Bears coming up empty

October 23, 2017 10:34 AM

Here we are at the back end of all these cycle points and bears have come up empty. Friday was the anniversary of the 87 crash. Today is 612 trading days from the May 2015 high that led to the last market correction. Its 620 calendar days from the bottom of the 2016 correction and 89 weeks. We could still see this week or next, but we are sitting at the sweet spot of the entire cycle season right now.

So, what if it doesn’t happen? We are still at tremendous risk as the VIX hit the generational low on July 26. Not a sell signal but it’s a contrary indicator which could have a lag of 7 months before a reaction hits. In a prior post, I mentioned the only thing missing was euphoria. There is plenty of complacencies.

Right now, the only potential for a black swan was in Catalonia where the Prime Minister Rajoy invoked Article 155 of the Constitution which means they are in the process of removing Catalonia’s ability to self-govern which is like the type of autonomy our states have.  They will dissolve that Catalan parliament. There may have been relief no explosion materialized, yet. The next move or should I say the moment of truth has finally arrived for the Catalonians to either declare total independence which will provoke a violent reaction from the Spanish government or back down which would be an end to this mess. On Monday morning, a key ally to the separatist coalition, the CUP party said Rajoy’s decision was “the greatest aggression against the civil individual and collective rights of the Catalan people since the dictatorship of Franco” who died in 1975. Article 155 still needs the approval of the upper house of their Senate which is a foregone conclusion since Rajoy’s party is the majority. This is far from over, but it appears the market has breathed a sigh of relief.

On the surface, things appear quiet for the first time in a couple of months. Markets have survived a debt ceiling debate, three hurricanes, one fire, one terrorist attack, the ongoing vitriol with North Korea and may even get a tax cut. It appears for the first time there is smooth sailing ahead. That’s when you should be concerned. Without fail over the years every time I’ve heard a pundit on television say the market has a clear path to keep going something comes up to poison the well. It’s still a market to be taken one step at a time.

Until Thursday the Transports started leading to the downside which could’ve set up a divergence but recovered. Housing, the SOX and the BTK stayed up. Biotech peaked Wednesday and has drifted lower. In early Monday action, the Dow struggled to hold small gains with tech slightly in the red. As far as the FAANG stocks are concerned, AMZN may very well have peaked. It is now 4 days down after putting in a 59% retracement at 59 days off the top. This is another example of how price and time square out, as the retracement lines up with the time units. AAPL is lower, FB made a higher high but couldn’t hold it. Google got hit on Monday and NFLX rolled over at 61 days from its prior high. Right now, we are back in the same situation as earlier in the year when these leading stocks were off the highs after holding up the market for weeks. goldman which is a very heavily weighted Dow stock remains very choppy.

Overall, nothing has changed other than the fact markets ‘feel’ like they are going up and never going to correct again. How do we get a bubble to pop? It can happen one of two ways. Either we get so euphoric and by definition, euphoria is a fleeting emotion that can’t be sustained or some catalyst finally materializes. It wouldn’t take much. In June a Goldman Sachs report which declared the FAANG stocks to be as safe an investment as the bond market caused a shake of the trees. This week Alphabet (GOOGL) and Amazon both report earnings on Thursday. It’s possible we could have another of those buy the rumor sell the news events, we’ll see. By the way, Microsoft also reports on Thursday. Once upon a time that was the singular most important event as we know the entire Internet bubble popped over Microsoft anti-trust concerns.

Finally, the precious metals are close to getting in hot water again. They turned up recently on some excellent square outs. About 10 days ago I told clients to expect a shake of the trees on the 11th. It didn’t happen right there as it peaked 3 days later. But now we are getting that exact shake and its dragging on to the point of retesting this recent low. The lows we have in gold and silver are very interesting. If for whatever reason they get taken out, it would be a serious breach of support because it would mean something larger is materializing. Not all pivots are created the same. These are good and should not be taken out. It has serious implications to the currencies, so we’ll watch that very carefully.

If we are forming a top, it’s a massive top because it has been dragging on for months. We have to consider this no matter what these cycle points are doing simply because indicators like the VIX are at an extreme. In terms of socioeconomics, if we were to top, it would be devastating to the country. Simply put, look how divided the country is right now. The one thing Trump really has going for him is he can continuously point to a rally that has lasted a whole year since he won the election. On the hand, look at the historical bias and vitriol against him. What goes up eventually comes down. If you think we have problems in society right now, just wait to see what will happen if the market were to have a 20% correction. It won’t be pretty, I can assure you of that. 

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