The previous Friday we anticipated the market would fill out the Chimney portion of then"New" rounding top, which is really about 15 years old, but vs. the price patterns from the 1930's that still hold today, their rather new and it's no coincidence why they changed when they did if you think about the technological changes in the late 90's, the cheap online brokers and the sea-change view of Technical Analysis as "Voodoo Analysis" to mainstream as people managed their own accounts through cheap online brokers.
This is what last week looked like.
This "Chimney" wasn't very big or extreme, usually they are because they have to convince longs and reach out to that greed factor and get them buying, it's not just a random pattern we see over and over, there's a purpose to it and that's why it was predicted at least 3 weeks ago. Although it wasn't very strong, I doubt we get anything much better, the market internally is just too weak, there are too many stocks that WON'T rise and are headed down, making it hard for a broad average of stocks to do much with that anchor pulling in the opposite direction.
Last Friday's The Week Ahead for this week of course, expectations are not high, in fact pretty low and this was before the unexpected news out over the weekend from the G-20, the PBoC and the ECB.
SPX futures traded pretty ugly overnight with a 10-11 point loss, depending on where you want to count from (highs or close).
Te "This time it's different " crowd, the same as the "BTD" crowd, have been looking for any way to justify why the F_E_D has their back or how there's some big coordinated central bank conspiracy in which the F_E_D backs out of stimulus while the PBoC and ECB after just having made minor stimulus additions, are set to take over providing an unlimited, never ending source of liquidity for the market irregardless of what rates do and what investors do as rates climb and they will take different actions, especially as the market comes down.
That wishful thinking had a cold dose of reality this weekend when first the G-20 Finance ministers warned of excessive risk taking in the market, nothing new, the BIS said the same as well as the F_E_D quite a few months ago and we still hit new SPX/Dow highs. However the two central banks tasked with keeping RETAIL traders in the money, as if that's all the central banks were meant to do, had something harsher to say. The Chinese fin-min of the PBoC essentially said, "Don't get your hoped up on the stimulus front" and last week's PBoC stimulus seemed like it was targeted toward the upcoming golden week holiday when cash demands would rise, plus it was $500 bn split among 5 banks, not exactly QE3.
In another blow, an ECB member told the G-20 that further stimulus might not be needed since the Euro had dropped enough.
While these stories are credited with the broad overnight weakness in stocks, with treasuries on the move and carry crosses like flopping fish, what was it that we saw last week, last Friday well before any of these comments came out that suggested the Chimney is over, expect weakness this week? Well it's all there in the The Week Ahead post from Friday before the close.
I don't think there's any need to panic, although I'm happy to be about wrapped up in positioning as early August was the last place to make major position additions or deletions and last week was one of the better spots to do the same since early August with many more opening up early this week I believe.
HYG should continue to lead the market and it's not looking good, but not the leadership on the downside so I think there's still plenty of time in plenty of assets to get great positioning, but as I said Friday, I no longer think it's a matter of top-ticking the market, I think it's important to get busy.
Also we saw the SKEW index hit an extreme new high of 146, the highest of the year, all since the F_O_M_C Wednesday, almost a 20 point move consecutively, telling us there's major fear among smart money who are buying deep out of the money puts and willing to bid them up.
I usually don't like when a number of people are calling for a top at the same time, that's when the market throws you for a loop, but perhaps a few is not too many.
The infamous Hindenburg Omen was sighted both Thursday and Friday of last week, a cluster. While I don't put any faith in these as predictors of a financial crash, they have preceded nearly every financial / market crash we have seen except I believe for 2007, so they seem to be more of a pre-requisite indication than a timing one, but it does have traders talking.
Also Elliot Wave specialist, Robert Prechter had this to say in one of his Friday reports,
" As of this morning's run-up ... we are short all 3 major stock indexes. "
As I said, I don't like it when too many people are expecting a move down, but as of the last Investors Intelligence Sentiment survey, bearish sentiment was at 27 year lows, not lower since 1987, so I suspect we still have a sentiment extreme on the bullish side and it will only take a gain of a half percent for a day or so for the bulls to come roaring back confident as ever.
Tis means, there's not too much need for overall market analysis, we landed where we expected to with the Igloo, HYG needs to be watched as it's the canary in the coal mine, but other than that, most work right now should be focussed on setting up assets for the next stage just as we did early August for the up wave whether taking piggy back longs or cutting some short exposure to add it back at better prices. Now's the time to act for the next leg.
That's pretty much what we'll be doing this week a I suspect this isn't just a move to the August cycle's stage 4 decline, but looking at breadth and Leading Indicators as well as 3C, I suspect it's likely the move toward the market's 5 + year primary trend's stage 4 decline, looking at the Russell 2000, it's not hard to imagine.
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