Market insights to start your week

Random musing time again. Today, as I occasionally like to do, I present some points of interest for readers to take into consideration, ponder on, and use for general market intel in your trading strategy. Today I cover: Recession risk, Canadian debt, and an update on the neartermed market trade I spoke of last week. Finally, I talk about the current bearishness, which is a bullish forward looking indicator.

In no particular order, here are some points of interest I’ve come across from other sources, along with some of my own observations of late:

Recession risk is rising

To determine the probability of recession, ClearBridge Investments uses a Recession Risk Dashboard

The 12 variables are economic watch factors that are ranked as growth, caution, or contraction/recession. The less green “Arrows” and the more red “X’s” indicates recession probability. Note the pattern over the past 3 months pointing towards recession. Growing trend towards less arrows, more X’s.

 

Canada needs to stop printing money

To soften the blow of inflation, the provinces and the federal government already have announced some C$21 billion in stimulus, which will feed into the economy in coming months. As noted in my blog last week, “Governments create inflation …. and then pretend to do something about inflation by causing more inflation”.

Canada should take heed of UK turmoil, resist more spending, analysts say (msn.com)

Beyond the impact of our wasteful non-GDP accretive inflation-spending of late (aka pouring gas on a fire to put it out), all that spending hasn’t been directed in helped us much. As the cost of living rises in Canada, many are feeling financial strain. But data shows that even before the COVID-19 pandemic, the costs of everyday products and services in Canada have been some of the most expensive in the world. Here’s why: Read in CTV News: https://apple.news/AboI-g0TvRN-tkZ8bX2a2Hg

Take a look at the top 4 debt-loving PM’s chart, below. Three of the four had last names ending in “T”. Before anyone defends the current record debt …it was not due to COVID. Nearly half of federal budget deficit during pandemic not related to COVID spending | National Post

 

Timing a neartermed trade

If you get the ValueTrend Newsletter, you will have received our latest edition in your email on Friday of last week. In it, we address our newest strategy surrounding the potential of a neartermed market rally. You can subscribe to the newsletter here if you do not already. Its free, and it offers unique insights that are normally only available to our clients with only the specific securities & trades removed.

To quote the newsletter: “We will NOT be allocating more than 5% into such a potential rally, and will ONLY allocate after confirming that the S&P 500 can hold 3600 until at least Tuesday. We anticipate reviewing the trade to sell should the rally fail near the top of the channel. If the market breaks its 200 day moving average, we will be more inclined to treat this trade as a new bull market. One step at a time.”

We’re likely to take a position in the current rally. We view the potential for some neartermed upside similar to the August rally in that it may move significantly enough to offer opportunity. Should the rally continue, we anticipate a run to the top of the channel, and/or around the 200 day (40 week) SMA which sits at 4100 currently.

That said, note my longer termed comments under the sentiment discussion below. There’s room for one last leg down after a rally. Not a prediction, just a history lesson.

Here’s the chart with the channel, a reversal candle and some momentum oscillator hooks suggesting some upside potential:

Beyond a rally…Bear market history

 

Sentiment indicators suggest the end of the bear is near

Early this year, we saw a similar breakdown in the chart patterns and 200 day SMA as we saw in 2008/9. Now, we are seeing similar sentiment and breadth indicator patterns that lead the market into the bottom of that bear.

By most measures I’ve looked at lately, particularly those dealing with the options market, we’re in an environment somewhat similar to early October 2008. That wasn’t the bear market’s low. In fact, the low was 4 months later in early March 2009.  But, like now, breadth momentum and consumer sentiment, along with option positioning were becoming one-sided.  These lead us into period of relief rally and wild swings in both directions (see the chart pattern below in late 2008) – just as we are seeing now. After a final washout in early March 2009, the market formed a base, which, as always, eventually broke out. That base & breakout, which turned out to be a H&S pattern (FYI: how the base forms really doesn’t matter), began the new 13 year bull market that just ended in 2021. Below is the 2008/9 chart:

 

Here are just a few of the charts suggesting bearishness is a crowded trade

Too many bears = good news, eventually.

AAII Bears Index

Smart Money/ Dumb Money Composite

 

% SPX Stocks trading > 200 day SMA’s

Check out 001/2 and 2008/9!!

 

National Association of Investment Managers Equity Allocations

Check out 2008/9!!!

 

CNN Fear & Greed Index

Vacillating between Extreme Fear (last week) and Fear.

 

 

4 Comments

  • some great charts to consider.

    do you think this is another options expiration rally like in the summer?

    if the Fed keeps tightening until at least year end & it takes a year for the real economy to show it’s true colours then the markets may not bottom until summer of 2023.
    what do you think?

    Reply
    • Mark I won’t set a date for a bottom. Nor will I absolutely assume that there is another down leg coming (although history suggests it may happen). I just follow the trend with a strategy to do whatever the market says it is doing – take my Online Course to understand how to do that. But – yes, there are a lot of hedges unwinding as markets rise – creating a wave of temporary buying – see my blog last week where I talked about a short squeeze. I do believe that will be a primary driver for the rally. This looks like the August setup, as I note in todays blog. That’s why I have entered. Albeit, not in a huge way, and with a tight finger on the sell button. Here’s the blog covering the short squeeze comment:
      https://www.valuetrend.ca/did-yesterdays-reversal-signal-the-bear-markets-demise/

      Reply
  • super posts, although I found the video with David a bit depressing, which was a good thing as it brought me back to the charts and your course that I took. Trudeau’s the town idiot, but the liberal marketing department is very good. Were screwed either way and I love your rants so keep them coming. My question is, I am worried that the market is going to gap up or down quickly during this run, I still am foggy on how we can identify a gap before it happens as we may have top move quickly and I am not a day trader, or do you care by using the 3 bar rule, sometimes you win and sometimes you lose?? (within limits).. Thanks Keith

    Reply
    • Yes–David is a bit of an uber-bear– don’t worry, its just an opinion. Truthfully, his doomsday target is identical to that which I showed on a blog called “The worst case scenario”–basically 2500 on the SPX. But that’s the worst case. And frankly, if it goes there, history shows that a proceeding bull market off that trendline point would be massive. I don’t bother predicting, beyond laying out what the potential support points are. And also–I didn’t stop to debate him, but to imply that we will go into a depression – well, we didn’t have the social safety nets, the bank restrictions, education programs, government job retraining, and support systems, and that kind of thing back then. That’s what created homeless hobos etc in the 1929-31 era riding the rails looking for work. When he talks about people in tents – these mostly are addicts, derelicts, etc who have no interest in being normal members of society. They are not hard working people actively looking for unavailable jobs like in 1929. There has NO shortage of over job openings over the past number of years (in fact, there’s been a labor shortage until very recently) for those who actually want to work! So, the conditions are NOT at all leading into the 1929 depression environment.
      As far as gaps, you cant identify them early – they just happen. I have identified the conditions that make a probable market move, so we bought in our massive (ha ha) 5% new position yesterday. Trend channel touch, RSI/Stochastics hook, Spinning top candle, and repeated successful tests of around 3600 recently (I don’t get too tied up on precision over a few points in any support resistance level). Yes, it could move VERY quickly. I have a quick trigger finger ready to sell. And, if it turns down, I have not increased our exposure too much (we are still over 1/3 cash).

      Reply

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