September 2, 2020

Volatility Reports 09/02/20 Stock Market

“Best first day of September for the S&P +.75% since 2010.”

“The S&P 500 was up 7% last month. Here’s what it did the next month the past 15 times it was up at least 7%: You might notice a pattern. 5.0% 5.9% (3.1%) 0.5% 0.8% 5.7% 5.1% 9.4% 5.3% 3.4% 3.7% (0.5%) 0.1% 3.0% 4.5% for an Avg 3.2%” 

Does the above type of handicapping work? I doubt it.

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Sentiment among financial professionals propagated in the public sphere is predominantly bullish, as the above headlines. I have compiled over four weeks the content from the Twitter space provided by a sponsored compendium of TradingView. To date, 99% of all stock market posts are bullish in the face of the bulls proclaiming the market is climbing a “wall of worry,” Gives me a mind cramp.

Well, actions speak louder, as seen in the next two charts. Goldman’s chart of short interest is the lowest going back over 15 years, reflecting an aversion to the “short and hold” strategy. On that note, this is a glaring mistake in the imagination of bulls, that they sell short and hold, in the same way, they buy and hold. Profitable bears are good at market timing; its evident that over the very long term, markets go up.

But the point here is the retail trader at Goldman is a friend to short, which from a Contrary Thinker point of view is bearish.

To go hand in hand with the above sentiment measure is the “options speculation index, aka a put/call ratio is exceptionally bearish. It has not seen this amount of speculative history since the dot.com bubble burst two decades ago. That length of time is about right for letting people forget who was there and enough time to bring in a new crop of entry-level investors. This is one of the key leading indicators of a significant peak just not according to me but part of the list of seven major top factors by Ray Dalio.

My featured chart seen here is the cash S&P, showing the proper EWT wave count. A bar chart structure that explains the “V” shaped low and high rate of change advance, which fits the action post triangle. This advance has been making headlines as being the fastest recovery.

For example, a big firm pro thinks the market was parallel to the low in 2009; he says, “Check this out: As of last week, 83% of #stocks in the #SPX were above their 50-day moving average. That isn’t a bad number, and it’s one that has been fairly consistent in recent weeks. The level of participation is consistent with the 2009 recovery roadmap.”

Contrary Thinker does not see the low at point [4] being the same as 2009, in that this is not the beginning of a new secular bull market.

What the chart does show are one of our “in house” indicators that is accurate as a leading warning signal of a significant perk “coming soon” As we made clear in the last Volatility Reports” on the stock indices, the market is working on borrowed time, pun intended.

It goes without saying that no systems, no overreaching investing/trading model is perfect. However, the Technical Event Matrix rarely gives panic signals – TE#1 – on the monthly bar.  This was pointed out the last issue. I wanted to reinforce that the advance in August in the Dow, S&P,  and Nasdaq was panic buying, otherwise referred to as irrational.  As pointed out also is a panic high is nine times out of ten if not better, is climatic; and will lead to a reversal.  The small-cap did not play along. 

What else is interesting is the three standard deviation move by the Nasdaq – lead by the FANG stocks – making it the most overbought in 11 years on the futures, and 15 years on the composite.  Such an event suggests at least a reversion to the mean.

MarketMap – 2020 with the current set up time windows for change, in publication, shortly.

Back Story

According To Nomura The “Largest Pain Trade In The World” Will Hit In September

Click here to view the original web page at According To Nomura The “Largest Pain Trade In The World” Will Hit In September

If one looks at sto(n)ks, it appears that nothing can dent their relentless ascent as virtually everyone is now convinced that central banks will never again allow even a modest correction and so even the slightest dip is bought with reckless abandon… or rather a handful of stonks are bought now that the S&P500 is the S&P5.

Yet while everyone is just as certain that yields will only sink lower, McElligott counters that precisely because of that, a spike in yields would be “the largest pain-trade in the world”, one which sends shockwaves across both equities (Value vs Growth) rotation and Commodities (send gold tumbling). As the Nomura quant explains, a spike in yields would trigger counter-moves across the asset spectrum:

1. Gold’s recently “grabby” vertical move as everybody owns it now (real yields higher would mean gold lower), with any potential bond selloff also likely to:
2. trigger a reversal in crowded legacy US Eq “Growth” factor over “Value” positioning as well (particularly into any bear-steepening, which sees “Value” benefit to the pain of “Momentum”)So if not August, then when? Well, as the Nomura quant answers, “the key window then for a UST bond selloff becomes September (and Q4 thereafter)” because that’s when traders and bankers come back from vacation, and the result is a flood of new bond issuance which is “likely to tilt the supply/demand dynamic finally in favor of tactical “bears” when traders return following the Labor Day holiday.”“IG issuance this month is running at 30% of June’s pace, and August is traditionally a slow month for issuance given vacations, so I wouldn’t be surprised to see corporate issuance ramp back-up in a meaningful way come September. This issuance in conjunction with the ongoing steady deluge of government supply could prove to be the catalyst for a revisit to the upper-band of the recent yield range.”

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Great and Many Thanks,

Jack F. Cahn, CMT

A Thinking Man’s Trader Since 1989,

Copyright 1989-2018

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