It’s becoming increasingly probable that we are reaching, or have reached a capitulation bottom for this stage for the markets. Either that, or it really is the end of the world. In which case…
Today I’d like to cover a few of the indicators that suggest a capitulation bottom is nearing, if not already here. I’ll be short and sweet in commentary. The charts say it all.
VIX is nearing capitulation highs—very close to my “green buy signal”. Also, as Larry MacDonald of the Bear Traps Report (www.thebeartrapsreport.com)
notes: “The VIX index (fear index) is well into backwardation (front month more expensive than the outer months). Meaning, investors are paying up for front month protection as they get more and more nervous. To us, this is ultimate measure of fear because it represents how much investors are willing to pay for front month short term protection on the market. In other words, the richness of the 2 month vs the 8 month is at extreme levels. Historically, when it reached these levels it has occurred at the same time with near term market bottoms in equities.”
Disproportionate put (defensive) buying vs. call (optimistic) buying. In fact, put/call is at an EXTREME level–showing massive capitulation. Levels not seen for 20 years+.
Smart/Dumb money ratio
Smart Money, aka: Institutions, sophisticated investors, insiders and commercial hedgers are moving into “extremely optimistic” territory. They’re 71% optimistic–that’s high.
Meanwhile Dumb Money aka: mutual fund buyers, small speculators, odd lot traders are selling. They’re becoming extremely pessimistic. Only 17% of the dummies like the markets. That’s low.
History has shown us that sophisticated pension managers and commercial hedgers are prone to buying and selling at the right time, while mutual fund investors and small traders are prone to buying and selling at the wrong time. Its best to see them thinking in opposing fashion. This is one of those times. The smarties like this market. The dummies are running for the exit. Very bullish. Chart courtesy www.sentimentrader.com.
Short termed momentum is looking for a bounce
I’ve said what needs to be said on the chart below – the only point not mentioned on the chart is the less-clean look of RSI at this time. I prefer a clean, sharp drop & rise. Summer support is being tested.
In a nutshell
Look for a rally soon! Near termed target for the S&P 500 will be 1990 +/-. From there, it’s either time to sell, or take your chances and see if that neckline will break to the upside. I am inclined to do both. That is, sell some positions near 1990, and watch the positions I hold for danger signals. Last week’s blogs explained my intermediate view on the markets beyond a short termed bounce. You know where I stand.
Best of luck in this rather harrowing environment. Don’t forget to leave your comments below. Remember, we’re all in this together!
Good stuff, Keith. Oil $29 today…. gotta be the bottom, right?
Not until it stops declining and bases.
Oh dear, WSP.TO has broken some kind of support.
Over at humblestudent he wrote about lack of capitulation on Thursday, but yesterday he wrote about “blood in the streets”: http://humblestudentofthemarkets.blogspot.ca/
Seems like no major change since last Weds — waiting for that bounce to sell into.
On another note, as I was reminded by the link in another comment, I’ve seen many, many uses of the expression “blood in the streets” in articles over past few days. I think these writers have forgotten that it refers to the nadir of a large-scale violent upheaval. In terms of the markets, late 2008 there was blood in the streets. Relatively speaking, so far 2016 has produced bruises and scrapes.
Good point Alex–more bruises and scrapes right now than outright blood n’ guts.
I truly appreciate your analysis and top down approach. I can’t emphasize how much it helps so many people, myself included. I would be of the same view. Looking for a short term rally here out of oversold levels. I am looking to establish short positions on S&P Bear ETF. I was curious as to how best establish such a position in your opinion. Would you be buying into these rallies as we go? Establishing a position throughout the week as the rally potentially materializes over the next 4 trading sessions? Was looking to initiate part of the position today because of risk the rally could turn around as early as late in this session or next session.
Jason-shorting-good topic for a full blog–I think I’ll tackle that next week–thanks for the idea.
As far as shorting–a few things to watch.
First, bear ETF’s are different than shorting. The inverse ETF’s re-calculate daily. Be careful of that.
There are short ETF’s that are similar to an actual short-my favorite is Rangers HDGE. Look it up–very negatively correlated to the S&P500.
Finally–and I’ll cover this more thoroughly in a blog–watch your momentum indicators, and your support resistance lines. I prefer using short positions like HDGE as a hedge against stocks I hold. That way, if I am wrong, they offset each other. I look to produce net 0 returns when buying short/inverse/VIX/ etc – but that’s my professional prudence. As an individual investor rather than a PM like me, you have advantages of only being responsible to yourself. So if you short and are wrong–you lose your money, and that’s your own problem – which can be an advantage if you are a more risk inclined investor.
Thanks for the quick reply. Much appreciated. I will look into HDGE. Lots to consider for sure.
Keith – I too look forward to learning more about inverse ETFs when you have time to do it justice. As hedge and as short. Have been doing some reading and the practical ramifications, the dangers, of daily re-balancing issue remain confusing. I instinctively looked to the Cnd offerings – eg. Betapro HSD. Sounds like I should look south of the border. (Haven’t carefully thought through the FX aspect on this front, either.) Thanks for keeping up on the blog, helpful.
I see a lot of false intra day breakouts. Up in the morning and then a lot of the gains are given up and most of the time the day ends up negative. Does this provide us with any clues? I didn’t see a noticeable pattern for the last 30 minutes of the trading day though.
Yes Eric–it is distressing to see a pattern of selloffs in the afternoon. When this happens on a single day it isn’t that meaningful–but lately its a pattern. This is not good–the retail money buys into hope in the morning, then pro traders sell into the enthusiasm to take advantage of the enthusiasm.
That works the other way too. Markets rising in the afternoon off of a low start means the traders are buying off of weak minded sellers–that’s a good sign.
I will keep a sharp eye on the August lows, which are being tested as I write. If they are penetrated, and it lasts 3 days–I will leg out. If it holds, I will still expect a bounce per this blog’s topic.
My indicators say a bounce is coming–but I must respect the support zone of August/September–that must hold or I can’t stay invested. This is one of those times where your system, hopefully, is going to save you from your emotions.
Can you give your analysis of the TSX? Closed Tuesday at 12002.24. Looks very oversold here. Stochastics are in the single digits. Do you see a rally for this market? If so, to what level?
Thanks for your help!
Daniel–I’ve said it before, and I’ll say it again. If you want to analyse the TSX–just look at the banks, energy and materials.
All three look pretty bearish–banks may be showing support at the summer lows–but the other two groups are decidedly in a bear market. I wont call a bottom point on this index–I will just look at those sectors and go from there.
Read this blog for more on Canada: https://www.valuetrend.ca/keiths-rant-some-animals-are-more-equal-than-others/
This is where I get confused–August lows soundly trounced but we “are due for a rally b/c oversold”. Of course I said that back at $SPX 1880 too. Do we get out or wait for hope to kick in?
Your opinion valued.
Yup–his is one of those times Deshy. All of the quant stuff I like looking at (momentum, put/call, etc–see my recent blogs) say oversold–ready to bounce. Then the summer lows break today.
I like to stick to my “3 day rule” when seeing major support break. Thus I wont sell until 3 days past support–however, these days – 3 days is like 3
weeks in movement! That’s what happened at the 1990 neckline.
All in, this seems like the setup for a capitulation bottom for a rally–even if its one that only lasts a couple of weeks. We’ll see…
regarding the s&p chart. I notice that if you use log scale on a weekly spx chart from 2009 it has broken the trendline. Take log scale off and we are exactly at support. So I wonder how long term does a chart have to be before a log chart becomes the best chart to use.
Dave–by “support” do you mean the trendline support? Support, from a traditional point of view is where price finds a floor of some sort and buyers bid it off of that level. Support at this point- at least the most recent support- was at the lows of the summer of 1870-80 “ish”
That support is not changed by log vs non-log scales. And yes, it broke yesterday.
However, you are correct in trendlines etc. They change with log scale. The standard for TA is to use log scale–and it makes sense. Obviously, a $10 stock that goes up a dollar (10%) is a bigger move than a $20 stock that goes up a dollar (5%). The log scale shows the correct proportion of the move–so the log scale is going to also show trendlines more accurately insofar as measuring a trend. If a trendline is drawn on a log scale chart, it can show a steady increase in gain from a relative viewpoint. The trendline that is drawn on a non-log scale is simply following price – not taking any account for the massive difference a 5% move would make in current price if the index has doubled over the longer period of study.
yes I meant trendline support
Thanks Keith for your analysis – always much appreciated. It was a roller coaster week. Do you see last Thurs/Fri asthe beginning of perhaps a short term (week or so) bounce that you called for earlier and then expect continued bearish action downward after that? Oil was up 2 days so if it’s up again Mon – would you consider this to be bottom (finally)?
I dont think oil has bottomed yet. I do think last week’s action is indicative of a neartermed bottom and rally, but my intermediate termed view is bearish. See today’s blog.
Would this Monday be a good time to get back in market, I have been sitting on cash since around the 4th of January.
Read my blog posted for today.