Mixed Messages

Jan 6, 2022 | Daily Note, Unlocked Notes

The recent equity market action has given a lot of mixed messages. The bond market action is becoming more clear. When I talk about the equity markets let’s review a few things. People who are long-only investors are commenting on the Fed causing a taper tantrum after yesterday’s hawkish Fed minutes yet valuations have been sky high, speculation running rampant, and yeah the Fed has Fed Funds rate at ZERO. They need to raise rates. People are in denial. The S&P is off the highs by a few percentage points while the Nasdaq 100 is down about 4%. It says a lot because people are feeling pain who manage real money. Last year in the total universe that Erlanger Research follows showed only 55% of all stocks were up in 2021. Of course, we know the indexes are skewed by mega-cap stocks which masked a lot of the recent weakness. The percentage of stocks above several moving averages with the Nasdaq Composite and the NYSE Composite has shown deep oversold readings. Daily Sentiment Index readings have seen equity bullish sentiment hold well over 50% for over a year now. One of the concerns I have had is if the mega-cap leaders give way and catch down to the average stock. It can and might happen. And fast.

The bond market is becoming a lot more clear as I am looking at multiple time frames that all suggest higher rates. I have the 10-year yield daily, weekly, and monthly time frames posted below and they all have upside DeMark Sequential Countdowns in progress. The Daily Sentiment Index readings on bonds were elevated recently over 80% and now they are at the 50% level. The 50% level is the majority line since below there are fewer bulls and more bears. A move from extreme highs to extreme lows is entirely possible this year.

So far the bond markets sold off with yields piercing some levels has caused equity weakness broadly with tech and highly levered non-profitable companies getting hit the worst. Every few days after some equity selling, participants will buy the dip rationalizing or ignoring the risks of higher rates. Large institutional clients at Goldman Sachs sold the largest $ notional amount last week ever in a four-day period. Morgan Stanley has seen very strong retail selling recently too.

They also continue to buy ETFs while the selling in individual stocks is heavy. Thanks MS QDS

Markets rarely go up or down in a smooth pattern because on the upside there are shorts that give it try each small dip and then get run over and have to cover and on down moves it’s the same with dip buyers buy and then have to sell when the momentum continues on the downside. Large historical moves and higher have even seen double-digit moves in between the continued trend. I expect this will be the pattern in the coming years. The easy 4% dip bought with the Fed now in hawkish mode will be more difficult. One of the big themes and 2022 predictions is that the massive inflows seen in 2021 will turn people into future sellers as volatility on the downside (again more than 4% drops).

I get asked a lot about “long-term ideas” and I can’t make any long-term calls at this time. Take a look at the last 5 years of the S&P especially the last two years. Throw in the prospect of the bond market selling off, there is a lot of risks. This will be a tactical year one day and one month at a time.

trade ideas and momentum monitor update

I’m adding a starter-sized 2% FXI long position as there are a lot of Hong Kong exhaustion signals lining up… again. I saw it again since some haven’t worked. The cannabis longs still linger in the red and remember I started buying these in Q4 them down more than 60%. I’m optimistic for the sector this year and in Q1. It’s been a challenge to find longs that are working yet the financials are doing fine and I will hold them through some turbulence. I’m taking off GLW long with a 6.3% gain. I’m tempted to cover DASH as it’s a 36% gain. I’ll hold for a little longer as the valuation still is absurd.

The momentum monitor on the site has been really helpful to many as I’ve heard some good feedback. The move up on 12/21 turned the momentum scores to buys and now some of the short-term time frames are getting neutral to sell readings. Just keep an eye on this as we update it twice a day. And I have stockcharts.com links on there too. The overall scores and the major US indexes.

US MARKET SENTIMENT

Here is a primer on how we use Daily Sentiment Index charts. S&P bullish sentiment and Nasdaq bullish sentiment dropped again. Nothing matters under 50% breaks. We’ve seen bounces at 50%

Bond bullish sentiment has dropped hard and the distance between the sentiment raw number vs the 20 day of sentiment is pretty wide – same with equities.

Currency bullish sentiment

Commodity bullish sentiment

US MARKETS

Here is a primer on the basics of the DeMark Setup and Sequential indicators.

S&P futures 60 minute achieved the downside wave 5 price objective with a buy Setup 9.

S&P 500 daily gapped down again and typically that’s very bad which leads to continuation.

The Nasdaq 100 futures 60 minute also had a buy Setup 9 with a decent reversal starting

NDX index broke the 50 day hard and nearly achieved the downside wave 3 price objective

Russell 2000 IWM daily has the Sequential on day 12 of 13 and needs a little lower level to qualify the 13

Dow Jones holding the 50 day and not down so bad vs other indexes    

internals – update – mixed messages still

The 7 day moving average of the equity put-call ratio is lifting and made a higher low. When this is rising put buying is increasing. It’s has been in a lowered range for the past 20 months. A significant move above the range would have the markets crashing.

The Nasdaq Summation Index weekly has been crashing while the index hit new highs. I’ve never seen this happen. In the last 3 weeks it’s bounced with the momentum measures oversold. This happened in Q4 in 2019 (bounced after it dropped hard) as the mega-cap gave way to the downside

This is one of the main charts I show often to highlight oversold conditions. When the percentage of S&P stocks above the 50 day is below or near 20% or the 20 day is below 18% or lower the market is oversold. It’s pretty odd seeing where they are now despite the pullback in the last week. One thought is that the recent three-day surge triggered a “breadth thrust.” A usually reliable indicator. Again a mixed message.

uranium update

Everyone keeps asking me about Uranium. This needs to work a little lower to qualify the Sequential buy Countdown 13.

FACTORS, GOLDMAN SACHS SHORT BASKETS AND PPO MONITOR UPDATE

Factor monitor now has a reset YTD performance column. Factor monitor now has a reset YTD performance column. Nearly everything is down YTD. Most shorted factors at the bottom continue to have short-sellers rewarded.

This is similar to the above monitor with various ETFs other indexes as I wanted to show the same 5 day, 1 month rolling as well the YTD and 1 year. Most are down YTD. Seeing this ranking show how what is working relatively the best today also has been the better performers in the last 5 and 30 days.

This is the monitor that has the S&P indexes and the Goldman Sachs most shorted baskets. Today the shorts are down more than the S&P sectors. Again shorts are being rewarded.

The PPO monitor (percentage price oscillator) force ranks ETF’s by percentage above/below the 50 day moving average. For information on this monitor please refer to this primer. This monitor is offered to Hedge Fund Telemetry subscribers who are on Bloomberg. Most are down today however there are some above today’s VWAP a sign of some demand and another reason why I’m buying SPY, QQQ, and IWM today for trades.

demark observations

Within the S&P the DeMark Sequential and Combo Countdown 13’s and 12/13’s on daily and weekly time periods. For information on how to use the DeMark Observations please refer to this primer. Worth noting: Still quite a lot of weekly Sequential and Combo 13’s and on deck 12’s. That’s a more intermediate-term risk.

REKR a micro cap stock I am long has a new Combo buy Countdown 13 follows the Sequential buy Countdown 13. Until the pressure on the market stops this will loiter down here.

ETFs among a 160+ ETF universe. Seeing a few buy signals starting to develop. Wait for price flips up for more confirmation. A “price flip” is defined as a contra-trend move identified by a close that is higher/lower than the close four price bars earlier.  In order to complete the Setup 9 there must be nine consecutive closes higher/lower than the close four price bars earlier.  If this pattern is interrupted the Setup will cancel and disappear from the chart