with rising interest rates, soaring inflation, and commodity supply restrictions since the 1970s.

As a result, investors remain overweight in traditional stocks and bonds and underweight in hard assets.

The problem with accommodative Fed policy is the markets are NOT prepared for exogenous events such as this. There are still trillions of US Dollars in financial assets that must move into hard assets.

This will provide opportunities in precious metals mining stocks and reinforce trends already in place in key commodities.

The Stock Market

This daily chart of the S&P 500 shows key support areas.

On the right side of the chart is the volume profile. This indicator reveals significant price levels as determined by the volume traded at each level. The most significant bar is around the 3200 level. This is key long-term support for the market.

Looking more close up, the price action on Thursday broke the last significant price level of what some technicians might call the neckline of a head-and-shoulder top.

This has initially been met with “buy the dip” as U.S. stocks finished higher on Thursday and formed a bullish daily hammer. Traders felt that the war would lessen the likelihood of the Fed raising interest rates.

I do believe though, that this rally will be short-lived. The panic-low had caused prices to stretch away from trends and what we are seeing is a more likely reversion to the mean price action.

There should be a confluence of resistance with the 5, 9, and 20 exponential moving averages defining the trend until proven otherwise. I’ll place the current resistance on the S&P 500 around 4260.

Bearish sentiment has also reached an extreme. This can often be a short-term contrary indicator. If prices can consolidate around current levels, it should help work off some of the bearish sentiment.

I believe that Sectors that are highly dependent on consumer spendings, such as retailers and home builders (all part of the broader Consumer Discretionary) should be avoided.

Even if issues between Ukraine and Russia can be resolved soon, the factors that have brought us inflation will remain.

 

[CityIndex]

It’ll be interesting to see if the ASX200 and S&P500 follow a similar trajectory in the near-term, with both indices finally managing a close back above their respective 200-day MAs on Tuesday.

The ASX200 is currently up 0.39% today, extending yesterday’s gains. All trading carries risk, but if both indices can hold their breakout, it might open the possibility for an extended rally as long as new macroeconomic and geopolitical developments don’t spark a return to risk-adverse flows, dragging equities lower.

 

[DaveTrade]

It’ll be interesting to see if the ASX200 and S&P500 follow a similar trajectory in the near-term, with both indices finally managing a close back above their respective 200-day MAs on Tuesday.

The question that is starting to materialise inside my mind and others I suspect, is, 'have we put in a bottom?'. Watching and waiting for the market to answer.

 

[CityIndex]

The question that is starting to materialise inside my mind and others I suspect, is, 'have we put in a bottom?'. Watching and waiting for the market to answer.

That definitely does seem to be the question on everybody’s mind.

From a technical standpoint there is a case to be made that we have seen a bottom, but it never pays to predict the market, especially when there are still so many factors that could potentially create headwinds.

As you said, looks like we are just going to have to wait and see.

 

[DaveTrade]

This "Major Recession Warning" Is Almost Here

Stocks roared at the open this morning before giving up some of their gains through noon. Hopes for peace between Russia and Ukraine swelled after negotiators hinted that progress had been made in talks between the two countries.

Russia’s chief negotiator Vladimir Medinsky called the ongoing discussions “constructive,” and added that he would take Ukraine’s proposals directly to Putin himself. The New York Times then reported that “the Kremlin’s spokesman, Dmitri S. Peskov, told reporters that the talks, which he said could continue on Wednesday, could be of great consequence, without offering details on the shape of a possible deal."

Russian Deputy Defense Minister Alexander Fomin compounded the bullish enthusiasm with a statement on how Russia would reduce its military presence in response to productive talks.

"Due to the fact that negotiations on the preparation of an agreement on the neutrality and non-nuclear status of Ukraine, as well as on the provision of security guarantees to Ukraine, are moving into practice, taking into account the principles discussed during today's meeting, by the Russian Ministry of Defense in order to increase mutual trust and create the necessary conditions for further negotiations and achievement of the ultimate goal of agreeing on the signing of the above agreement, a decision was made to radically, at times, reduce military activity in the Kiev and Chernigov direction,” Fomin said.

On the Ukrainian side of the bargaining table, negotiators confirmed Fomin’s remarks. Ukraine seems willing to maintain NATO neutrality and recognize Crimea as an independent region – two things Russia wants.

Shortly before the market opened, Russia began to withdraw its forces from Kiev and Chernihiv.

This unsurprisingly launched stocks higher at the open today. A few hours later, however, US Secretary of State Antony Blinken dashed hopes for peace when he said that he had not seen signs of “real seriousness from Russia” in regard to negotiations with Ukraine.

Then, shortly before noon, Medinsky noted that this morning’s de-escalation didn’t necessarily suggest that a ceasefire would soon follow. Thus far, talks have yet to produce any concrete results despite Fomin’s assurance that the Russian military pullback was done to “increase mutual trust” in negotiations.

In other words, barely anything has actually changed in Ukraine. And if talks deteriorate again (like they have several times now), Russia could very easily take another stab at Kiev. This isn’t helped by recent footage that's surfaced showing Ukrainian soldiers torturing Russian POWs.

It’s highly unlikely that this behavior is widespread, however even one isolated incident may be enough to sour negotiations.

And as the “will they, won’t they” Russia/Ukraine talks continued, a far more sinister danger emerged for bulls:

The market's most-watched yield spread (2s10s) is now on the precipice of inverting.

The 2s10s plunged today, falling to just 0.029% after the 2-year Treasury yield surged while the 10-year Treasury yield sunk. The 5s30s inverted yesterday for the first time since 2006. It seems now that it’s only a matter of time before the 2s10s inverts as well.

“With the Fed set to hike into restrictive territory, the curve will invert,” said Morgan Stanley economist Seth Carpenter yesterday.

“As has always been the case in the past, markets will debate whether an inversion presages a recession. A policy mistake that causes a recession is clearly possible, but our baseline is that an inversion without a recession is more likely.”

Carpenter will be proven right if the Fed “chickens out” and calls an end to the rate hikes in the next few months. If the Fed keeps hiking, however, a recession is virtually guaranteed. Historically, yield curve inversions as the result of a hiking cycle have always resulted in a recession.

Because of this, bulls are starting to hide out in value and financial stocks, which typically beat the general market during tightening cycles.

But if the Fed goes all-in on hiking, these sectors probably won’t rise. They’ll simply fall less than the broader indexes do.

That’s considered a “win” for the buy-and-hold investing crowd. Pockets of active traders, on the other hand, have already cashed out of equities by now. More will join them as the yield curve inverts further.

So, as tempting as it may be to remain fixated on Ukraine, investors need to instead focus on the yield curve. The 2s10s is on track to invert by tomorrow morning. If it does, the market may not react favorably.

And that’s potentially a big problem with stocks looking vastly overbought in the short-term following several weeks of runaway gains. Which, in the event of a 2s10s inversion, could come to a screeching halt.

 

[DaveTrade]

Russia’s “Secret War” Against the US

Stocks fell modestly this morning as the market melt-up finally took a breather. The Dow, S&P, and Nasdaq Composite all dropped while tech stocks endured the brunt of the selling.

Short-term bulls have little to complain about, however, given how much stocks have risen since bottoming out in mid-March.
Nonetheless, uncertainty reemerged today following setbacks in the Russia/Ukraine peace talks. Negotiators from both countries said yesterday that discussions had been “productive” over the last few days. This culminated with a Russian withdrawal from the cities of Kiev and Chernihiv yesterday morning.

But optimism concerning a ceasefire was short-lived. US Secretary of State Antony Blinken commented that the recent de-escalation may simply have been a Russian diversion intended to draw out Ukrainian defenders from heavily populated civilian centers. Russia’s continued shelling near Kiev and Chernigov suggests this may be the case.

The narrative then flipped back toward peace after the Kremlin released a statement this morning claiming that Ukraine “has essentially agreed” to maintaining NATO neutrality. Ukrainian negotiators also said that a peace deal with Russia was in the works.

Following these remarks, the Financial Times dashed hopes for a ceasefire – again, just like yesterday – when it reported on the Russian withdrawal.

"We have seen the Russians begin to draw away from Kyiv. But we have little confidence at this stage that it marks some significant shift or a meaningful retreat," a US official told the Financial Times.

Ukraine’s Defense Ministry drove sentiment lower, too, after a spokesperson said that Russian forces were preparing to “resume offensive operations.” Russia then issued another statement, saying that “the Russian army has created conditions for the final stage of the operation to liberate Donbas” and “all main tasks of the armed forces of Russia in Kiev and Chernigov have been completed."

Stocks traded lower through noon as oil prices continued climbing.

“We’re already seeing signs of what I call a countercyclical inflation environment, sometimes called a cost-push inflation environment, where inflation gets so high that it starts putting pressure [on growth],” said Liz Ann Sonders, chief investment strategist at Charles Schwab.

Rising oil prices remain a bearish impulse as the Fed battles inflation. Only energy stocks (specifically oil-linked ones) seem to like it when oil rallies.

The rest of the market slumps in response.

And while it’s true that the conflict in Ukraine prodded oil higher today, an emergency measure to ration gas in Germany likely did as well. Russia said last week that “hostile states” would need to start paying for Russian oil in rubles.

Since then, Russia has only doubled down on this demand. German Energy Minister Robert Habeck activated the “early warning phase” of Germany’s gas emergency law in response, which means the government will begin alerting German consumers and businesses on how to conserve energy.

If the gas emergency law progresses to later phases, strict rationing will limit the amount of gas individuals and businesses are allowed to use.

Russian lawmaker Vyacheslav Volodin felt little sympathy for Germany after his country was aggressively sanctioned by the West.

“If you want gas, find rubles,” Volodin said.

Germany is still refusing to pay in rubles. As a result, rationing may soon begin, and not just in Germany. Russia dominates gas and oil exports to the EU. In 2020, Russia exported 167.8 billion cubic meters of national gas to the coalition of European nations. That’s more than any other natural gas exporter in the world.

As a result, more rationing could emerge from EU partners that don’t make the switch to paying in rubles.

It should also be noted that, as of this morning, the ruble has completely erased its post-invasion losses vs. the dollar.

It begs the question:

Who is supposed to be sanctioning who again?

Right now, it seems as though Russia’s in the driver’s seat. Yes, the country has been completely cut off from the West.

But Russia is rich in natural resources and carries a very low debt-to-GDP ratio (just 17.8% as of 2020). The US, on the other hand, saw a debt-to-GDP ratio of 128.1% in 2020 and 137.2% in 2021. That makes it difficult (if not impossible) for the US to fight inflation via monetary policy adjustments.

And Russia is doing all it can to drive up inflation in the West while protecting its own currency. Case in point, in addition to forcing oil customers to pay in rubles, Russia began buying gold at a fixed price of 5,000 rubles per gram, roughly 1,000 rubles below the going rate.

That’s a bad deal for sellers at the moment, but consider that Russia will find plenty of willing business partners if the ruble continues to recover, thus causing Russia’s fixed price for gold to exceed the spot.

So, despite assurances from the mainstream media that Russia’s economy is in a completely hopeless position, the truth is that Putin has waged a relatively effective campaign against the West in a new kind of economic war. We’re still in the early stages of it, but make no mistake, so long as the sanctions against Russia continue, it’s only going to get worse for the West.

For that reason, investors need to maintain realistic expectations about what’s going to happen the rest of the year. The war in Ukraine will eventually end, but the damage being exacted upon the US economy has only just begun. That’s made Fed Chairman Jerome Powell’s job even harder.

It also makes aggressively hawkish monetary policy look more attractive as the lesser of two evils, which would ultimately crash stocks as rate cuts and a new round of QE – both things investors assume are coming this year – fail to arrive.

 

[DaveTrade]

S&P500 has started to pull-back in all sectors;

 

[DaveTrade]

An update is required here, as can be seen there has not been a follow through on an all-sector pullback;

 

[DaveTrade]

Some good analysis here;

 

[DaveTrade]

 

[DaveTrade]

Markets Don’t Go Up Forever

By Tim FortierApril 12, 2022

​

Trees don’t grow to the sky and markets don’t go up forever.

Over the course of a lifetime, an investor is likely to experience both bullish and bearish cycles.

As defined by Investopedia: “A bull market is a market that is on the rise and where the conditions of the economy are generally favorable. A bear market exists in an economy that is receding and where most stocks are declining in value.”

Historically, there have been 26 occurrences since 1929, when the stock market has fallen by 20% or more.

What makes bear markets somewhat deceptive is that they often begin very stealthily.

Prices will continue going up while the market internals begin to erode – exactly as we have witnessed over the past 12 months.

In the chart below, the percentage of stocks above their 150-day (30-week) moving average has been steadily falling.

This means that as the market peaked in early January of this year, it did so with much fewer stocks that were in uptrends.

This divergence was evident across a large number of internal indicators that we follow.

Investors who were simply following price could have easily been fooled as the rug has been being pulled out from under investors’ feet for over a year.

The other deceptive characteristic of bear markets is that some of the largest market rallies have occurred during bear markets.

For instance, in the 1929 crash, the crash phase lasted from October 10–29 and was then followed by a 36% rally, which then gave way to a drop to new lows.

In 2008, the initial decline was followed by a 24% retracement, which then gave way to fresh new selling.

Now it may seem puzzling to some that bear markets can spawn such large moves up, but it really makes sense.

First, there are many buyers who are hopeful that they just “caught the bottom.”

Second, there are those investors who sell “short” on the way down, and begin to panic and buy back their short stock, adding additional buying pressure.

This is how and why bear market rallies can look so impressive. In fact, half of the S&P’s strongest days in the last 20 years have occurred during a bear market…

Which brings me to our current market.

The January 4 high of 4818 was preceded by months of internal decay. The initial leg down fell just shy of -15% and was followed by a 12.70% rally to the recent high of 4,637.

I’ve seen many on social media calling for new all-time highs – the weight of the evidence suggests otherwise.

From a pure price perspective, the impressive rally of the last few weeks has backtested a two-year channel and reversed with a bearish engulfing candlestick pattern. This coincided with a close below both the .618 retracement level and the 20 SMA.

So the setup as we entered this week was looking more bearish than bullish.

Shifting to market internals, each of the key bullish percent indexes has reversed down in a column of Os, after yet again failing to reach a higher high.

Check out the Russell 2000 Bullish Percent Chart.

The S&P 500 Bullish Percent and the Nasdaq Composite Bullish Percent present similar messages telling us that institutions have used the recent rally to sell, not accumulate, shares.

This is bearish.

Looking further, the NYSE Advance-Decline line has rolled back over and failed to get above its moving average during the recent rally.

This too speaks to internal market weakness.

The Nasdaq Advance-Decline looks absolutely horrible. Note that this peaked over a year ago!

Sector Analysis

Sectors provide invaluable analysis given their interrelationship and significance to the overall economy. When you follow these relationships, you can easily see where the market is going.

Before each of the last three recessions and bear markets, consumer discretionary equities were significantly underperforming defensive consumer staples. The discretionary/staples ratio is now at its lowest level since the US election in 2020. The ratio is also diverging lower from the S&P 500, just as it did prior to the last three recessions.

The steepness of the white line is telling.

The JNK High Yield ETF hit new lows on Monday while the S&P 500 is still well above its March lows. Credit was never truly buying into the recent relief rally in stocks. Remember, credit tends to LEAD equities to the downside.

The SOX Semiconductor Index as a whole is now just above horizontal support at the 2022 lows set back on March 14. Semiconductors are now down -22% YTD.

The semiconductors are considered an important bellwether for technology in general and the industry plays an important role in the overall economy.

The Home Builders (XHB) is a sector I have been especially bearish on. Coupled with extreme construction costs and higher mortgage rates, new homes have become unaffordable for many.

The XHB Homebuilder ETF is not only in a downtrend but is accompanied by heavy volume as well. This sector exemplifies the growing problem of stagflation where the consumer is unable to keep pace with rising inflation costs.

CONTINUED IN NEXT POST, HIT MAX ATTACHMENTS

 

[DaveTrade]

One particular worrisome tell is the recent weakness in the Transports. A reliable measure of the supply versus demand, IYT tells us if goods are moving or not. What we do not want to see in a strong economy, is for supply to outweigh demand. IYT tells us about that relationship, hence, about the health of the US economy.

According to Dow Theory, any rally in the Dow Industrials must also be accompanied by price strength in the transports. The recent weakness in shares of IYT was accompanied by the highest selling volume seen in several years – and a break below the recent low would solidify a major top for this critical sector.

Inflation is here.

You can see it everywhere you spend – food, travel, even used cars. Nobody is immune.

Today’s print of 8.5% CPI was the highest since 1981 and reflected price increases not seen in the U.S. since the stagflation days of the late ‘70s and early ‘80s.

Strong inflation means the Fed has to change policy direction to fight it. They now must tighten policy rather than loosen it to stimulate economic growth.

The Fed policy of the last 40 years was managed in a deflationary backdrop, but the backdrop now is inflation so that changes all of the rules.

Strong inflation changes valid investment strategy because stocks and bonds can correlate to the downside thus removing the diversification benefit of traditional risk management.

You need different risk management rules to control portfolio losses (see this investment resource for a smart solution).

Stocks tend to perform poorly during inflationary periods, which is counterintuitive to most investors’ expectations.

In summary, downside risk management is paramount at this time.

 

[DaveTrade]

This Market Calls for Defense & Caution​

By Mike ReillyApril 26, 2022

Here’s what sector performance looks like right now:

• Consumer Discretionaries (XLY) is down -13.2%.
• Technology (XLK) is down -16.32%.
• Communications Services (XLC) is off by -19.78% year-to-date…

And it’s still only April! Think about this for a minute…

These three sectors XLY, XLK, and XLC account for two-thirds of the market cap of the S&P 500, and collectively they have lost -16.43% on average…

The performance of these three goes a long way in determining the overall direction of the S&P 500 index.

The S&P 500 is a large-cap growth index led by Technology, Communications, and Consumer Discretionaries. These are the growth trades of the S&P. The problem is they’re not very growthy right now.

Not to say “we told ya so,” but we’ve been pounding the table for the last six months about the rotation out of growth and into value. No, we didn’t have a crystal ball or some kind of magic spell…

Instead, we understand how to interpret the very charts and indicators we’re sharing with you every week.

The narrative of value over growth or defense over offense hasn’t changed. That’s very clear in sector performance.

Energy, Utilities, and Consumer Staples are the only three sectors with positive returns in 2022.

• Energy (XLE) is +34.07%…
• Utilities (XLU) is up +3.71%…
• Consumer Staples (XLP) has positive returns of +3.68%.

From a Relative Strength perspective, Energy has slipped a little while Utilities and Consumer Staples are taking over the leadership – these are the most defensive sectors.

The problem for all you index watchers (and investors) out there is these three sectors only account for 14% of the total market cap of the S&P 500.

That’s a big problem if you’re an index investor because it means you own too much of what isn’t working and not enough of what is.

This continues to be a market that calls for defense and cautiousness.

Yes, we will certainly see the headlines and hear the heroes out there telling you how it’s time for Tech to reemerge as a leader.

“Stocks are cheap – it’s time to buy…”

My reply? There’s a good reason growth stocks are “cheaper” than they were a year ago.

So, before you decide to jump into these growth sectors with both feet, I’d suggest you take a good look at the charts below.

And, if after careful consideration, you still think now is the time for tech and communications to go into full-on rally mode – well, may the investment gods be with you…

Let’s focus our attention on how to spot a market that is distributing stocks (to unwary souls) vs. a market where accumulation is taking place by some of the biggest investors in the world.

Let’s start with this: Four times as many NASDAQ stocks have been cut in half as have rallied 50% from their 52-week lows.

Or this little investor factoid: We have continued to see more stocks making new lows than new highs in both the NYSE and NASDAQ – 22 consecutive weeks of more new lows than new highs, making this the longest such stretch since the Great Financial Crisis.

Call me cynical, but this stat alone makes it difficult to make the case we’re in a bull market. Much easier to make the case this is indeed what a bear market feels like.

Here’s a chart of the NYSE Common Stock only Advance/Decline line or A/D line for short.

If you’re not familiar with it, it’s just a fancy title for a line chart comparing the number of stocks moving higher (advancing) in price vs. the number of stocks moving lower in price (declining).

What investors need to know: Healthy bull markets will see more advancing shares than declining shares.

However, today’s current market environment has been anything but bullish over the intermediate-term – as expressed through the NYSE A/D line peaking last November. Since November (when stocks peaked) more stocks have been declining than advancing.

Investor Tip: Line charts moving down and to the right are not bullish.

In the lower pane of the chart above, we can see the S&P 500 index looking like it wants to test the March lows.

The million-dollar question is: Will it hold here and mark the lows for April or will the index break below the 4200 level and continue its descent to 4100 or even lower?

Unfortunately, we don’t have tomorrow’s newspaper today…

This is why we rely on breadth indicators like the A/D line in order to visualize what is happening under the surface – out of sight to many individual investors.

Continuing with the idea of tracking advancing shares vs. declining shares, here’s a chart of A/D lines of the S&P 500, NYSE, and the A/D lines of both mid-cap and small-cap stocks.

The theme remains very constant – it doesn’t matter where on the cap scale we are looking, from large-cap stocks to small-cap stocks or the NYSE vs. the S&P – since the beginning of 2022, we have continued to see more declining shares. Lower highs are another indication of weakness.

We are very interested to see if the A/D lines up and down the cap scale will continue lower and form new lows, indicating the selling pressure has not yet abated.

It’s a simple story, bull markets are not made when more stocks are declining than rising.

Investors will want to follow the A/D line as a means to track what is happening under the surface – away from the noise of many indexes.

While intense selling can signal exhaustion, it can also just reflect an acceleration of the weakness that has been seen for months now.

If selling is getting exhausted, then Friday’s downside volume should soon be followed by two or more days with similarly-sized upside volume…

Until then, the bearish case gets the benefit of the doubt.

 

[DaveTrade]

 

[DaveTrade]

Did Amazon Just "Kill" the Bull Market?

Stocks plunged this morning as investors digested the latest Big Tech earnings. Amazon (NASDAQ: AMZN) and Apple (NASDAQ: AAPL) both reported after the closing bell last evening, revealing forward guidance that ranged from underwhelming to downright bearish.

Apple posted major beats in both EPS and revenue but warned investors that persistent supply chain issues, coupled with the recent Covid outbreak in China, could cost the company billions of dollars next quarter.

Amazon, meanwhile, missed on revenue while providing a major downward revision to guidance that caused AMZN shares to crater after-hours. It’s clear that inflation has cut into Amazon’s margins significantly.

Instead of passing these costs on to customers, though, CEO Andy Jassy is making investors foot the bill – something Jeff Bezos was famous for doing in the past.

AAPL was down roughly 1% shortly before noon today while AMZN effectively crashed, falling over 12% through the morning.

The three major indexes dropped as a result. Now, the S&P and Nasdaq Composite both seem as though they’ll test support near their 2022 lows in the near future.

“The current market performance is threatening to make a transition from a longish and painful ‘correction’ to something more troubling,” wrote Marketfield Asset Management Chairman Michael Shaoul.

“March 2020 for instance saw very sharp declines, but equally fast recoveries. The current episode looks much more likely to impose long-lasting losses in investors that piled in during the 2021 rally, and is best thought of a ‘creeping bear market,’ that is steadily widening its net over prior market leadership.”

During every bear market, most investors believe that the next bull market is right around the corner. Plenty of otherwise successful traders were caught in this trap after the Housing Bubble burst in 2008. The S&P rallied 13% from March to May of that year after falling almost 20% the five months prior.

Wall Street advised its clients that the worst was over. The S&P then crashed another 50% after the bear market rally peaked, eventually bottoming out nine months later. Macro concerns scrubbed away any enthusiasm generated by earnings.

A similar situation has formed over the last week.

“Despite what we view as a solid overall earnings period so far, the positive results look to be getting overshadowed by some of the broader concerns related to inflation and the Fed,” said BMO’s Brian Belski said in a note.

The Nasdaq Composite is already in a bear market, having fallen over 20% from its recent high. The S&P needs to drop another 8.5% to join it.

Will that happen? If the Fed sticks to its guns and aggressively tightens this year, it probably will. Should the Fed capitulate in response to recession fears, however, an enormous rally would follow.

But for the time being, it looks like the Fed’s going to stay the course. The central bank’s favorite inflation gauge – the personal consumption expenditures deflator – rose 6.7% year-over-year according to a reading from this morning. That’s the highest it’s been since 1982. Spending rose 1.1% month-over-month, outpacing the 0.5% monthly rise in incomes.

In other words, the inflation situation has not really improved. It arguably got worse.

And that should keep stocks subdued, especially after AMZN and AAPL revealed disappointing Q2 projections last night that have only intensified slowdown concerns.

 

[Ann]

Did Amazon Just "Kill" the Bull Market?

I normally don't bother to chart US stocks but after reading your post I decided to look at AMZN.

I am trying to find a pattern with large volume spikes, volume is something I have ignored in the past, I think this was a mistake.

One of the patterns I am finding is a good volume spike at the bottom of an extreme fall, in a quality stock or ETF, appears to send it back up again. I see just such a volume spike with Amazon, let's see if this plays out as I am feeling it might....up with possibly an energetic lift.