October 1, 2018
Incalculable Sentiment Ignores the Bears
In my many years plus of experience I have never seen the market top on bad news. It is not in its nature. Sure, there may be hints of an underlying problem like in ‘07 sub-prime, but nothing in the headlines of mass media. Rather, at peaks, the good news is an exaggeration.
All tops have the same background and process, from 1987, 1989, 2000, 2007, and 2018, each earmarked by inner greed and a conviction that easy money will never stop.
What was an ambitious market has now become a fear of missing out environment covered up by arrogance and bravado? Popularity is more important than empirical evidence. All signs of the kind of ingrained buying a current generation of smart money need to cash into.
So broad is the public’s participation that even NYC taxi cab drivers are bull market day traders and making easy money like ‘87. In 2018 it has shifted from cab drivers to twitter traders. Add on top of that the fact that everyone in the social blogosphere is an expert market analyst vulgarizing the trained analyst and a just another sign of overconfidence.
It is in this phase, that capital managers need to see the highest level of financial risk, everyone is happy, euphoric.
The biggest debate is about when the bear market will begin, which is always – 99% of the time – put off “until next year,” to provide the appearance of a balanced argument. Being a bear or pointing to the bearish facts draws jokes and alienation.
Quants need fine data to generate signals for the above. So they count IPOs and the like. Yet, a simple periodic random sampling of the financial media should make it self-evident. A few of us have programs that count positive and negative tweets to spot optimistic extremes of a major peak. But it’s not required.
We can also look at hedge funds, as the professionals will be correct sooner or later.” Have a look at the high level of hedging since 2015 low that have preceded at least minor market corrections and most notably the February 2018 spill.
At major peaks, the market’s exaggerate good news and ignore the bad news. Today October 1, 2018, NAFTA is back as a trilateral agreement. The news as of this writing is driving the markets to toward new historical highs.
It is not so much the public’s ignorance of bad news rather they don’t have a clue regarding news events potential meaning or rationalization.
Many pros did not have a clue that on August 9, 2007, BNP Paribas’ announcement that it was ceasing activity in three hedge funds that specialized in US mortgage debt was a clue of the seizure in the banking system on the horizon.
A perpetual state of low volatility since August
The energy that drives the markets comes from conflict, the battle between buyer and sellers. CT gauges this tension with its measures of volatility and how the market typically reacts to four different extremes.
The Nasdaq (NQ) back in April hit a high level of %C and a high level of Historical Volatility at the same time leading a period of expanding ranges. That move is a trend that lacks brute force but advances based on the expansion of the high to low range for that period. In April there is a good example with the horizontal triangle contracted to an apex coincidental to the TEM indicators cycling out of their high extremes.
In August the NQ reached a new set of extremes, now the market had fallen back into its 2017 pattern of low volatility. I highlighted the weekly chart on the left the extreme readings into the current time frame. Expectations come with this low volatility backdrop to change trend dynamics from dull to forceful trend and from up to down.
Furthermore. It is this extreme low reading by TEM modeling that is associated with low %BB-VIX readings, like the CBOE data reflected today, that says there is a low perceived risk in the market.
From a contrary and experiential point of view, these two leading models -TEM with the %BB-VIX – lead to dramatic declines in the majority.
One of the big money makers for the man-on-the-street in 2017 was the inverse VIX ETF. It doubled from its previous high in 2015 whereas the S&P only gained half as much. These inverse VIX funds peaked and crashed in January/February 2018. Unlike the averages, they track they have not confirmed the new highs.
CT had a spread indicator of the short-term/medium term inverse VIX funds in January that did not confirm the new highs by the stock averages. It was part of our evidence supporting our appeal for the peak in January.
The charts above give the same comparison– short term on the left. They are not in gear relative to the averages they follow; they are in weak wedging formations and TEM is at an extreme TE #2, a situation that calls for a high rate of change trend. All of which is bearish and calls for a spill in these investment vehicles. Such a spill cannot occur unless VIX spikes higher.
Bottom line is the risk to reward here in both time and price is avoidance behavior, move to the maximum about of cash allowed by your investment policy.
More to follow shortly
- MarketMap continual refinement of change of trend dates
- Offshore equity markets – Hong Kong and 21 countries ETF
- Sector leadership condition
- Failing sectors, the overall market is only as strong as its weakest sectors
- Twenty-year appraisal and long-term risk assessment