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Tuesday, May 9, 2017

Daily update 5/9 Three Fast Facts About Slow Markets

Still no buyers above 2400.

The bulls pushed SPX above 2400 right out of the gate this morning, but then it just sat there.  After about 40 minutes the sellers started to outnumber the buyers and SPX started drifting lower.  In the afternoon there was some news about North Korea possibly doing another nuclear test which caused a minor dip.  The buyers showed up and rallied the market into the close, but they failed to get a positive day.  Breadth was -55%.  New highs were stable again at 151.  New lows were also stable at 28.  That 28 is high on a day SPX hit a new high even if it did close in the red.  That makes two days in a row SPX made a new high, but the market closed with negative breadth.  That tends to be the sign of short term exhaustion.

The futures tested the upper channel line today, but failed to climb above it.  This looks even more likely to test the lower channel line now.

The green count slipped a bit.  This is not a great looking chart for hitting a new high in SPX.

The McClellan oscillator and the 10 DMA breadth lines are now negative.  The red/greeen count is the only short term internal that doesn't have a negative cross.  That could happen with a big down day.

The bulls are hanging on by a thread here.  It was clear from the last two days there are no buyers above 2400 at this time.  Given all the negative divergences in a wide range of internals that is not surprising.  A pullback of some sorts seems to be in the cards.  Interesting since the last several days I have been bombarded with people saying it is impossible for the market to go down in a big way here.  Even those that are usually cautious on the market seem to be close to raging bulls these days.  I can't say that I remember a time when the opinion was so unanimous that there was no danger to the market.  I have to admit the second quarter does not have a lot of major tops.  The only two that I am aware of are 1946 and 1981.  Usually the market retests a Q2 peak at some point before anything really bad happens.  However, the utter complacency here probably increases the risk at least somewhat.  The China situation could easily blow up anytime.  I saw an article today about some banks refusing to do business with some other banks without proof of adequate collateral.  You might recall that is how the global financial system froze up in 2008.  It started in the U.S. and contagion took it around the world.  It all started with banks worrying about the other guy blowing up.  However, the Chinese government has considerable reserves and might be able to stop any real trouble as long as they recognize the problem in time.  However, the debt in China is probably close to $40 trillion against $3 trillion in reserves.  A default rate of 10% or higher would put a considerable strain on things.  That is not a particularly high rate if things go bad in the economy.  So things could blow up or not.  Who knows.  A pullback here could be the start of a bear market or just a garden variety sell off before moving to new highs.  The sentiment environment is very much bull market top like.  The internal divergences also are bull market top like.  Therein lies the problem.  Should we be worried or not?

I heard Bob Pisani talk about the reasons why the VIX was so low.  One of them was that there was new trading technology making the markets more efficient.  Too funny.  You know there were periods of very low volatility before computers were even invented.  This is a good read on the very low volatility of late.  Three Fast Facts About Slow Markets  The one thing that has been true in all markets through all of time is that volatility is mean reverting.  People that believe that low volatility is here to stay because of some bull&*(( they heard on TV will be really surprised some day.


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