S&P 500 Rebound Situation

19 apr 2020

This is a more detailed look at the current crash rebound on the S&P 500. The daily chart with a Fib Retrace box shows we've managed to rebound higher than the 50% fib retrace (2788 on the chart) which was my initial call for a reversal point. If we continue higher, the next fib level up is the 62% retrace which is about 2930, around 2% higher from Friday's close.

The NASDAQ 100 (not shown) has incredibly broken over the 62% retrace. This is due to very strong tech stocks like NFLX (at new highs), MSFT, INTC, and insanity stocks like TSLA filled with morons. I'm not exactly sure what tech buyers think the future holds... I guess they see a virus treatment soon followed by a V-shaped recovery to new all time highs? Yet all over the global markets we see record breaking horrors... unbelievable unemployment, small businesses closing, decimated oil prices, ugly bank index, dead airlines/leisure/auto markets, and real estate looking terrible. All this and more is screaming an economy with serious problems ahead, not new all time highs. Most likely the tech buyers aren't thinking anything but are just buying what is going up and betting on further Fed stimulus to offset bad news. I think that will end in tears.

The fundamental action of markets is to discover fair value by testing price levels--going up and down seeing what values hold and which don't. So my expectation (which is just a guess like anyone else's), is that despite manipulations from the Fed, there can be no faith in a higher market given the current situation of extreme negatives and unknowns without a retest of previous lows. If the market drops and holds previous lows, then maybe bulls have a point. Until then it's just a bear market rally, amplified by the Fed, sucking in fools and their money to be separated. And once the current bullish frenzy turns, the charts will show an ugly lower high on the indexes, the fear will return, and I wouldn't expect March lows to hold.

However, to keep myself from getting too carried away with a bearish view, here's a bullish take (at least for the short term). I've also put the S&P500 priced in gold (the yellow line), which I think is a proxy for a market index with the "Fed shenanigans" removed. This value is still approaching the 38% retrace. In 1930, when the DJIA was priced in gold (along with everything else), the initial rebound from the 1929 crash went as high as the 50% retrace over 6 months or so. So from the point of view of the S&P500 priced in gold, one bullish view might be a bounce to the 50% retrace by the yellow line.

We'll see how long the market can continue its extreme ramp higher, but when it finally turns, I suspect the market mood will turn uglier than anyone alive has ever seen it.

30 apr 2020

Nota

The S&P 500 hit the 61.8% retrace (around 2931) and is now dropping. We're also at the end of the month so this will look like quite a shorting position on a monthly chart.

Unless we're magically headed to new highs despite near a depression situation in jobs, oil, airlines, cars, travel, etc., etc., this is a great short point.

6 mag 2020

Nota

Huge divergence going on between the few big tech stocks that are still going up and the entire rest of the market. But those few tech stocks are managing to drag up the NAS and even the S&P 500 too as they have such large market caps. It's a very unhealthy, narrow market, with a lot of people piled into those few names hoping for a positive outcome. I don't see the outcome being positive.

So far the 62% retrace on the S&P 500 has held as resistance... with the bulls managing to keep the index from collapsing. I don't know how much longer it can keep from falling.

11 mag 2020

Nota

The handful of tech stocks running the show continue to move higher taking the NASDAQ and especially the NAS 100 nearer to their Feb all-time-highs. They're even managing to drag the other indexes (S&P 500, DJI, Russell 2000, etc.) up, though with less success, especially lately. The S&P 500 closed at its 62% retrace Friday and is about 10 points under it now, so it continues to be resistance as in all my other updates. We might manage to move to new highs on the NAS 100, which could drag everything else higher, but the tech stocks are so over extended right now I don't think they're gonna have anything left to continue the climb. IMO we're looking at making a lower high quite soon, and it will look ugly on every chart.

The whole situation is very deja vu for me as it reminds me of the tech crash in 2000. At that time I was fairly new to trading and hadn't seen a significant bear market. The younger, tech savvy traders like me were super excited about the internet and how it was going to change the world. For years every dip on the market was a buying opportunity and anyone that complained about the cash burn and lack of business models from most internet companies just didn't get it. Even once the market started to fail, it was just time to buy even more because the future was bright and it had been easy to make money. Today seems very similar, except this time I'm the old trader warning the reckless kids that it's gonna take some years for the future to happen and meanwhile the latest dips should probably be avoided. But 2018/2019 have taught a lot of noobs that when the market tanks, you just buy and make a lot of $$ when it continues higher--so that's what they're doing. The Fed is helping... and if we do crash back down again, like we did in 2000, there will be a lot of tears.

12 mag 2020

Nota

The 62% retrace again acted as resistance, with the market falling pretty hard into the close. The NAS 100 looks extended as hell, going almost straight up since the March low then a big red candle today. The leading momentum stocks are running out of gas trying to pull this market higher all by themselves, and they were all red today. This narrow, manic market is the stuff bear market rallies are made of... without broad support from other stocks, this is going to turn and burn. But frankly the economy is in too bad of shape for broad support. So, next stop is retesting the March lows IMO.

20 mag 2020

Nota

The truth is a rare commodity these days, and people that speak the truth are generally hated. But, here's a bit of truth:

The US economy has collapsed. We're not in a temporary slow down, or a recession--this is a full blown deflationary collapse of the Great Depression variety (and quite possibly worse). HOWEVER, with the urging of the Fed, the stock market remains in the first stage of grief and loss: Denial. And I don't know how long that stage will continue. In 1930 the initial rebound after the crash lasted 6 months, though it didn't rebound nearly as strongly. We've only been rebounding for 2 months.

Somehow everyone is happy to believe the NASDAQ belongs at new highs (now just a few percent away) despite the historic economic collapse. Apparently a collapse doesn't matter if those in charge of our financial system pump a ton of new debt into the system. So for the moment, markets don't reflect any sort of economic reality (and arguably it's been that way since at least 2008).

So we have a Depression vs The Fed situation, and so far the Fed is "winning." But at no time in history has financial engineering ever overcome an economic collapse. All it does it is delay the inevitable and further damage the currency and economy. Without a healthy economy there is no healthy market. But all these lessons have been forgotten and need to be relearned--that will take a lot of time and a lot of pain.

For the moment the market refuses to face reality, and this stage of denial could continue for months. The break over resistance here suggests the market doesn't want to accept reality yet. So I might close this short if we hold above resistance on the S&P 500. It's difficult to predict a market based on fundamentals when the entire country is in denial and financial authorities are actively encouraging it.

We're all hiding in our homes and not seeing the economic devastation that has already occurred let alone what is to come. Eventually the lockdowns will lift and we'll be faced with a view of closed businesses and abandoned malls. Then we'll move to the next stage of grief/loss--ANGER that things didn't return to normal as we were told. Maybe then will be the time to short.

26 mag 2020

Nota

I probably should close my shorts, but I'm thinking I'll just reduce them while holding the core position. There is nothing in this move that makes any sense for a continuation of the bull market. Treasury yields are going sideways not confirming the bull thesis. Emerging markets and Russell 2000 are hammered, not confirming the bull thesis. VIX is high and in bear territory, not confirming the bull thesis. The economy itself is crippled and not confirming the bull thesis. However 2nd quarter GDP doesn't start being reported until July, so maybe we rally for another month? I don't know. What I do know is all signals still say this is a bear market rally... though the biggest, most viscous bear market rally ever.

I think a fitting metaphor is the story of the tropical country when the tide inexplicably rushes out enticing the tourists to go out and collect the fish left high and dry. Meanwhile the older natives run for the hills knowing a tsunami is coming.

3 giu 2020

Nota

Today the S&P 500 is hitting the 0.78% fib retrace. The NAS 100 is testing all time highs. But for me it's difficult to take the equities indexes seriously. Are they a reflection of the reality of collapsed economy, decimated employment, and historic nationwide riots? Or are they a reflection of Fed action, denial, and moral hazard (the fancy term for "looting" when financial types do it)? You be the judge.

In my original post above I made a call as a "bullish view:"

"However, to keep myself from getting too carried away with a bearish view, here's a bullish take (at least for the short term). I've also put the S&P500 priced in gold (the yellow line), which I think is a proxy for a market index with the "Fed shenanigans" removed. [...] one bullish view might be a bounce to the 50% retrace by the yellow line."

As of today we hit that bullish call. The yellow line (S&P 500 priced in gold) hit the 50% retrace. This is the same level of retrace hit by the 1930's DJIA on its rebound from its initial crash, before it started a multi-year decline that would take the index down 87% before it was over.

Bottom line I don't know where we go from here in the near term, but I don't see much real upside in the long term. Shorting this insane rebound has been a big mistake, but IMO it would also be a mistake to join those buying here. Make your own decisions. I'm just observing as the world goes mad around me.