The market started out strong and rallied even more after the open. About 10:30 it hit resistance (shown on the futures chart below) which caused a considerable intraday pullback. I was not sure about resistance yesterday at the 20 SMA, but there can be no doubt about it here. After the selling stopped the market rallied back almost to the morning high before coming to a stop. It had started down just a bit when the FED minutes hit the tape. They had talk of bubbles in equities and the possibility of reducing the balance sheet. The market did not like that at all. Some time after that Ryan made comments indicating we are not close on getting tax cuts. That just added fuel to the fire. At the end of the day the breadth was -61%. It was +74% at the morning high. That was the biggest breadth reversal I can remember since the May 2013 Bernanke taper tantrum. New highs were 96. New lows came in at 26.
The futures rallied up to the top of the blue bar marked by the red arrow. That clearly provided resistance as the sellers suddenly appeared out of nowhere on a strong day. The rally back mid day stopped slightly below the morning high.
The red count jumped up considerably today and overtook the green line. It is still below 50.
While the short term lines have not crossed down both the intermediate and long term lines have negative crosses. That is the case with COMPX hitting a new high today. That is not usually a good thing.
The sellers definitely showed some ambition today. There were a lot of very negative tick readings on the NYSE tick indicator. That indicates considerable selling pressure. SPX has been correcting for over a month already. While today was not technically a key reversal day I believe it was important at least in the short term. I have heard some rumblings of late of FED speakers talking about reducing the balance sheet. Today brought that front and center in the minutes. All through the rate hikes so far the FED has said they would maintain the balance sheet as is. The FED minutes clearly changed that narrative. For years we have been shown charts of the SPX and the FED balance sheet climbing together. A few months after QE ended SPX started struggling to go up. It even traded sideways for over year before last summer's technical break out. If people believe that relationship is real would they not be a bit scared to hear talk of a reduction in the balance sheet? With valuations so high it seems likely to me that such talk will at a minimum reduce the buy the dip enthusiasm. I think there will be at least some follow through on the downside.
I was listening to one analyst today saying he did not see the ingredients for a big decline. Here is the problem I have with that statement. If one studies the history of the market and margin debt it becomes obvious that high levels of margin debt relative to GDP (>2%) have caused more crashes (including 1987) then any other factor. We have record levels of margin debt today. The ratio to GDP is lower then it was in 1929, but probably a record high otherwise. Margin debt is like a loaded gun. It can sit around and not be a problem for a very long time until the trigger gets pulled. All of a sudden the market is crashing uncontrollably. Wall street has many ways to measure risk, but they never include margin debt. I understand that because the risk can't really be quantified. Just because it can't be quantified does not mean the risk does not exist. In my book margin debt is the single biggest risk in the market any time it is above 2% of GDP. Its north of 2.5% now. However, it has been high for years. That is the very trouble with it. Nobody knows when the trigger will get pulled. So while things are calm and the volatility is very low the market could still crash much more severely then people think. The problem is it may not happen anytime soon. This is a subject that has bothered me for years when doing this blog. I am 100 percent sure there will be a very ugly margin debt unwind some day. But when. It is highly likely to happen during the next recession. When the market sniffs out a recession is coming people will unload in mass and surely trigger many margin calls. That is why I spent so much time going through the economic data in 2015. I want to know as early as possible when a recession is happening.
I hope you are starting to understand my problem analyzing this market. I know that the economy is still at risk for a recession. I also know the market is in a highly leveraged bubble with a high risk of a nasty margin debt unwind. I can't just say don't worry, be happy. Be a big bull and stay loaded to the gills in equities. However, I can't tell you when the bad stuff is going to happen. I just know that it will. As I mentioned a while back I have had a nagging feeling this market would start going down one day without a warning and just keep on going. That could be happening right here right now and I have no way of knowing if that is the case. On the other hand, this could be just another garden variety pullback that races to new highs and beyond. Quite the dilemma.
This is an interesting read from Axel Merk. What Could Possibly Go Wrong?
Bob
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