On my Bear-o-meter blog from the weekend, I noted that the indicators point towards high risk, despite a neartermed potential for a tradable bounce. One reader asked me the current support levels, and I responded that the SPX had round-number support at near 4000. If that fails, we cold see somewhere near 3500-3600. Keep in mind that these are rough estimates. What is more important is that Bear-o-meter reading was that the big picture risk is not over yet. But there is (to quote myself) a “tradable bounce coming soon to a theatre near you”. I believe that this capitulation washout (not bear market bottom) and neartermed rally could literally be today or in the coming few trading days.
To start, I’d like to point out a few things that might suggest a “bottom” within the current downtrend that will point to that “tradable bounce”. I want to see some or all of these before buying. Again, though, my spidey – sense is telling me that we could see that “bottom” (in the context of a bear market rally) today or in the next few days. There are factors I am watching for. Some, such as the sentiment and momentum signals noted near the bottom of the blog, are already present. Here goes:
Key reversal day
We have been witnessing “AM rallies” and “PM selloffs” during the current mad rush to the exits. Stocks rise in the morning – bought by dumb money attempting to time the bottom. Then the pro traders and algo’s step in to sell into that buying frenzy. Further, we are seeing volume in the afternoon (please see my new book Smart Money/Dumb Money to learn how to interpret this AM/PM indicator. We need to see a reversal of that pattern. AKA- we need to see a morning selloff and afternoon revival. Preferably for 2-3 days. The flush will possibly present itself as a hammer formation with a long wick below the main body (open/close). IF YOU HAVE NOT YET DONE SO…Please take my Online Technical Analysis Course to understand this setup. It is described thoroughly in the course.
The hourly chart below roughly divides the trading day, and the arrows indicate if the afternoon was generally more positive in trend (not necessarily the close level) than the morning. More down arrows than up mean the afternoon has generally witnessed selloffs. This needs to revers, and the best indication will be a daily hammer candlestick formation, with a bit of positive follow-up. Ideally, a strong final hour of trading (3pm-4pm roughly) can be very telling.
The US Federal Reserve has hinted (or markets anticipate) that they anticipate 12 rate hikes over the coming year or so. That would occur if inflation figures start to subside. They are between a rock and hard place. Raising rates tames inflation but influences recession – how do you pay off that higher priced floating mortgage rate or loan? So they will look for any excuse to send a positive spin on inflation to slow on the rate tightening. That could be a positive news bite to spur a temporary rally. Keeping in mind that slowing inflation doesn’t mean low inflation, and there are potentialities coming out of China for further inflationary pressures. See Brook Thackray’s very interesting comments in his newsletter. So the rally will likely be short, in my opinion.
There is a problem that Putin has with his push to overthrow the Ukraine. The problem is, it ain’t going according to his plan. Its looking like a current stalemate. So, now he is not winning the war AND he has instigated a massive step back in the economic stability and growth in Russia’s future. Big problem for a dictator. US security council recently noted that Putin has to find a way to “win” (aka avoid embarrassment) in this war. How this is accomplished is to be seen – but any signs of stabilization – negotiation – etc (and hopefully NOT a resorting to increased violence such as poisons, nuclear weapons or other unspeakable’s) would spur a strong rally.
As an aside (price of admission to this free and very accurate market timing blog, folks) – I just had to laugh. PM Trudeau visited Ukraine and met with leaders to discuss freedom and the need for democracy. Um, Ok. This, after refusing to meet/ discuss the concerns of his own citizens via the ongoing freedom protests across Canada, Freedom Convoy & hundreds of thousands of their supporters, Rolling Thunder motorcycles, etc – all who are concerned with the declining trends (freedom, democracy) here. Anyhow…
Sentiment is screaming buy!
There are too many sentiment indicators that are living in “uber pessimistic” (aka contrarian bullish) zones to list here, let alone post charts of. You know that my Bear-o-meter was already showing many leading sentiment indicator bullish signals. Added to this list are:
- NAAIM (Portfolio Manager net equity exposure percentages) are low and into my “buy zone”.
- US Michigan Consumer Sentiment is low and into my “buy zone”
- AAII survey of retail (dumb $) investors % Bears is high, well into my “buy zone”
- New High/Low for the NYSE is low and into my “buy zone”
- % of stocks above their 200 day simple moving averages (SMA) is low and into my “buy zone”.
Momentum is screaming oversold
Here’s a daily chart of the SPX. Note the oversold CMS (moneyflow momentum), and price momentum (RSI, stochastics). If you took my TA course, you also know that the % above or below the 200 day SMA shouldn’t exceed more than 10% for too long before a reversal (down OR up!) occurs. All of these conditions are in place for a move to the upside right now.