Update From Last February Market Top Call

Last February I called a Market Top. At first a bit tentative, then more directly, but also including a caveat that we’d need to decide later if it was a market top, or just a correction. Well, it was pretty clear a few months ago that this is a bear market entry, but I didn’t get a posting up. Now that The Fed has walloped things with a 3/4% rate hike, you can pretty much say it is absolutely a bear market.

A bear market has typically lasted a couple of years, so we likely have about 1.5 years yet to go. Call it about Start of 2024. We’ll tune that up for greater precision as the time approaches.

FWIW, I’ve been basically 100% cash for about 6-8 months now.

https://chiefio.wordpress.com/2022/02/03/us-stock-market-looking-toppy-to-me/

US Stock Market Looking “Toppy” To Me
Posted on 3 February 2022 by E.M.Smith
I’m seeing classic indications of a Major Top in the stock market graphs. The Fed is saying they WILL raise interest rates this year, and you just can not fight the Fed. Arguing against that was the horrible jobs report with 300,000 lost instead of 200,000 gained, so it is remotely possible the Fed will hold off a while until the next jobs report. But I would not count on that. Central Banks around the world are in a Liquidity Trap. Interest rates are near, at, or even below zero and there is no monetary stimulus from that. Keynes warned that this would happen if “easy money” was too much or too long (IIRC he set the upper bound for easing monetary policy at about 3 years… not the 2 decades we’ve had.)

So Central Banks have their “naughty bits” in a mangle. Their choices are keep cranking, or stop and let things stay a bit squashed while they hope for a solution. NO AMOUNT OF ADDITIONAL EASING OR LOWER INTEREST RATES WILL ACCOMPLISH ANYTHING GOOD. Period. Full stop. That’s just the nature of a Liquidity Trap. At the same time RAISING INTEREST RATES WILL CRUSH ECONOMIC GROWTH, right at the time when it is needed the most as folks have been locked down and out of work for 2 years. Rock, meet hard place. So I think the Fed will likely post a nominal 1/8 basis point rise, just to prove they are not as impotent as they are. Perhaps even two of them. Then sit for the rest of the year through the election (The Fed hates raising interest rates during election season when a Democrat is the incumbent…)

But ANY rise will cause a way overheated and overpriced market to take a “correction” and or crash. (Depending on how overpriced and how much rate hike and how moribund the economy. Unfortunately, the market is very over priced, and the global economy is screwed from logistics, labor, and inflation issues right now.)

So they did raise 1/8 and then sat a little while. Eventually realizing it didn’t do much so did the 3/4% sledgehammer. There comes a time when they must act, politics or no — or perhaps because the politics of runaway inflation was starting to chew on the DNC election possibilities…

By the end of last February it was clear what was going on, but how long was up for grabs:

https://chiefio.wordpress.com/2022/02/27/market-top-correction-or-drop-tbd/

Market Top – Correction or Drop TBD
Posted on 27 February 2022 by E.M.Smith
I use a long duration (5 to 10 year) weekly interval chart to determine market status as “bull”, “bear”, or “correction”. At present, this chart says it is at minimum a “market top”, and next we find out if it is “just a correction” or a “year or two bear market”.
[…]
9) It is not yet clear if this is a correction or entry into a new bear market. That will be shown by a return to the SMA stack and punch through (correction) or fall away to the downside (confirming bear market).

10) The Fed is raising interest rates and claims it will do more. That argues for “Assume Bear Market until proven otherwise”.

11) I’m 100% in cash.

12) I can’t hold cash long term as The Fed and The Government is trashing the Dollar so I’m going on a hunt for alternatives. Watch this space later…

Since then The Fed has walloped with a bigger than expected rate hike, a promise to do more if needed, and I’ve moved to Florida (still looking for a house – they are now about double what they were 2 years ago and I’m not sure I want to pay up double… but “we’ll see”)

But it’s been 4 more months. Time for a Check In on market status today. First off, we’ll look at a 5 Year Weekly chart.. I usually do a Decade Weekly for this function, but the first 5 years of data starts to be hard to read as the variation get compressed out. A 5 year is easier to see what I’m talking about:

3 July 2022 5 Year Weekly SPY

3 July 2022 5 Year Weekly SPY

On weekly charts I use a SMA (Simple Moving Average) stack of 9 weeks. It’s “3” so you get 9, 18, and 27 weeks. Roughly 2 months, 4 months, and a bit over 1/2 year.

The little red dots over the SMA stack and price lines is PSAR – Parabolic Stop And Reverse. Basically it swaps trades in and out of the indicated stock so you want to be on the opposite side of the red dots. Mostly good for trading rules based faster trading. Here the red dots are on top, so time to be out of the indicated (SPY) S&P 500 Stocks.

The SMA stack has 27 over 18 over 9 week over the indicated SPY. A full on SMA Stack inversion. As this is on a weekly basis, it’s a longer term call saying “been going down a lot for a while and likely to continue doing that.

IF you look carefully, back about April the SPY price bars touched the SMA stack, failed to penetrate fully, and proceeded to continue falling. The “correction” turned into a bear market indication (though it takes 2 full quarters to be a confirmed bear).

Looking at the other stock fund tickers:

QQQ the top raspberry line, is plunging from higher, and faster. That’s what Tech Stocks do in a bear market.

DIA, that blue line just below the S&P 500 SPY, the Dow Jones Industrial 30 are falling more slowly (again, what they do in a bear market) but never did get as high as the S&P 500 and certainly not the hot QQQ during the run up. In Bull Markets one wants the hot volatile stocks. In bear markets it is better to short them against the DOW.

Just below DIA is the orange RUT – Russel 2000 American Stocks. The S&P 500 are the 500 largest in America. These are the smaller ones. They are financially weaker and tend to be damaged more by Government Policy & The Fed, so drop more (but are not as bubblicious as the Nasdaq so don’t have the big bubble to work off…)

This configuration looks a lot like an early Bear Market. We’ve not had the QQQ drop to below the SPY and the DIA are not yet on top.

Moving down to the Volume+ panel. Look back at that price dip in about April of 2020, notice how Volume spiked up huge. Red “down volume” lines bigger than the black “up volume” days of the relief rallies. While a bit harder to see (due to the compression of smaller numbers in older data) you see the same thing about December 2018 and even January 2018. That’s what the bottom of a “correction” looks like. Bear markets end similarly, but bigger and with a Dead Cat Bounce. But look at the latest data. Just small little red lines on sell off weeks. Both red and black about 400 million shares and nowhere near the 1.5 billion of the last correction bottom. We’re not yet out of the woods on this market. People have not yet done their panic selling.

Down one more is MACD. Moving Average Convergence Divergence. It tells you how the moving averages are behaving relative to each other. It is firmly below zero (so very much a down market). Red still on top (so still headed firmly down).

DMI+/- is firmly Red On Top, with blue way low. All the momentum is to the downside. ADX (think of it as momentum strength) is high and not yet crossed over the red line. (At the point where whatever is on top crosses the ADX line, it tends to indicate a cessation or reversal of trend strength coming). But for now, it’s saying “still more down action than up by a long shot and down not weakening yet”.

Again, look back at April into May 2020 to see what this indicator looks like as a crashing market comes to a halt and prepares to rise again. Red crosses black to the downside, blue starts to rise off the bottom, that’s when you put in “buy if touched” orders. Later MACD crosses over and it’s off to the races again. But if you wait for that you miss the big “relief rally” or “short cover rally” at the very start.

Conclusion

So my take on this is pretty simple. It’s pretty much a confirmed Bear Market. The move to cash last February was a good one. I didn’t put on any shorts (My Bad) mostly because you must watch them closely and I was busy selling a house (also at top of market ;-) and moving, so tearing down computer systems, internet, etc.

There’s still some time for short positions, but more as weekly or even daily trades based off of a 1 Year Daily chart. Essentially our context is Bear Market until that is reversed and that usually takes about 1.5 to 2 years, or about 1 to 1.5 years after the confirmation. So no really long term shorts at this point.

Then there is the Rampant Real Inflation. That’s going to be brutal to companies in any kind of retail operation. Folks will be short of cash and NOT buying what they can not afford. That’s not going to change until:

1) The Fed stops raising interest rates, likely in a year or two after stopping inflation or at least cutting it back from 15% real, 8% Govt Claimed Value and closer to 2% target rate.

2) The Democrats realize they need to stop the $TRILLION GRAFT PACKAGES (yeah, right) and stop the $TRILLION sized “print and spend” crap; or get voted out of office “Bigley”.

#2 has no hope before the November election (and subsequent new Congress about Jan 2023, so don’t hold your breath)… I think this pretty much has it “baked in the cake” that it’s all down to The Fed raising interest rates until Jan or Feb 2023 at best.

Sidebar In Inflation Protection Investments

Just as an FYI, during times of inflation, cash is trash (yes, I know, I’m holding a bucket of it right now… but only for a few months to buy a house and pay cap gains taxes also while waiting for the market crash to reach bottom. Call it about a 5% value loss / risk). Gains are better in low capital intensive stocks, real estate & REITS, and TIPS Treasury Inflation Protected Securities. “Stuff”, like precious metals, tends to “hold their value” but does not grow value. It’s insurance not an investment in growth. Still, good as a store of value.

I’ll be doing another posting on this soonish with more details. For now, Historically, sectors that outperform inflation tend to be:

Energy
Equity REITS (Real Estate Investment Trusts)
Consumer Staples (TP, Food, Medicine, etc.)
Utilities (though with the Government screwing over electricity companies, be wary)
Precious Metals & Mining of them.
To some extent Health Care, but again, the current Government Pot Stirring means be cautious

Sectors that tend to do badly include any that need to borrow a lot of money for capital goods replacements or issued mortgages that are now suffering under rate rises, plus the things folks stop buying. Like:

Consumer Discretionary (washers, dryers, cars, appliances, new home builders)
Telecoms & Tech (IPOs and loans to tech tend to dry up)
Mortgage REITS.
Broader US Stock Markets
Industrials
Financials
Materials (as manufacturing and building slow down)

To the extent that the 40% “Excess Deaths” continues to be proved up, I’d also avoid Life Insurance Companies and go long Funeral Parlors…

So that’s it for now. More as the time becomes ripe for change. Bear Markets can be long and painful. Inflation is a cudgel against cash, but for now even just cash is better than being long falling stocks. Hedging with a few Short Funds can soften that effect without too much risk.

So look at the charts every so often and watch for those big volume spikes, and for “ADX over DMI-” on the DMI indicator to tell you when the end is near.

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About E.M.Smith

A technical managerial sort interested in things from Stonehenge to computer science. My present "hot buttons' are the mythology of Climate Change and ancient metrology; but things change...
This entry was posted in Economics - Trading - and Money, Stock Charts, Wall Street Week.... Bookmark the permalink.

6 Responses to Update From Last February Market Top Call

  1. philjourdan says:

    I bought into some metals a couple of years ago. I am thinking of upping that as I do not see anything holding its value through this stagflation other than physical assets.

  2. E.M.Smith says:

    I usually put some in “other currencies” during inflation, but this time is different. Many of my preferred nations are doing the Same Old Stupid as the USA, so their currencies, too, are suspect / inflating:

    Euro
    UK Pound
    Australian Dollar
    New Zealand Dollar
    Japanese Yen

    So what’s left? The Swiss Franc is about it, but it gets frothy and over traded in heavy inflation as folks rush into it.

    The Chinese Yuan is pegged to the $ US (more or less) so is useless and also thinly traded. The Ruble is way up on Sanctions Crap Blowback, so too late in many ways. South African Rand was one of my Go-Tos when it was the Kruger Rand, but now as Just Another Sub-Saharan African Kleptocracy, not seeing the point.

    Essentially Europe and North America / UK / Ex-UK Colonies have joined with South America and Africa in having inflating Fiat Currencies.

    So I’m also looking at metals. I usually go for the miners where you can get some profit along with all the metal “in the ground”, but there’s some challenges in picking miners these days. Decisions decisions.

    The TIPS bond fund is in Treasury Inflation Protected Securities, so ought to be going up, but is in slow decline. Guess I’ll need to find out how to buy TIPS bonds directly (last time I bought direct bonds was about 30 years ago… maybe 40…) The directly owned TIPS bond gets a periodic increase in principle as inflation adjustments are made, and that then raises the premium paid at the nominal bond rate (on the now larger premium). Very Nice ;-) But the adjustment is based on “Official Inflation Rate” and not on Real Rate.

    Then there’s that risk that W.W.III erupts. Diminished now that the EU / Lithuania have realized that going into a war with Russia short on fuel and with winter 4 months away might be a Very Bad Idea. (Wonder if they remember Napoleon,, WW I, WWII, etc. etc.) That could make all paper assets worthless.

    I’m looking for Real Dirt With House as the major buy (and hopefully soon…), then “Stuff” on the land and in the house. Everything else after that.

    FINVIZ with a 6 months view says that what has been winning are Energy Stocks (well duh…), Healthcare (well duh again), Coke et. al. (consumer non-durables), Aerospace (war much??), and a bit of Utilities (heavy on gas and selected regulated Electric companies.
    https://finviz.com/map.ashx?st=w26

    Watch out for any water and electric companies in the Desert Southwest. (Las Vegas, Phoenix, Los Angeles…) as lake Powell and Lake Mead are at about 28% and just a few dozen feet from “Dead Pool” (either in about September or if they make it to the next “water year” 2023 September) at which time water and power from them halt. Somewhere around 1/4 to 1/3 or so of all those place’s water and power. (More on this later).

    Lake Mead is already down to something like 5 out of 14 turbines working (the others go offline at “inactive pool” that happened at about 1048 MSL water level. The other 5 quit at 950 MSL. Water is dropping about 3/4 foot / day… 90 feet to go (closer to 20 for Powell, but it gets some refill from full reservoirs above it – amount TBD). Figure about 120 days to Mead “dead pool” at present rates. So July, August, September. Everyone is hoping for a Monsoon Season to give it One More Year of life… Yeah, that “hope” thing…

    Maybe I need to by beer and whiskey futures ;-)

  3. John Hultquist says:

    There are many interesting ideas above — too many for comments, except . . .

    ” go long Funeral Parlors… ”

    Many deceased are now cremated with ashes scattered rather than buried, and that requires natural gas (mostly). Both trends must be negatively impacting funeral parlors.
    …and:
    ” Real Dirt With House as the major buy ”

    There is a hit country song called “Buy Dirt” by Jordan Davis

    Happy 4th & stay safe, y’all!

  4. Ossqss says:

    2 quarters of contraction experienced this year = trouble by definition

    Already seeing the layoffs and downsizing to help balance sheets, but that is not going to work for some companies.

  5. philjourdan says:

    @EMS – yea this is a new world order recession. That is why I am not looking to gain, just hold my own. Don’t know mining at all, so sticking with solid objects. It is a crap shoot. I was hoping to retire soon, but that looks like a non-starter in the near term.

  6. The True Nolan says:

    For anyone thinking of physical metals, I have had personal good experience over an extended period of time with SD Bullion.
    https://sdbullion.com/

    As for “buy dirt!”, yup, always a GOOD idea. After buying, using, and selling various pieces of dirt over the last fifty years, my conclusion is this: Two acres of good dirt is worth forty acres with rocks. And whether it is two or forty, you HAVE TO HAVE A SOURCE OF RELIABLE WATER. Water is not normally a problem in Florida. A shallow well will water your garden almost anywhere in the state, and even if it is sulfur water, you won’t taste it after a week or two.

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