First off: Don’t Panic!
So far it’s just a garden variety “correction”. I’d guess we’re on our way to a larger drop but it will take a while to get there, and so far the indicators are NOT saying that.
Here’s a spaghetti graph of a mix of indicators. Don’t worry that it looks like crap and is hard to read which line is what. I’ll sort it out and the ones that matter will get more detail below. You can click on the image to get a much bigger one to look at.
IWM & SPY vs a basket of things. 9Feb2018 yrd
The main ticker here is IWM. An exchange traded fund (ETF) for the Russel 2000, so a good indicator of very broad market actions. The blue line tracking just above it pretty much the whole way is SPY the S&P 500 ETF. They are both moving very much together. At the very top, the green and light gray lines are semi-weaving their way along. EEM (green) being the Emerging Markets ETF while QQQQ is the Nasdaq ETF (so largely Apple, Alphabet/Google, Facebook, etc.) They tend to rise more in bull markets and fall more in bear markets. They’ve had a big run up and at the end took a big drop down (along with the egg yolk yellow Dow Industrials Index just under them at the end).
The more exotic tickers: Bouncing between SPY and QQQQ is JJC the copper ETF. It rises when economies are booming and drops when sales of things are off. Volitile and in the long run goes nowhere, but in between moves fast sometimes. It has dropped modestly at the end, but still indicates an expectation for strong global economics overall. The dark gray / black line is USO – oil ETF. In the long run it tends to slowly evaporate as it is based on contracts, not actual oil. In the short run it is an easy option buy without buying options. It has had a big run up in the last 1/2 year. (You probably noticed at the pump…) Global demand for oil is strong, economies are moving, and the $US is a bit weak.
The gold line is the DJTA (Dow Jones Transports Average) and very hard to see at all. It shows a run up, then a slighly earlier fall than the other stock tickers. That’s common, especially during rising oil prices.
Then, at the very bottom on the far right, TLT the long term bonds ETF. It’s rolling over on speculation that The Fed will continue to raise rates as the economy is doing well. (Well, that IS what they do… euphemistically called “taking away the punch bowl”…)
Now, when all the various stock markets and indexes move together into a drop that usually means a lot of Big Money shorting the hell out of things to drive folks into selling as they have sold off all their “inventory” of stocks and need to get more to re-sell back to you at higher prices. They MAY think it is a market top time and run this down for a year, or they might get enough cheaper inventory in just a few weeks. We’ll know as this unfolds. My bet, given the “Talk Dirt About Trump” theme, the long long up run in the market, and the general Raise Rates Fed, would be that we are in for a down spell of about a year. No, the indicators do NOT yet say that. It’s a guess.
So why guess? Because by the time the indicators call it, you can be down a LOT. AND because I’ve seen this “double tap top” a few times. Watch for a BIG down day, a smaller up, then another BIG down day. That’s the signature of mega-bucks shorts pushing the market down by sheer force of Wallet Size. Eventually they will panic enough folks to collect on the short bet. Only rarely do they give up before then.
The Indicators
First, look at MACD. End of January it called a “Get Out”. (Red on top, “mouth” open downward, histogram – the black lines – below zero.) Now MACD itself is below zero (red and blue lines). That’s a bear call.
DMI / ADX has had red on top since then too. Black has not yet been crossed, so young in this cycle. Magnitudes above 30 so a strong move.
Now back up to Volume. Scan it from end to end in a gross overview way. Note it is generally sloping downward and in Late January early February had two low dips. (I think of that as “two spooky eyes” – in the “Go” game sense). Then volume rises spectacularly in the selloff. Markets are a volume seeking device, and they have found volume to the downside. Arguing against a full on bear market is the large up volume on the bounce back day, but do note that it is less on the second sell-off / bounce back.
Typically the way these things shape up is that it takes a week or two to get a good panic going, so the shorts sell hard in a pulse, let the longs buy back in large, then push down again hard, then another buy back, then when price returns to the SMA (Simple Moving Average) stack from below, they shove really really hard, right when folks who didn’t sell before see thier chance to get out nearly whole. That’s what we are watching for. That confirms a bear market. Price bouncing off the SMA stack from below and continuing down, SMA stack inverting (slowest on top, fastest on the bottom).
So far we don’t have that. Just the opening gambit of a sell-off push. Look back at Aug / Sept. That is an example of a simple “correction”. Prices got shoved down during the summer slow markets, the SMA stack started to invert but then prices instead of bouncing off to the downside, just punched through and the bull market continued.
So that, too, is what we are looking for. Bounce off for continued Bear action, or punch through for return of the Bull.
Now, some time back I went largely to cash. Volume and volatility had gone way low. Prices now are roughly at last July levels. The opportunity to make money in between then and now has been limited (but you could pick a few trade cycles) while the risk of this kind of Short To Hell was very high. But now the game has changed. With improved volatility more trades can cover their costs. BUT: It is VERY hard to play the long side in a short market. You could try to “call the bottom” on a day trading chart, then get out at the SMA stack (or invert to short then if it looks good), but that takes day trader timing. Also, you may well find that price returns to the SMA stack by the expedient of moving sideways as the SMA stack comes down to meet it…
So I shift to more day trade timing cycles and away from long term holdings. Folks who are all “long” stocks and worried need to NOT sell on the big down days. Price return to the SMA stack is the time to sell IFF you want to sell. IF it looks like more “drop days” are being shoved at the markets, sell on the next bounce up day. This is when traders say “buy the effing dips” and then you sell into strength days. You can always buy back in if the stock market punches through the SMA stack for another run up; so if you were “stop loss” exited a week ago, you have plenty of time to get back in as a wash sale. No need at all to do it the very next day, or even 4 days later (settlement done).
It’s an odd thing, but this kind of “chopping top” requires very great patience for longer term focus as well as a hair trigger for day trades. Just be sure to remember which one you are doing…
Also realize that for all the Talking Heads talk about what “investors” are doing or feeling: The Market is 75%+ automated computerized High Frequency Trading by major financial institutions and driven by folks with multiple $Billions to toss at the market when they want to move it. We no long have the “uptick rule” so you are NOT safe and do NOT have time to just “look at the market once a week” and then decide to sell (or buy). Shorts can now short endlessly to ruinous prices. What was learned in the recovery from the 1929 crash was thrown out just prior to the 2008-9 crash.
So YOU can not influence markets at all, either singluarly nor even in significant groups. It is no longer an “investors” market; it is a Financial Institutions Casino and THEY know how to run the table with their nearly infinite Fat Wallets. (Do YOU have an unrestricted line at The Fed?)
Close Up On Spy
SPY 6 months Daily 9 Feb 2018
So here we can see the price bars much better. Note the little red dots near them? That’s the PSAR indicator. For folks who trade: it calls when to get in / out by swapping sides of the price lines. Generally it is a lag of a day or two, and it can be choppy in trendless markets, but it’s a good call on major movements. It’s clearly saying be out now and not get back in yet. It made the “get out” call end of January / start of February.
Next, you can see how much volatility has spiked. Volatility is lowest at market tops, highest at bottoms.
Below it you can see RSI and Momentum, both showing time to be out (below the zero line). They can lag a bit, and in sideways chop can make many fast useless trades, but in trend driven markets generally call the trend well.
Now, back up at those price bars. Notice how short and squashed they were back in October / November? That’s why I was saying I was sitting out for a while. That happens just before local tops (and strongly before market major tops). Yes, I missed some run up. OTOH, I didn’t have to watch the markets daily being ready to pull everything out at the drop of an index. Now look at the price bars on the far right. Giant things. Huge price ranges. IF you are buying anything in these dips, it is important to pick your price. A “market order” can happen anywhere in a very wide range. Either you time your buy (sell) with a fast (minutes) chart, or you pick your price.
The furthest right price bar is interesting. It’s a small box with long ‘tails’. Generally these are called “Kangaroo Tails” and the notion is that price “springs away” from the long tail. This shows high and low at the end of the tail and open / close at the edges of the box. It ought to mean Monday will be a somewhat up day. Traders tend to close out their positions on Fridays, especially in volatile markets, and I’d expect Monday to be a battleground day between the shorts and the ‘long’ investors. I’d also expect some shorts to sit out a day or two, let the folks rush back in, then at the SMA stack short like crazy again for another major down leg. That is ONLY if “they” have decided to make this a major market top. If it’s just reloading the inventory for another run up, and it punches through the SMA stack, well, we’ll know.
Note that all this is somewhat SPECULATIVE. With the move to algorithm driven computer trading, it now all depends on who updated what computers with a new method. With a big enough wallet, you don’t need to wait for folks to get back in, you can just short to zero… So I’m more tepid about ‘buy the dips’ than I was a decade ago. I’d rather wait until I know what trend “they” have chosen…
At Present, the indicators still say it is an uptrending market and this is just a correction. I continue to treat it like that until the indicators confirm it has swapped to a Bear Market. We ought to know in a few days.
As usual: None of this is investment advice. It is only for educational use on how to read charts and a description of what I do for me. What you do is entirely up to you and you must consider your personal position. Oh, and remember that I’m just an amateur at this and if you really want to play in this sandbox, get professional help…
Musings from the Chiefio 
IMHO the stock market was due a “Correction” given that it rose more than 30% based on the expectations of what Trump would do.
The tax cut has only just started to affect the economy but suddenly wages and interest rates are rising (0.25%) and that triggers a stock market plunge? My guess is that the economy will grow at a robust rate and the stock market will get over its current funk.
When people have jobs, tax revenues increase and government outlays on food stamps etc fall. Federal budgets rise no matter who is running Washington. What matters is getting America back to work which increases government income while reducing support payments. The USA could generate a surplus even though the budget predicts an increasing deficit.
The CBO (Congressional Budget Office) is a useless bunch of twits. We could get a much better forecast from Price Waterhouse or Arthur Andersen for much less money. Ooops! I forgot that one of Mueller’s hatchet men drove Arthur Andersen out of business.
Interesting comments – thanks.
About half of US adults claim not to have any money in the stock market. There was a drop after the 2008 sell-off.
This is a “correction” but seems more significant because of the long upward path. So one of the things of interest is – if the drop continues – how many more will bail out on the way down, and stay out?
Other interesting numbers are those related to folks such as Jeff Bezos, Warren Buffett, Gates, …, Musk.
Bezos with $120 Billion, if stocks go down (on average) 10%, will likely have ‘mac & cheeze’ for a week.
I’m a watcher on this.
The CBO (Congressional Budget Office) is a useless bunch of twits. We could get a much better forecast from Price Waterhouse or Arthur Andersen for much less money.
The CBO does a good job if they are given good guide lines. What happens is some congress critter, asks them to calculate the impact of xyz legislation assuming 5 stupid assumptions are valid.
This is how they tune the dial to get the output they want. It is rarely the case that the guide lines attached to a request to the CBO are anywhere close to rational. That is why their reports often leave out important factors or use silly assumptions.
@E.M. – Thank you very much for your views. I respect your knowledge and experience that backs your analyses and find them much more valuable than the Business News Blatherers and Bloviators’.
It’s been a few years since I’ve mentioned it here, but I come from a buy and hold and hold and hold and hold family. When Mom died last year, I inherited a portfolio of dividend-paying stocks, some of which were bought by my grandfather and the rest by my father in the ’70s and ’80s. All of those companies have good long-term prospects and a couple of them should prosper very nicely under President Trump’s policies.
When I retired in June of ’16, I rolled my growth-oriented 401k into a dividend-paying IRA. I need some income, but I don’t need to sell any stocks until my mandatory withdrawal age, which is about 12 years away. Under President Trump, I do expect to see some increasing dividends and perhaps a stock split here and there. I’m just not personally very concerned about stock prices for now.
So… I don’t see any of my holdings going belly up, unless a Dim gets elected and starts picking winners and losers. I am expecting the market to be a good bit higher when I’m required to start selling. That’s when I’ll be watching the dips and climbs.
All that said, that doesn’t preclude me from being interested in how the market behaves, which is why I like to read your take on the markets, E.M.
Thanks again, and best to all.
P.S. Packed up the trailer and critters and left for Florida mid-January. Stayed in Winter Haven a couple of weeks to visit with my sister, who lives in Lakeland. Currently booked for 3 weeks in the Madeira Beach area just south of Tampa/Clearwater. After that? I guess it depends on the weather at home.
Since I work, I didn’t really have time to do the necessary research and certainly couldn’t day trade.
I’m reading “Fooled by Randomness” by Taleb and loving it.
On that note, CIO, the indicators you use, have they been tested in relation to Black Swans? It could be, and I’m not saying it is so, that some indicators work well in a relatively tame market, but fail when major market-quakes occur like in 2000 or even 2007. Have those been back-tested against those major moves? Also, when those major moves happen, frequently one can’t even trade because the trading pipe is beyond capacity. When that happens stop-loss orders can kill you.
When I was running my IRA I tried limits, stop orders, stop-limit orders and option calls/spreads of various types. I got hit by the 2000 drop, lost about 40% and made it up plus some, but it was a nail biter. The pros handling my account now will get out at a 20% drop, but I worry because the above concerns still apply.
I’m wondering if, like Taleb, I should put that money in bonds and be done with it.
@Jim2:
Bonds DROP (and if it is a bond FUND it is an unrecoverable loss as folks sell out) during rising interest rates. The Fed is started on a course of rising interest rates….
I made a killing buying a ladder of long duration strips / zeros when interest rates were about 15% and Volker had killed the inflation beast. Turned something like $5000 into $40,000 pretty much guaranteed. My only mistake was being too conservative in the ladder structure. I could have made it into $160,000 with slight changes of duration.
So please let go of the notion that “Bonds Are Safe”. They ARE NOT safe. Bond FUNDS are horribly non-safe. IFF you hold an actual bond and the price drops, you can just hold it to maturity and get the principle paid back. In a bond FUND, folks sell out, the fund is forced to sell at a low, and you can never ever recover that loss of principle in the fund. So as a trading vehicle, bond funds are nice. But as a long term investment, you want REAL BONDS not a bond fund.
Per “back testing”:
It isn’t as valuable as you might think. The rules and laws about markets and the market structure is a constantly changing river. What worked in the era of the “uptick rule” no longer will be the same today (when unlimited shorting can cause far more rapid onset of panic and selling). In the ’70s, most long term investors held their stock certificates. That meant they could not be hypothecated so could not be shorted. Now folks almost universally have their stocks in an account or fund. This means roughly 100% of the stock can be hypothecated (loaned to a short seller that might be your own brokerage account company trading desk) and sold short against your interests.
That said:
What I use are indicators that look at basic market realities. Volume sold. Price trend. Price range. They have fancy names (like volatility for ‘range of prices’ and Simple Moving Average for a price trend) but they are the basic physical movements of the price and volume of the trades. That has constant behaviours over time as people have constant reactions.
The only change has been an acceleration of the rate of change when the shorting comes in as those are often machine driven and have nearly 100% shorting available.
Yet that just changes how fast the same “indication” shows up. Price plunges through the SMA stack faster now than it did in the ’70s, and so the stack has a more compressed look to it as the fastest line rolls over quicker yet the slower line still is slow. But the fact of the rollover stays the same. As it must, since price is what drives it.
Basically the indicators I’ve used most are all just ways to visualize the price and sometimes volume movements in a more standard and more focused way.
I’ve been using these basic tools (with lots of exploration around them and with refinements) since about 1980. That has been through several “black swan” events (i.e. dramatic market crashes).
THE major change is that initially I was a Ben Graham Value Investor (Read “The Intelligent Investor”). This got me to realizing that he did a LOT more math than was needed on any given selection. (He realized it too and while “Securities Analysis” was the main tome it was several hundred pages and lots of math, so he made a quicker method in “The Intelligent Investor”). Eventually I realized that there were years of “no cheap stocks” and then periods of “Everything is cheap” and that these indicators tended to show what market phase you were in. Using that “timing” information coupled with some “value investor” POV and with a little bit of “social trend stocks” (think Apple and Tesla) I realized that by not just picking “cheap stocks” but also picking “growth” when the timing was right, I could do better.
So I wanted Birkshire Hathaway, but wanted it cheap. I bought it during the crash of ’87 IIRC. (Just wish I’d bought a few more of it). Choosing BRKA was a “value investing” decision. WHEN to buy it was based on “the time to buy is when blood is running in the streets”. Similarly the bond strips. I knew what was going to happen to interest rates due to Reagan and Volker, so the strips were “way cheap” on a decade holding period basis.
I eventually got into more rapid trading just to see if I could do it. I’m OK at it, but don’t have the patience to sit all day at a terminal churning for nothing. I’d rather wait for the “once every few years” moments with just the right vehicle. Thus my “step out” a ways back when thinking it looked a bit toppy and my interest in watching this dip to see if “things get cheap enough”. Oh, and as soon as I’m seeing significant inflation and rate rises, I’m back at those bond trades (but from the short side as rates rise).
Oh, and yes, much of my use of indicators came out of dissatisfaction with stops, trailing stops, etc. etc. There really is no substitute for looking at the actual graphs and thinking.
@H.R.:
Yes, I made most of what I’ve made out of long duration buy and hold. See Ben Graham’s books in the prior comment.
Still, it’s useful to time your buys to “blood in the streets” times. Yet to do that, you must sell when all is quiet to have the cash ready. That eventually leads to trading. The only questions are how often and how well thought out. At the time you buy or sell you ARE trading. The issue being how good you are at it… So when things get really quiet and toppy, I start raising cash. Then I’m ready to pounce on a bloody market. When I’ve bought at the bottom of a horrid market, I’ll then often hold for a decade or two…
@John F.:
Post The Great Depression there was essentially no public participation (by the “small investor”) for a generation in the stock market. The foolish return to some of those same pre-crash rules and the resultant volatility and Fat Wallet driven markets is likely to result in that again.
I know that even as a very educated and skilled market participant; I’ve cut way back on my participation as they buggered the rules. I’m only in it now as a trader (on a couple of time scales) and no longer as an “investor” since it’s now a traders market.
The really really big Fat Cats have a problem we don’t have. They just can’t unload $Billion of stock in a day without causing the crash they want to avoid. Using options to “hedge” just moves the short to the brokerage house (as they do “inversions” where the option becomes a short to protect themselves) and that leads to even more downward pressure. (The reason the “uptick rule” was eliminated was so that the Brokerage Houses could easily short to fill their options contract needs at zero risk to them and generate more volume for the trading desk with short sellers. It was NOT to help you, or stabilize the stock market.)
So about all they can do is diversify widely and “ride it out”. Then again, if you have a few $Billion, riding it out on your $Millions yacht is not so hard to do…
They can also unload in short bursts and let the bottom feeders who reflexively buy the dip push the prices back up again. By doing that, they can unload a $Billion but it has to be spread over a time period where they play the news market and dump a bit every time there is an excuse to sell.
That of course is greatly helped by having access and clout in the financial business world where they can have friendly pundits talk stocks up or down in tune with and timed their plans.
Like you say it is a system rigged for the big wallet accounts and the little guy has little opportunity other than figuring out what the big wallets might be doing and trading in parallel with their moves.
That is why I only have stock participation in my 401K funds and let folks who have an inside track on all the manipulations try to keep ahead of things. I just have no reasonable expectation of being able to beat their performance and have a significant chance of doing much worse.
Like most folks, I simply do not have the liquidity (big enough wallet) to jump on good situations with a big enough wager to win big or eat a big loss.
Yep, I kept ~20 % of my IRA in actual bonds, for a while.
Great piece. Agree the algorithms of the major players create this scenario. While I doubt they are colluding to short the market, it can sure look like that. There are many in in full schadenfreude watching the market tumble while Trump is touting it’s highs, including at least 17 US multi-billionaires between #1 Bezos $111.6B and #201 George Soros $8B on the billionaires list. https://www.forbes.com/billionaires/list/#version:realtime
Among these are several hedge fund owners. Together they control nearly $650B. This doesn’t count the minor billionaires, such as Cuban and Steyer, who hate the president.
Interesting item here from Nassim Taleb
“You don’t have to be right about how the world works to make money”
or from his other writings
“Some people who are very successful are successful because they are lucky, not because they are good at what they do.”
https://www.zerohedge.com/news/2018-02-11/nassim-taleb-xiv-why-people-who-make-money-are-usually-wrong
“Fooled By Randomness” has a lot to say about market gurus. Their trading style just happens to mesh well with the current market trends and they make a lot of money, only to lose a whole lot more than they made when the nature of the market changes. Same for those who got lucky predicting a big move. If you follow them after, you see their later prediction are bunk. He was a professional trader, which I believe was his muse.
Yes Taleb was a “Quant” – professional mathematics and statistics applied to risk management of market assets.
He spends a lot of time on how most market players really don’t understand the risks of their trades, because they don’t realize they are not dealing with truly random behavior, but like many natural processes, behavior characterized by “fat tail” behavior. These are systems where extreme outcomes are far more likely than they appear using statistics which assumes normal gaussian distributions.
Zero Hedge article on market manipulation of VIX
https://www.zerohedge.com/news/2018-02-13/whistleblower-exposes-rampant-manipulation-vix
http://w3.tribcsp.com/~fredj/ney.html
The reason the randomness worry doesn’t cause me grief is that I don’t expect to have some special insight nor know why things are happening. I’m reactive to the movements of price and volume. As all buys and sells have a price and a volume, it is just seeing what REALLY has happened and reacting; not surmising over what folks are thinking and trying to predict that.
Now I do wrap a “story” around the movements that I think explains why they are as they are, but that is NOT the basis for any decision. Only the actual market stats are important for that. (So, for example, I really don’t know or care if the drop at the top is due to accumulated stop loss orders from a million small players or just a couple of whales shorting things with $Billions. I only need to note that it ALWAYS happens in market tops, both “local” “corrections” and “secular” start of Bear Markets.
I also try to use at least 3 different indicators to define an inflection point.
Yeah, it isn’t 100%… but you really only need about 60% to make some money… coupled with good “get out of bad trades” rules.
@EM: It has been interesting to see the portfolio recovery over the last 5 trading days, and how certain offerings and segments headed north in advance of others.
Thanks for the Don’t Panic. The analyst I follow said the same, so I just rode it out.