Last week was one of those weeks where I was completely dialed in and laid out the roadmap very close to the way it worked out. If only I could do that every week. Of course, it helped to have the aid of the time windows. As you know markets peaked in the 610-day window to the August 2015 bottom, which is the Dow bottom.
When you get to day 610, there is usually a reaction at day 618, which was last Tuesday. I was looking for the bounce and would judge accordingly. That being said I think we can all agree this time it "felt" different. It is different. The bounce was weak, and markets wasted no time going even lower. Why did it go lower? There are many reasons, but one of them was a VIX that almost hit 50 but it happened in the overnight action. Imagine, the VIX went from 0-60 in five seconds flat! First, it was hovering in the teens where it has been forever and the next thing I know its skyscraper levels. Where did that come from? But the headlines never reflected the fear. It accelerated so fast and came back down it never had the time to scare anyone.
There wasn’t the proverbial "blood in the streets." The VIX retreated and had to recalibrate again to make a secondary high. Is there fear now? I’ve seen the headlines that suggest there is no end in sight to this thing. That’s a good contrary indicator.
On Friday morning the Dow was up about 350 when I was talking to a client. I mentioned in passing that it could be down 350 in an hour. Well, I was close. An hour later it was at breakeven and an hour after that it was down more than 300. At that point, it felt like there was no end in sight. Consequently, it ended up more than 300 by the close. There were some decent calculations at the low. One of them is the SPX which came to the bottom of the channel line which started around Brexit. We have some interesting 34 vibrations where the ratio of the retracement lines up with the bounce and is a derivative of the 340-point drop that bottomed this chart out for the time being.
The oil chart which has been hit good is also trying to find the low. The next bounce in crude oil is going to tell a lot because it's not so much the leg down that tells us about the long-term but the quality of the countertrend activity. In terms of the stock market, I’ve seen a lot of rumor and innuendo concerning what they believe is a conspiracy by Goldman Sachs and others to sink the market and sabotage the one thing Trump has going for him. Let’s be clear about one thing. We have a market that has been long overdue for a phase like this. It turned at the exact right time. I don’t see any behavior in the markets that is out of the ordinary. It doesn’t matter who is selling right now, people should be selling on the other side of a time cycle. The market ran up beyond the statistical norm and it will go to the extreme like it is on the way down. But here’s another consideration. A one thousand point drop in a 25,000 Dow is a lot different from a thousand point drop in a 15,000 Dow. That’s another reason why we haven’t seen any panic.
There’s a great piece in the New York Post about three Chinese companies-Anbang, Dallan Wanda and HNA who’ve been buying lots of real estate. They own everything from the AMC movie chain to the Waldorf-Astoria. Now they have become sellers. HNA is having trouble paying its interest costs and this is a low-interest rate environment.
With a young bear market for bond prices developing you can see the anxiety developing for the higher rate environment which has been blamed for this scenario change in the stock market. You consider that with the fact markets started taking the hit around the time the FISA memo came out and we suddenly have some real problems on our hands. Those who believe this should be part of a market climbing a wall of worry think again. Markets climb a wall of worry in the early stages of a bull simply because it is a leading indicator and the bad news from the prior recession has not been wrung out of the system. In a late stage bull with euphoria markets will go up for any reason, as we’ve seen.
Monday started better, it does appear we could have a low in place, but we would be getting ahead of ourselves to call it any more than that. But it may prove all those worries about institutions trying to sabotage the recovery are just hysteria for people who aren’t used to seeing markets pullback. That hysteria can be viewed as a contrary indicator. The bond market is also trying to find a low and that would help quell some of the anxiety.
For this week, there is a good chance markets will calm down and test the breakdown. But I must warn what we just experienced is the reaction to the 610-day window only from the August 2015 bottom. There is another bigger bottom to come based on the cycle work from February 2015 where the 610-day window comes in the middle of the year. Let’s say for a minute the bond bear takes a break. The higher rate scenario will drag on for months. As far as FBI scandal is concerned, it appears they are peeling the onion one layer at a time. Each new layer reveals deeper corruption. The wheels of justice could drag on for months if not years. What am I really saying? We may have just had a cycle shift that will take months to play out. Have patience and for those of you who have long-term gains from this bull market, take serious inventory about where you want to lock in profits. Don’t give back in a few months what has taken years to accumulate.