Daily update 7/18

I think people have absolutely lost their mind.  They were busy celebrating today's turn around on TV and I swear I heard one of them say yesterday's 1.2% dip in SPX was a long term investors buying op.  Really.  That is an insane thing to say.  I would bet a lot of money that there are far fewer instances of a 1.2% pull back from a bull market high being a price not seen again for 5 or more years then instances where price was lower within the next 12 months.  I guess in today's world the definition of a long term investor might be a holding time of a few hours.  I thought people reached a craziness in 2000 that I would never see again in my lifetime.  Wow.  I was seriously wrong on that one.  The worst part is it was a guy that I have heard many times over the years and he is usually pretty reasonable.  That is what euphoria sounds like.

Yesterday the VIX was up 32%.  I looked back through the entire history of SPY back to 1993 and found 18 instances.  I could not find a single instance where the low of that day was not at least slightly exceeded in the days ahead.  We gapped up this morning and did not retest yesterday's low.  If we don't see yesterday's low within 10 days or so it will be a case of it is different this time.  Lets take a look at the SPX daily chart.

SPX retraced the news driven down move all in one day.  However, the percentage of stocks above their 200 SMAs did not make up for the damage yesterday.  The divergences we had on Wed. are now even bigger.  Here is a the futures chart.

The futures never confirmed the trend line break and climbed back above it today.  The market also found resistance in the same area it has been.  Was that enough of a pullback to entice buyers to push us to new highs?

The bounce today got IWM back above the 200 DMA, but still below the 50.  It is probably over sold enough on a short term basis that it could bounce further.  That would likely get SPX to new highs.  However, it is still in poor technical shape and has a lot of work to do to get itself back in a true bullish position.  That could make any trip to new highs short lived if IWM rolled over again.  At the same time it would appear we have very high odds that SPY will revisit yesterday's low again in the not too distant future.  It might want to start that journey on Monday.  On Wed. I said the market was on shaky ground.  The last two days seemed to have made the ground even shakier.  Since I can make a case for a move in either direction on Monday I am not going to guess at it.  At the moment the only thing that would surprise me is if SPX breaks out to new highs and just keeps going from here.  Saying that in the blog probably just made that the most likely scenario.

I thought this chart was interesting.

This chart is from the Merrill Lynch Fund Manager Survey.  Here is a snippet from Merrill.

Improving investor sentiment on global growth, inflation, equities and risk-taking are all testament to a potential macro normalization in the second half. This could eventually feed into a normalization of rates. If growth does pick up, volatility will rise too,” said Michael Hartnett, chief investment strategist at BofA Merrill Lynch Research.

Global Asset Allocators overweight on Equities rose to highest reading in over three years. The reading of net 61% OW is the second highest reading in the surveys history. Merrill Lynch warned that any summer “melt-up” in stocks, “is likely to be followed by an autumn correction. This aggressive positioning for recovery in H2 reflects a significant increase in investors’ inflation expectations,” the survey said.

I added vertical lines marking instances where the survey got above the +1 STD line.  The market did not correct every time.   However, the second time above the line usually does.  The only time we got two peaks above the line without a notable pullback was in 2013.  This is now the third trip above the line.  Will it spark a pullback this time, or just keep on trucking?

The market and sector status pages have been updated.  Have a great weekend all.

Bob