8/6/2017 Total market view: "Bottom line - Larger trends for stocks intact. But with safe havens strengthening, VIX divergence and XIV bang on YR3 it is time to pay attention to risk management."
Indeed. Whether risk management meant trimming longs, hedging with inverse ETFs, puts, or playing the volatility trade that was urgently recommended a week ago (+44% so far), risk management was the theme of the week.
Indexes cracked last week as safe havens continued up, and most important to The Pivotal Perspective, volatility exploded. But is this another index mini-dip / false break / one day bear wonder like 4/13/2017 or 5/17/2017, each days that looked to be risk-off yet turned out buying opportunities instead?
I don't think so - risk-off seems real this time. For one thing, safe havens are speaking loudly. VIX is above 2HP now; on 4/13 2HP held as resistance; and the same situation on 5/17. TLT had no long term strength then; it does now. Further, several main indexes had bearish action on long term levels: SPY near tag of 2HR1 and down; DIA 2HR1 rejection; IWM 2HP break; NYA 2HR1 rejection and YR1 break. Even more, this is occurring as global leaders China (HSI, FXI, KWEB) and India (Nifty, Sensex, INDA), EEM, and MSCI EMI index all had bearish action on significant levels, mostly yearly resistance levels. Some of these levels were called out here on 8/2 Global index post, and here is a review of what has happened since then. Simply stated, I think is it is the time to err on side of waiting for dust to settle and let indexes drop further, rather than jumping right back into risk after such a minor drop.
While markets can snap back from political worries, I think the problems here are more intractable and likely to continue. Regardless of this opinion, the majority of charts - which is by far the more important consideration - point to serious trouble. According to VIX, stocks are not really a buy here. Even if VIX fell back under the Q3R1, it would still be well above the 2HP! If SPY matched VIX technically (this doesn't always happen but still), then SPY should be at 237 (SPX 2374). I would rather buy stocks if VIX tested its YP at 19.02.
If bearish view is incorrect, we'll see more indexes recover AugPs (SPY to start), VIX collapse, XIV huge rebound back above Q3P, and TLT YP rejection.
Also, review of "speculation" last week, "Wondering about some nasty counter-trend moves like: $USD rally on higher rate hike odds, which could sink GLD and cause some pullback in EEM and related FXI, INDA, etc; VIX up and XIV YR3 slam; Tech stocks down again after failing at June high." DXY no action and GLD higher, but the rest was bang on.
Bottom line - Last week's Total market view pointed to risk management with a focus on volatility. This was exactly the right approach and worked extremely well. I'm still cautious on risk and am expecting more than a -2% drop for SPX/SPY before this phase is over. TLT above the YP, should that occur, would be also bearish for stocks.
PS - Vacation this week 8/16-20. I may return in time for a few posts on 8/20.
USA main indexes - DIA and QQQ still above all pivots. SPY, VTI/NYA below AugPs. IWM below AugP, Q3P and 2HP! (IWM led down as called.) IWM so weak means breadth has significantly weakened for USA indexes.
Safe havens - GLD above all pivots and above Q3R1 is one of the strongest asset classes I track. TLT if higher would join above all pivots, and bearish for risk.
Sectors of note - Always interesting to see what sectors holds up best in a decline. So far SMH like QQQ had 1 day break of AugP and recovery.
Global indexes - KWEB, FXI and oil influenced RSX and EWZ remain above all pivots. ACWI, EEM, INDA and SHComp below AugPs.
Currency and commodity - I probably should start covering bitcoin here, though unlike some more famous strategists who just recently added this to their analysis, I started in February 2016 with BTCUSD at 420 and only discontinued due to time pressures. DXY has been below all pivots since 5/15, and just a couple days later I issued "screaming bearish" call on 5/17. DXY remains below all pivots, though selling pressure seems to be abating.
I have been watching RSI divergence on weekly charts carefully and mentioned it several times in the USA main index section. Last week I mentioned another more obscure indicator, average true range, and said it was multi year low on both weekly and daily SPY chart. Thus far situation similar - fear stokes a sell-off that was ready to happen.
VALUATION AND FUNDAMENTALS
Pro selling at 18x forward earnings for SPX. I have been pointing to this area as resistance all year (and then some), and said last week that due to negative slope of the moving average valuation level, that 2483 more likely to act as resistance.
Sentiment extremes reached near end of July and beginning August were part of shifting to defensive mode. Put-call has jumped but otherwise not near bearish extreme.
Proprietary work in progress model that I am still maintaining in bare bones form due to calls like this.
August dates - a busy month for timing, alas, probably too busy to be much use.
8/2, bias stock high
8/8 - turning out key stock high!
8/11 - TBD
I know, +/- 1 is not helpful at all with this many dates. I don't control the model and it just so happens to be busier this month compared to others. With August 2015 recently in memory, a lot of people seem to expect a fast sharp drop. I can tell you that very few were expecting that at the time. Maybe markets will melt up instead, or these dates will be minor swings in a range bound period.