Blood in the streets

During the Panic of 1871 in Paris, when everyone was selling, Baron Rothschild was buying. When asked about his buying decision, Rothschild apparently replied that “The time to buy is when there’s blood running in the streets.”


As noted in my “Smell of Fear” blog,  there are some quantitative factors that we can watch for signs of “blood in the streets”. I have collected a number of these “fear-sensing” sentiment factors, along with some breadth and trend factors – and created a broad based indicator that I call the “Bear-o-meter”.

Monday’s blog featured the newest reading of the Bear-o-meter, and focused on some of its individual components that have changed over the past month. My last reading was on October 3rd, when it read an astoundingly low “1”—very deeply bearish. This reading looks to have been vindicated, given the carnage that began literally the next day. I should note that the Bear-o-meter normally doesn’t work that accurately. It is a risk/reward reading – not a market timing program. But, it appears that deeply bearish or deeply bullish readings (e.g. –close to 0, or close to 8) may offer some insight on neartermed moves. My point is, don’t expect that to happen all of the time. I use this system to read potential risk and reward, not to time entry or exits. As you may note from Monday’s blog, the Bear-o-meter reads “4” at this time. That’s neutral. So we are at an average risk/reward tradeoff at this time. That can change, likely to a bullish setup sooner rather than later.

When the blood is running on the streets, we want to start looking for buying opportunities. One sign that the blood is running in the streets is a statistical summary done by Charles Dow Award holder Charlie Bilello. The chart below shows us how markets performed after each time CNBC ran a “Markets in Turmoil” special. Sometimes it’s just too obvious, isn’t it? Thanks to reader “JP” for pointing this chart out to me.

Anyhow…I decided to review four of the dominant sector trends in seasonally favorable groups. They are Technology, Industrials, Financials and Discretionary stocks. All of these sectors are favorable into late winter or spring. So these are not short termed seasonal patterns – they offer a bit of wiggle room to refine your entry point. I’ll use the SPDR ETF’s to illustrate the sectors. Let’s get at it.

Technology (XLK-US)

The XLK ETF broke a trendline and its 200 day SMA recently. It has not taken out its last significant support low of $62 from February. A move back above the 200 day SMA (currently near 69) would signify a probable reversal of the current dangerous pattern. Watch for that break.

Industrials (XLI-US)

This is one distressed chart. The neckline break at around $71 paints a Halloween-scary picture. I would expect an oversold bounce back to that price point, but the chart shows clear and present danger past that potential. For now, I am inclined to avoid the sector, despite the positive seasonal tendencies.

Financials (XLF-US)

The financial sector looks to have broken its technical support (neckline) at around $26. Its not so far below that level (as compared to Industrials)—but there is little question of the precarious look to the current chart pattern. If the sector doesn’t rebound back above $26 again shortly, it could be ugly. I’d be wary for now. A decisive move over $26 might change the picture.

Consumer Discretionary (XLY-US)

XLY broke its trendline and the 200 day SMA. But, it did this in 2016 and still managed a recovery. So I’m inclined to play this like I would XLK. That is, a move back above the 200 day SMA – currently residing around $107 – might inspire me to buy into the sector.

 

Keith on BNN tomorrow

Don’t miss MarketCall tomorrow at 6:00pm. If you call in with a question, mention that you read this blog!

13 Comments

  • Hello Kieth,
    Over the last few weeks, rising wages (inflation), rising interest rates, global growth slowing, and a increase in the 30 treasury yield were causing the market to sell off.
    Wages in the U.S increased the most since 2008, 30 treasury yield is getting higher this morning, China is slowing, yet now the markets are rallying?!?
    Something tells me the big Wall Street institutions create fear amongst investors, using the media (CNBC) or other T.V channels, to create panic and bring the market down. They are the first ones to scoop the shares for cheap. Tomorrow, the Wall Street Talking heads will be saying the bull market is back, and all the retail investors will jump in (a bit late) only to be tricked into buying in again
    I think there is alot of manipulation by big instituional players who should be investigated.

    Reply
    • Ray, I wouldn’t doubt your theory. I have been learning a lot about AI (artificial intelligence) lately–in its current form it is used in ways that vary from fairly harmless (aka the Amazon tracking of your search patterns to offer product suggestions “you might like”) to manipulative practices. Eg– the media’s bias towards left-wing agenda. eg–my iPhone has selected news stories every day that use key words to inspire you to open the story, and very misleading headlines to push left-wing extremism. If it wasn’t so serious, one would have to laugh at some of the headlines. Seriously… “Ford hates the poor” and “Ford hates the environment” were (more or less) recent headlines–wordsmithing decisions Ont. Premier Ford made to allow building on a patch of green belt and his kiboshing of a costly and failing green energy incentive. You can angle that any way you want, as in offering supply for housing needs and a stoppage of a virtually useless and costly “green energy” program. But the media wordsmiths it to influence to an agenda. Similarly, you can label the stoppage of the basic income project in 2 Canadian towns brought on by former Premier Wynn as either stoppage of yet another controversial tax-payer subsidized hand-out, or label it as “hating the poor”. The AI programs know patterns that inspire clicks, they know key words that stir emotions–and in the case of the investment media, may know how to feed the flame to feed their behind-curtain masters–much like the political media.
      Listen to podcasts with Sam Harris and Skeptic magazine on these topics–AI will become increasingly invasive as it is used to learn more about you and I than we know about ourselves (via internet search patterns, shopping patterns with credit card data, everything that can be recorded–even buying a rock concert ticket), and use that info to influence decisions in all manners.
      Interesting. Thanks for that insight.

      Reply
  • Keith, in your blog today, I particularly like your reply to Ray. I may be wrong but I am not so concerned with privacy, i.e. StatsCan collecting personal data. They are not interested in my data but to gather macro data. But that’s not how the tut-tut class has it.
    More concerning to me is the issue you suggest that the leftist media uses words to inflame and mislead us. My answer is to read the National Post and Financial Post. I know…they have their biases too. But they are, or tend to be, right of centre. On-line Google stuff I use to read about specific interests such as cyclingf and sailing.

    Reply
    • Hi Fred–I am less worried about what I read–and more worried about the manipulation by the media and its over representation to create bias amongst unsuspecting readers of things like the iPhone news stories. I can read National Post and somebody on the left can read the Toronto Star—fine–each to their own. But my iphone picks up hugely biased and wordsmithed stories that are read by the masses–and are clearly picked to steer and manipulate the reader in a direction that is often based on a very inaccurate interpretation of a fact (my examples of Ford painted as “hating” poor people and “hating” the environment was not something I imagined). Trump, in his brash, bombastic and sometimes irritating manner did have a point when he spoke of “fake news” manipulation by the media.
      AI goes further than my iPhone’s news stories. It can look at Facebook entries, college marks, employment facts, Amazon purchases, visa spending habits–etc – and paint a picture of individuals that can be sold or used for commercial, political and other reasons. Look up interviews by Sam Harris on the subject (his Waking Up podcast has a couple of such interviews).

      Reply
    • sally–per the blog, I am not buying until we see a move over the respective 200 day SMA’s for sectors and or stocks

      Reply
      • Thanks Keith,
        Just to double-confirm, you’re evaluating the 200 per sector to go in, more than SPY?

        Reply
        • Sally–I am waiting for a break over the 200 day Simple Moving Average on sectors, stocks and the market. Basically, as the stock or ETF you are looking at goes above the 200 day moving average, you wait a couple of days (3 is ideal) to ensure it stays above that moving average. That, to me, represents a good entry point. Understand that anything can happen, so it just increases the odds of success, but does not assure that the trade is a sure thing by any means.

          Reply
  • Love your review – thank you Keith. All 4 of the sector ETF’s have moved above the levels you mentioned today. And for the most part, I think the technical indicators look favourable too – e.g. MACD, stochastics. It is anyone’s guess now if these pullback first and then resume up or just continue up, but would you agree that the direction seems to indicate up?

    Reply
    • Yes Jim, I am increasingly bullish. Note my comment to Dave –typically a bit of a pullback is expected after a 3 day run, and that can be a good entry point. Should note: due to the market maintaining under the 200 day SMA–I am not going to fully deploy until that breaks- but will leg into stocks a bit at a time starting early next week.

      Reply
  • The weekly RSI and stochastic are starting to hook up. Could be time to get back in

    Reply
    • I anticipate legging in as of Monday or Tuesday. Typically after a 3 day rally you get a bit of rest (pullback)–especially after Apple’s earnings guidance, that may indeed happen. The final trigger that will push me to fully spend the cash we’ve hedl will be a pop above the 200 day SMA–which is not far away at all.

      Reply

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