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Chart stolen from somewhere…
WHY EQUITIES WOULD DROP
IN A BOND MARKET SELLOFF (MishTalk)
“It is impossible for people to dump bonds for stocks or
dump stocks for bonds. For every buyer there is a seller. Someone must at all
times hold every stock or bond issued.” Full
explanation at…
MARKET REPORT / ANALYSIS
-Tuesday the S&P 500 was down about 1.5% to 2127 at
the close.
-VIX jumped about 18% to 17.85 at the close.
-The yield on the 10-year Treasury jumped up 1.73%. (It
is unusual to see rising bond yields when stocks are falling. Yields rise when
Bond prices fall, so both Bonds and Stocks fell today an example of the
MishTalk piece above.)
Over $60-million was added to the long Rydex Funds in
just 2 of the long/short Rydex funds I track at the close Monday; clearly, the
dip-buyers were out in force. Based on Tuesday’s price action, it looks like they
were too early.
I forgot to note yesterday that Monday was statistically-significant
and that would suggest a down day for Tuesday.
Today was another statistically-significant, down-day and that suggests
an up-day Wednesday. I wouldn’t bet on
it this time. The selling-train may be
picking up steam. Further, the number of
these days recently suggests trouble overall since there have been 6-statistically
significant days in the last 3-weeks. Large back and forth, up-and-down moves
occur at tops.
It is odd to see Bonds selling off when it seems so
unlikely that the Fed will make a move in September. Is the market beginning to discount a move in
December? Perhaps, but Zerohedge wrote, “bonds will likely continue to slide
until the Sept 21 BOJ announcement at which point either more easing will be
required or the VaR whock will result in a supernova of P&L losses for
anyone who still holds bonds.”
Definitions: “VaR-shock”, an often abused expression for
a rapid and significant market correction.”
Tuesday was another extreme down-volume day with nearly
all volume to the downside. This is the second extreme down-volume day in
3-days. This is an unusual occurrence that frequently occurs near a bottom as
investors panic out of stocks. It can also occur near a top. The last time we saw two-days close together like
this was in late August 2015, a day before the S&P 500 bottomed in what
turned out to be a 12% correction on the S&P 500. That was 66-days after the top. When this sort
of action occurs near a top (such as now) it indicates a shift in demand for
stocks and suggests further downside is very likely.
VXX Trade. I am still holding VXX since the data looks
like there’s further downside ahead.
SHORT TRADE
I am still holding short positions in SH and QID.
MARKET INTERNALS (NYSE DATA)
The 10-day moving average of the percentage of stocks
advancing (NYSE) dropped to 46.9% Tuesday.
It was 53.1% Monday. A number below 50% is usually BEARISH for the markets
short-term.
On a longer term, the 150-day moving average of advancing
stocks slipped to 55%. A value above 50% generally indicates an up-trend. The McClellan Oscillator declined from -22 to
-62 (percentage calculation method).
New-lows outpaced New-highs. The spread (new-highs minus
new-lows) slipped to minus-15 Tuesday. (It was zero Monday.) The 10-day moving
average of the change in spread was -18. In other words, over the last 10-days,
on average, the spread has decreased by 18 each day. Market Internals switched to negative on the market.
Market Internals are a decent trend-following analysis of
current market action, but should not be used alone for short term trading.
They are usually right, but they are often late. They are most useful when they diverge from
the Index. In 2014, using these
internals alone would have made a 9% return vs. 13% for the S&P 500 (in on
Positive, out on Negative – no shorting).
LONG TERM INDICATOR
Tuesday the Price and Sentiment indicators were neutral. Sentiment
may be neutral on a multiple of standard deviations basis, but the current
reading of 74% bulls is very high. VIX and & Volume indicators were
negative and the calm-before-the-storm indicator is “carry-over negative”. Overall the long-term indicator switched to
SELL.
During the QE era, this indicator was too sensitive so I
set a limiter on it that required the index to be 5% below its all-time high
before a Sell would be tripped. Now,
since there have been 2-extreme down-volume days in close proximity, I think additional
caution is warranted so the limiter is “off”.
On the other hand the recent market pattern has been to drop going into
a FED meeting and rise afterward. I note this just to point out that this sell
could be followed by a Buy soon thereafter. I have often under estimated FED
impact.
MY INVESTED STOCK POSITION:
TSP (RETIREMENT ACCOUNT – GOV EMPLOYEES) ALLOCATION
My invested total in my
long-term portfolio is currently 40% in stocks. I will cut back to 30% stocks
in the S&P 500 Index fund (C-Fund) Wednesday. 30% invested is a good amount
because in the unlikely event the index were to be cut in half, I would only
lose 15%. On the other hand, it keeps a
goodly amount invested should the Index reverse up.
