Sunday, December 11, 2016

Blow Off

I will be the first to admit that my call last week for further consolidation was wrong as the SPX followed European markets higher last week after the "No" vote on the Italian referendum.  The breakout over the previous high last month at SPX 2014 produced what can only be described as panic buying or a blow off.  I mentioned a couple of weeks ago a Tom DeMark prediction of the same type of market action, but it was still somewhat unexpected.  Given that the Indicator Scoreboard has reached the SELL point, but that the Short Term Indicator remains in the murky middle ground, I can only say that more gains are possible, but it is likely a terminal rally.

Before discussing this week's sentiment outlook, I want to mention that the update for my long term forecast is out, What Happens When Growth Returns?

The overall Indicator Scoreboard has reached an extremely low bearish level seen only twice the last two years, where the November 2015 high was followed by a volatile six weeks before the sharp January decline and the July 2016 high produced a rounded top with a moderate decline. 

The short term SPX ETF ratio of SPXU/UPRO continues to look more like the six months preceding the August 2015 crash where only a few brief instances were seen of more funds flowing into shorts than longs.

The Short Term Indicator  (VXX $ volume and Smart Beta P/C) shows that bears are still fighting this rally as hedging by VXX and ETF put buyers still lends a modest support for stock prices.  Compared to the August and November 2015 highs, a decline to about -.5 for the 5Dy EMA and -.4 for the 10Dy EMA is expected.

Disbelief in the stock market rally is being matched by renewed safe haven demand for bonds as fund flows into the long TLT ETF continue to exceed those into the short TBT ETF.  The argument that money is flowing out of bonds and into stocks doesn't seem to hold water.  The last drop in bearish sentiment this steep was in August 2015 as rates fell from 2.4% to 2.0%, and the fact the rates have consolidated at the highs looks very bearish for bonds.  Other measures for NDX, RUT and HUI have shown little change in sentiment.

Conclusion.  The last two years I was expecting a December rally that would last into the first of January, so maybe this is the year.  Although sentiment points to much higher interest rates over the next year, until a break and hold over 2.5% on the TNX is seen, the outcome is unclear.  The only time I can remember when stocks rallied with rates rising strongly was 1987.  In 1987, the DJIA rallied 20% the first six months until the dividend yield approached 50% of the TNX yield, then the second half of the year stocks fell 40%.

Weekly Trade Alert.  None. Updates @mrktsignals if necessary.

1 comment:

  1. As you mentioned, the 10 year yield increased 47% from July 1986 to September 1987. One month later, stocks crashed. A very similar thing happened when the 10 year yield increased 66% from October 1998 to January 2000. The market topped out 5 weeks later. Currently, the 10 year yield has increased 87% since the beginning of July.