Review
10/29 Total market view: "Bottom line - SPY & VIX "trouble alert" issued 10/27 via SPY clear rejection of Q4P and VIX move above its Q4P. Consider previous incidences this year: 1/4-6, 1/29-2/2, 6/24, 10/11. 10/11 not much damage before the next alert issued, and 6/24 turned out quick buy 6/27+, but that was not the case on the first two. Until we see lower levels on stock indexes (ie SPY Q4S1) or recovery and end of alarm I think cautious positioning warranted. This means reduction of longs, more cash, perhaps short hedges though as mentioned DIA shorts have been frustrating."
Result was a fair amount of trouble with markets down each day last week and SPX down about 2%. Some indexes dropped considerably more.
Sum
If you have been keeping up with this site and know that I have been bullish post Brexit, caught *the turn* in bonds on one and only attempt, been saying upside limited on stock indexes since mid August - just to highlight three of many major correct calls - perhaps you heeded the trouble alert from 10/27 that was emphatically repeated in the last 10/29 Total market view. If so you have avoided this market drawdown and the next question is when to buy or lift hedges.
Due to the election this is a tricky matter. How you can position depends quite a lot on your role in the market (trader, retail investor, pro), and your risk tolerance. Stocks and ETFs will have the issue of a big gap. If you buy calls into any more VIX spike on Tuesday and then election results go your way, I think the VIX collapse will mean not as much gains as you would like to have. The best way to play this type of event is without question, 24 hour futures. Still I will try to address stocks indexes and ETFs as usual.
Positioning
Last week: "As long as VIX is signaling trouble I believe it is right to raise cash / hedges until we reach lower levels on stock indexes and/or VIX trouble ends." If you took this advice you watched the markets drop day after day and weren't too bothered either by having more on sidelines or hedged, depending on your type of participation in the market. So now you can either be looking for good setups for things to buy, or a clear signal to take off hedges.
On 11/2 I mentioned a partial buy for aggressive traders based on VIX small up bar below 2HP and multiple indexes holding levels. In my view that was basically a QQQ & EEM long try since these were sitting on Q4Ps and had rising moving averages to help out. The next day broke levels that were the conditions for the buy, so very simple decision to get out. Now you have quite a lot of cash, or are fully hedged.
I reviewed criteria on what has given the better entries here. Right now there isn't a lot that looks good. GLD was a maybe on 10/31-11/1, but I certainly didn't mention it at the time. TLT is not meeting conditions for a buy. On stock indexes, USA mains would have to recover pivots (QQQ Q4P, IWM YP) and VIX fall back under 2HP.
Due to election uncertainty, VIX is unlikely to drop back under its 2HP 20.07 on Monday or Tuesday, and perhaps we will see a move up to its YP at 27.46. If we saw this move (but not a close above) perhaps we will find something to enter. The best buys are days when multiple indexes or safe havens are saying the same thing. Right now they are saying avoid, hedged or short, perhaps excepting some Q1-Q2 buys in EWZ and SOXX, and more recently XLF.
Bottom line - Trouble alert from 10/27 was quite correct. The conditions to lift that trouble alert will be a VIX rejection of a pivot with clear move below the level. Right now VIX is above its 2HP and not yet at its higher YP. Either we need to see a move below 2HP, or higher to YP and rejection from there. Still I think it is better to be cautious with any long attempts with VIX above 2HP.
I will start sounding more bullish on the market when we see Tech set recover above its Q4P (QQQ 114.83), RUT set recover its YP (IWM 116.23), NYA above its YP (10302), and then SPX above Q4S1, VTI above Q4S1, all with VIX and XIV constructive for risk. Until then, cash on sidelines is quite fine.
Pivots
USA mains indexes - Trouble across the board, especially with Tech set below Q4P, RUT set below YP, NYA also below YP. The first sign of a real bounce would be ES futures back above Q4S1 at 2085, but until Tech - current USA main index leader - recovers its Q4P and VIX confirms the signal, markets can go lower.
Safe havens - TLT and GLD not impressive here, so safe havens not helping unless you bet on a VIX rise. I prefer to use VIX to guide positioning instead of trying to play the relentlessly sliding VIX related vehicles like UVXY.
Global and other - It is ugly out there. Other leaders like EEM and FXI broke Q4Ps, and PIN India crashed through its YP with no attempt to bounce. Oil is back under all pivots via current contract and USO (but not yet on CL1).
Other technicals
Bulls trapped and NDX 2000 high fail is the issue. Maybe it is the election but maybe not - we won't know until later.
Valuation and fundamentals
In early September, I noted the Citigroup Economic Surprise Index fade and said that added to my "upside limited" perspective. From 9/25 on, I have been saying that these are more headwind than tailwind for the market. At some point a drop may alleviate some valuation concerns, and economic data may change, but currently there is no change - valuation and fundamentals are not helping the market.
Sentiment
The indexes I track saw multiple bullish extremes in August and I wrote them up here. While those extremes have faded, we are just now starting see bearish extremes:
Put-call 10MA at highest level of the year
ISEE historical data oddly not available but several days in a row of very low readings
AAII individuals and NAAIM are lower, but not yet extreme
Timing
November dates (published 10/29)
11/1 - non event, middle of drop
11/18-21 - not sure how this will work out given election