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Thursday, December 14, 2017

Daily update 12/4 Stocks vs Commodities

Gravity does exist.  At least for one day.

Maybe the option related resistance is taking over.  Breadth was -65% so the selling was fairly broad based.  Small caps were down over 1%.  New highs dropped way down to 76.  New lows picked up a bit to 43. 

The futures came back inside the channel and even ended the day below the 20 SMA.  The pattern is a bit odd.  While the futures did not gain much altitude when they were above the upper channel line they stayed out there fore 9 bars.  That is not exactly coming right back into the channel which usually targets the lower line.  My guess is there will be more pullback here.

The green count slipped again, but is still above the red line.  This is no mans land.  We don't have a negative cross to bring out buyers, but it is weakening. 

The options chart suggested the optimal close tomorrow would be around 263 on SPY.  That would take a pretty big down day to do that.  The strike with the highest number of calls was 256.  A close below that should be easily done from here. 

I don't know if this is important or not, but the all company advance decline line did not make a new high with the major indexes this week.  Currently its peak was back on 11/30.  It is not a major negative divergence, but it is a negative divergence nonetheless.  I only mention it because every day I am being told how wonderful everything is.  When nobody is worried is when one needs to watch closely.  HYG still has not recovered back above its 200 DMA.  I also read today the PBOC did a surprise tightening move.  The U.S. economy is clearly benefiting from the repairs of 3 major hurricanes which should last several more months.  If trouble were to come to the U.S. stock market it would have to come from overseas.  China seems like the most likely trouble spot.  SPX has had a couple of spats caused by China in recent years and they seem to come pretty much out of nowhere.  Prior incidences have seen the Chinese government take steps to keep things going.  I am not sure we can count on that now.  I have read enough quotes from Chinese officials recently to make me wonder if they aren't ready to clean up some of the imbalances.  I don't know what the consequences of that would be exactly, but a slowing of their economy seems likely.  That would echo around the world fairly quickly.  What bothers me most is I can't really get a feel for what is going on there and what are the odds things get bad.  Jim Chanos and Kyle Bass have been out talking about how bad China could blow up, but they have been saying that for quite some time.  I can see a black swan out in the water, but I have no idea if/when it might come ashore.  If past history is any indication we could have a sizable blow up with very little warning.  On the other hand, maybe the Chinese government manages things with little or no disruption to the global economy and Chanos and Bass are wrong.  I know the amount of debt added since 2000 in China is staggering.  The amount since 2008 meets the criteria for a full blown financial crisis.  At the same time the central government has $3 trillion in reserves to play with.  I am not smart enough to know how that will play out.  I am only smart enough to know it might be a problem for the global economy some day.

If SPX continues to pullback the first target is the 20 DMA (2625).

Gundlach has been running around with this chart telling people it might be a good time to get some commodity exposure.

Clearly this is an unusual situation.  Theoretically commodities are very cheap relative to equities.  The prior two instances of the ratio getting near this level saw huge rallies in gold and near 50% moves down in SPX (1973-74, and 2000-02).  What is going to happen this time?  There is not enough data to be statistically significant with just two cases.  It could be different this time.  Then again maybe it will be similar.


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