What a very strange week. Last Wednesday the Transports led to the upside while the Dow lagged. You’ll recall the Dow lagged because IBM got clobbered on their earnings report. Also, the BKX along with Goldman Sachs flattened out. Goldman is still moving to the downside. Why is this important? IBM is the 9th weighted stock in the Dow while Goldman Sachs is number two.
Here’s the problem. When the Transports start to lead, in a good market the Dow will catch up. But the very next day it was all for naught as the Transports hit a very important resistance level and backed off. If that’s the case one thing is for certain. We are not dealing with a good market in the usual sense of the word. In fact, bears might come to believe in this market sooner as opposed to later.
The next problem is Apple (AAPL), which also got clobbered. While Amazon (AMZN) might be coming out of it’s funk, Facebook (FB) remains very questionable. Slowly but surely 2017 FAANG market leaders are starting to breakup. Here’s a summary where I’m reducing it all to the ridiculous. If they lose Goldman they lose the firepower of the Dow. If FAANG is ordinary at best, the Transports would almost certainly have to start leading to give bulls a chance to sustain the bounce. On the tech side the SOX suddenly looks terrible while biotech hit the wall but hasn’t collapsed.
The bottom line is we have a market that has more questions than answers. If the market were a sports team, I wouldn’t count on it making the playoffs. Since its NFL Draft week, I’d say this market resembles Miami (mediocre at best) as opposed to Cleveland. No offense to my friends in Ohio but I think we understand what having the first pick means. The strange thing about financials markets is when they get to the level of the Brownies, its usually very late in the run and close to bottoming. While there are better pockets in this market its important to understand the bigger corrections usually take weeks if not months to develop even after the market peaks.
There is also the potential they could lose the oil stocks for a while. Recently oil negated all the January readings to hit a new high. But right now, in the very least there is a reading for it to consolidate. However, everything I’ve just told you is a symptom of the larger issue.
Why did the market drop the day after the Transports started leading? Suddenly the crowd started fearing rising rates and they had good reason because the bond market has started to violate the recent rally phase. It will do that in a bear market. The TY is now below the February low while the 30-year has violated a very key balance line holding it up. Here’s how the long bond calculation works. It was a 244 day move from the prior bottom in March 2017. By itself that means nothing.
However, the drop from the September high is 14.75. From a 244-day low, the 247-day bar became the important vibrational bar in this sequence because it vibrates with the 14.75 move down with 47 being the vibration. As you can see, that line became important support that launched whatever rally bonds experienced. Now that line is violated at the same time the ten year is making a new low. What that means is as far as interest rates are concerned the toothpaste is out of the tube and will be tough to put it back in.
If this was all the crowd must worry about it would be sufficient. Geopolitical tensions are bubbling just below the surface so with the Trump meeting with the North Koreans getting closer risk remains very high. Understand there are factions that would prefer to embarrass Trump as opposed to cheering for peace to break out. Going forward this is not likely to be a "happy" environment for the stock market. That’s my friendly word of caution for those of you who think we are in a business as usual type environment. In terms of the cycles, in a few days markets enter that time of the year where they no longer have the wind at their back.
I’ll give the bulls credit, they haven’t quit and have been able to push many charts back to the middle of the range. Some stocks like NFLX did even better, hitting a new high. NFLX is a microcosm for the entire environment as the crowd remains complacent, preferring to lose themselves in their smart televisions as opposed to dealing with reality. But we know how the madness of crowds works. It reminds me of the scene in Eyes Wide Shut where the Sidney Pollack character tells Tom Cruise’s Dr. Bill Harford, “life goes on, until it doesn’t.”
To start the week, the action has been questionable at best as the Dow gave up marginal gains. Conditions are now ripe for a bigger drop. How should traders position themselves? They probably shouldn’t put blind faith in the pundits who never met a buying opportunity they didn’t like. The character and scope of this bounce phase remain questionable. There will be days where shorts are doing to work as well as other days were longs will work. It is likely a market that has something for everyone. But it is unlikely to last as this is a transition from an all-in bubble to an uncertain future where conditions end badly.