So, we hate to keep issuing these Trading Flashes, but given the stock market action since Wednesday 7-31-19 it seems such comments are warrened. Indeed, the S&P 500 (SPX/2883.98) was changing hands on 7-31-19 at 3017.19 and we were cautious believing the market was overbought and had run into an overhead resistance zone. That said, we though any pullback would be mild and likely contained in the 2940 – 2960 level. Boy was that a bad trading call as the SPX fell into last Monday’s intraday low of 2822.12 for a 195-point plunge, or a ~6.6% decline. Subsequently, last Tuesday we issued a Trading Flash commenting:
And for all of you that asked me about a stock market “crash,” markets almost never crash off an all-time high. They typically have a return move towards that all-time high where it then becomes “kiss and tell time.” This morning, because of the renminbi’s favorable reset, the ESUs are up some 26-points. However, the “fair value” is about 15, which implies the SPX should open 11-points higher. As stated, “I would not trust the first rally.” Indeed, I know old traders, and I know bold traders, but I know no old and bold traders.
And that, Ladies and gentlemen was a good call as the Dow declined some 589 points causing the SPX to tag an intraday low of ~2825 yesterday and then rallied. That chart pattern sure looks like a double bottom especial given the fact that last Monday appears to have been a 90% Downside Day, which tends to be a “capitulation low” and it how bottoms are made. Speaking to double bottoms Investopedia writes:
A double bottom pattern is a technical analysis charting pattern that describes a change in trend and a momentum reversal from prior leading price action. It describes the drop of a stock or index, a rebound, another drop to the same or similar level as the original drop, and finally another rebound. The double bottom looks like the letter "W". The twice-touched low is considered a support level.
My inclination was to buy that double bottom low yesterday morning, but I did not because I wanted to run my timing models and internal energy modals last night. Verily, in this business you need to be disciplined or you will lose money!
As our friend, and portfolio manager Craig White (Raymond James LTD. In Canada) writes:
Breadth was about even with slightly higher volume on the distribution side – new 52 lows printed a lower number than Monday’s session. The percent of stocks below their 20 DMA once again hit the mid-teens before closing at 26%. See June and December 2018 for similarities. The equity risk premium ERP (EY – 10-year Treasury) hit the highest level in almost 7 years. This is now almost 2 standard deviations above trend, with forward returns rather favourable at such levels when an ERP tranche is finally “hit”. 55% of the SPX now carry a higher yield than the 10 Year. It should come as no surprise that dividend yield was noticeable leadership today.
And then there was this from market wizard Leon Tuey, arguably the best Canadian technical analyst ever:
No doubt, many are shell-shocked from Monday's market selloff. The 767-point drop brought the bears out of the woodwork. Chicken Littles are running around screaming : "The sky is falling! The sky is falling!". Monday was what some called "puke" day. In fact, I find Monday's market action most heartening. At the close, on the NYSE, Declines outnumbered Advances by a margin of nearly 9-to-1 and Down Volume outnumbered Up Volume by a margin of more 10-to-1. It was a climactic day which is normally seen near bottoms, not at market tops. It was a sign of capitulation. This evening, in early trading, the Dow Futures were down nearly 500 points, but at this writing (8:53 PT), the Dow Futures are up and the rally is gaining momentum. The climactic selling and tonight's reversal are symptomatic of an exhausted bear and signs of the market trying to put in a bottom. Will the market go straight up from here? Not likely. As mentioned, sentiment backdrop is ideal, but the market is not yet oversold. Much of the risk is behind, however, and peak selling intensity has been witnessed. Hence, after a period of base-building, the bull market will resume and record highs lie ahead. Accordingly, re-deploy cash on further weakness. As mentioned in my recent report, "Buy the Dips!"
I will mention that the Demand yesterday was lacking with Down Volume at 55% of total Up/Down Volume, while Decliners were 54% of total Advance/Declining issues. I ran the models last night intermediate/long-term model never turned cautious, but the short-term model turned squirrely two weeks ago. It has now flipped back to constructive. Moreover, the internal energy model has plenty of energy. So, unless there is some downside catalyst (tweet, China, Iran, etc.) it looks like the lows are “in.” It will be interesting to see how the SPX acts when it closes the downside chart gap between 2898 and 2932.
Investing/trading involves substantial risk. The author and Saut Strategy do not guarantee or otherwise promise as to any results that may be obtained from using this report. Past performance should not be considered indicative of future performance. No reader should make any investment decision without first consulting his or her own personal financial advisor and conducting his or her own research and due diligence, including carefully reviewing any prospectus and other public filings of the issuer. These commentaries, analyses, opinions, and recommendations represent the personal and subjective views of the author, and are subject to change at any time without notice. The information provided in this report is obtained from sources which the author believes to be reliable.
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Jeffrey Saut
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