Difficult Market Timing and Charts

In many ways, this is the most difficult time to “time” the market. One set of time scales and indicators says “just be out” and another says “be in for the trade”. We’re also near a topping inflection, but not yet “confirmed bear market”.

In general, my personal “trading rules” say to step aside at this point. Often there can be a gain from this particular moment, but more often there can be an abrupt and dramatic fall.

Lets look at some charts and I’ll explain why I ‘step aside’ at this configuration.

The Long View Context

Here’s a 10 year chart of the SPY S&P 500 ETF with a weekly ‘tick mark’ for prices. This sets our context.

SPY 10 year with PSAR, Volume, MACD, and DMI

Price has crossed under the SMA stack and is returning to it from below. The entire question comes down to “Is this like October to December of 2011, or 2007?

Once price resolves to either above the SMA stack, or falls away to the downside, we will know. But right now, we don’t. But we can “make guesses”.

First off, 2007 was after a very long bull market fueled by The Fed keeping money loose. This market is after a very long bull run from The Fed keeping money loose.

There was a long run of low volume, leading up to a volume spike on down prices in mid 2007. We’ve had a long run of decreasing volume and a tiny volume spike on down prices in the last couple of months. Not enough volume yet to confirm a bias to the downside, though.

We would need to see a lot more volume to the downside to have a confirmed bear market trend.

Price is still below the PSAR dots, so not a ‘buy’ signal yet on this time scale.

Plus the SMA stack has had a “go flat” but not yet inverted the price stack. To some extent just starting the ‘weave’ with only the fastest line crossed over the middle speed one. (More easily seen if you make a 5 year chart with the same settings).

MACD is cleanly below zero, but showing signs of a “go flat” or maybe even a ‘blue crossover to on top’ setting up for ‘soon’. That can be a pause in a bull run “buy the dip” or it can be a “start of the drop”. Time will tell.

DMI is still ‘red on top’ but the red is crossing the ADX line. That means the recent drop is weakening. (So a possible short term bounce up, but also can be a ‘pause’ in a new downtrend). To me, it looks rather similar to late 2008 for the DMI signal.

All in all, a very muddy image. I’d reach outside to other information to set my bias. Given the mess the world is in right now, that bias is negative. I’m just not seeing the “engine of growth” that will rescue business from the insanity planned for Paris in December and the pending “Balkans Like Moment” shaping up in Syria. We’re one wrong death away from a similar influx of “bound by treaty” escalations as happened to start W.W.I.

In these times, I pull my ‘time scope’ in shorter. Faster trades, and no long term commitment. Be ready to bail on any headline that rattles things. From The Fed rate hikes, to NATO downing a Russian plane in Turkey…

A faster view

This is a 2 year chart of daily tick marks. We can see that the price SMA stack has cleanly rolled over. Price has approached from below and is ‘mid stack’. That is THE most unstable time. For “dips”, it punches through topside. For “rollovers” it falls away to the downside. I typically ‘step aside’ until the market calls the ball for me.

The other tickers on this chart are other markets. TLT is a long duration bond fund. EEM is an Emerging Market ETF (Exchange Traded Fund). EWG is a Germany ETF, while GLD is gold. RUT is the Russel 2000 smaller stocks. Smaller stocks tend to be above SPY in bull runs, below in bear runs (why? because they have less strong buyers in down markets and more folks rushing in to low volume stocks in up markets.)

SPY vs Mix 2 year daily with RSI, MACD, and DMI

EEM has clearly tanked hard. It MAY be having an early bottoming process as we have a ‘failure to advance’ to the downside with a ‘higher low’ between late August and late September. I have to discount that, though, as the Chinese Government came into their market with big buying and price support activity and they make up a good chunk of EEM. EWZ, Brazil, has an ongoing dead drop…

Gold has also had a ‘go flat’ so has likely bottomed. (More on that in a future posting. It’s time to do another metals and commodities look in depth.)

Very worrying, though, is that RUT is clearly below SPY and falling faster. The latest low is lower than the one August. While SPY can arguably be said to have had a ‘failure to advance’ to the downside, RUT is just blowing through it. Rot happens from weakest to strongest, so this argues for SPY to have failure next.

EWG, Germany, continues down too. This is colored by a strong $US along with the VW Brain Fart Stock Price Assassination… But both of those coupled with EEM beg the question “Who will be buying our products at high $US costs as they sink?”

Finally, TLT is “muddling sideways” with nothing much to say. Last week IIRC some 10 year bonds were sold at zero coupon. Yes, zero. That’s just nuts. Something is very wrong in the price of money. The implication is that The Fed (and other global bankers) are trying desperately to use Monetary Policy to make up for shitty Fiscal and Regulatory Policy. That never really works. It can inflate paper assets, but all the while having the Real Economy slowly die. The end game is Greece, or Portugal, or Brazil, or… When big players can get money for FREE, and STILL can’t find a way to invest it for positive returns and economic growth, you know your Fiscal and Regulatory (and Tax) policies are sucky and killing things.

But stocks ARE a ‘paper asset’… so tend to inflate with large influxes of “free money”…

But, to me, it looks like that has run as far as it can. The drug no longer gives the high and we are shooting up just to feel normal for a while.

Overall, the Chinese are now selling US Bonds. While our annual deficit is down from $1 Trillion per year to under $1/2 Trillion / year, it is still a massive pile of money. If not from the Chinese, from whom do we get it? I think that explains the fall of TLT over 2015. The Fed can only soak up so many Treasuries before folks start to wonder… and when “the best return you can get” is zero, something is very wrong in the world of savings.

Now notice that price peak in mid September. Price now is just about equal to it. If price can’t punch through that point, and falls again in the next couple of weeks, we have “failure to advance” to the upside and it’s way bad. That, BTW, is what I would expect to see happen. We are presently in the middle of the battle of bulls and bears, with both directions bounded by a ‘failure to advance’. I’d sit out until one of them wins. (Or go to day trading until that day…)

RSI has a ‘near 20’ followed by a ‘higher low’. That says “up coming soon”. While MACD is below zero but with ‘blue on top’ and approaching a zero crossing to the upside. Similarly, DMI is set up for a crossing of “blue on top”. All saying a little bull run ought to happen. BUT, in the context of approaching the SMA stack from below, that can be a very short bull run. Again, I’d trade it and fade it, not invest in it. Move to faster charts and swing trade in / out as these wobbles happen until a victor is declared. But these indicators say the bull market is likely to give it one more try before it falls.

But we can look at other data to see if it informs any more.

SPY vs Mix 2 year daily Volume Volatility Momentum Oct 2015

Here, volume to the downside was less in this dip than in the first one. Similarly volatility was less. Both saying the downside move was weaker in the second dip than the first. Momentum has a “higher lows” followed by a crossover to positive, if weakly.

Yet volume in the recent run up legs has been modest at best. No bandwagon there. And momentum is only just barely above zero.

My Opinion

To me, it’s a good time to ‘step aside’. I have all the risk, but not much reward likely. Stock picking individual situations. Trading short swing trades. It is likely to be a news driven market in any case. IF we punch through the SMA stack to the upside, there ought to be a medium long run to it in any case (and likely a ‘retest’ where price returns to the SMA stack from above to ‘confirm’ it’s going to stay there – and that’s the less risky time to buy). See mid 2012 for an example of the ‘retest’ back at almost the prior mid-SMA stack point. That’s the safer buy point.

There are so many things wrong with the “news flow” that I don’t know where to start. From China doing high test economic balloon inflation to Russia trying to replay one of The Great Wars, to the EU committing cultural suicide, to the UN and Global Warmers pushing HARD for global economic suicide in Paris in December to the USA having feckless and timid ‘leadership’ that is more worried about Left Wing Legacy than a functioning economy or government and the list goes on… And in all this most of the important Central Banks are in the same situation as The Fed. They have zero or near zero interest rates as they flood paper into the global markets attempting to fix via a sea of Pretty Pieces Of Printed Paper what is destroyed by lousy Fiscal Policy, Regulatory Policy, and Tax Policy.

Then, to top it off, Legarde was on TV saying that the highest priorities for the IMF were “gender equality” and Global warming? Really? W.W.III starting and economic stagnation don’t rank ahead of a fantasy about a magic gas that has done nothing for 19 years and a claim of gender in-equality from a woman heading one of the most powerful institutions in the world? Irony doesn’t even come close… So clueless and so out of touch. (She had some other similar brain dead talking point worry, but I can’t remember it at the moment…)

Sure, a few well connected Crony “3rd Way” Capitalists are making a bundle of that paper off of sucking it out of government, but that game can only go so far. IMHO, we are now globally at the point where the music must stop. Real Economics is shutting down. Yes, Greece was early to that party, but the others are not far behind. Real US unemployment is somewhere over 10% and rising (even as the “polite lie” of the formal unemployment number claims things are OK, if not great) and youth and black unemployment rates are obscene. As that happens, you are setting up for riots and collapse. We’ve seen some of that in places like Baltimore. And Greece. And…

So just where is all the gooey goodness that makes this stock market worth investing? I’m seeing it in the rear view mirror, but out the windshield not so much…

At this point I’m largely not playing the game anymore. More interested in making a new style of bread, or what’s on TV. Maybe signing up for early Social Security in the hope of collecting a little of it before it collapses. Not so much interesting in trying to fight my way though a throng of H1b visa holders and illegal aliens to see about getting a job at less pay than I made a decade ago. And I’ve got it good… Lord knows what Joe Sixpack is going through.

In all that context, a market at one of THE hardest type of inflections to call correctly just doesn’t interest me. I know The Fed Juice is dried up and they will not be pumping in more. I know the real economy is anemic and getting worse, not better, and the statistics are more lies than truth. I know that come December in Paris, Dracula UN expects to suck the life blood of fossil fuels out of economies globally, AND expects to be paid between $200 Billion and $10 Trillion a year for the experience. And I know that Obama is NOT going to do a damn thing to make the world or the economy better in the next 16 months.

Globally the Evil Bastards are winning, and at the expense of everyone else. So just why would I bet on that being good for me or for the bulk of companies in the USA, they being mostly NOT well connected in Washington? We can’t live on making more “Tweets” and spending ever more time on our iTimeSucks as those do not make food on the table, homes to live in, cars to drive, gas to put in them, or clothes to wear. The FANG trade can only take an economy so far. (Facebook, Amazon / Apple, Netflix, Google). At the end of the day we need real goods and services and real heating oil and real lights on. But I’m not seeing much of that in the markets.

So that’s my view of things. Dismal, I know. But IMHO more time to hunker down in a ‘risk off’ mode than play ‘risk on’ when things are blowing up and melting down at the same time and The Fed will not be spiking the punch bowl.

But I could be wrong. YMMV. Caveat Emptor. Make your own call on things. etc. etc.

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