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Friday, February 2, 2018

Daily update 2/2


I think we finally found that pent up selling I thought might be hanging around after last year.  Breadth was -88%.  This was the third day where the breadth was worse then -75% in the last four days.  We have not had three so negative days in close proximity since Feb. 2016.  New highs came in at 46.  New lows spiked up to 325.  That is the highest since Feb. 2016. 

The futures stopped at the 100 SMA.  The -DI shot up over 35 opening the door to a bigger decline.  We have had that condition a few times in recent years without the bears taking advantage of it.  Maybe this time is different.

The red count shot up to oversold levels.  That did not take long.

Multiple days of very negative breadth and a high number of new lows can signal a bottom.  However, when that situation happens coming off fresh highs it can often mean the start of a more prolonged corrective period.  The selling started in Europe overnight.  The reason most often mentioned was interest rates rising.  The 10 year was up significantly.  The dollar had a good day.  Oil and gold were down considerably. 

This is a complicated situation.  We had massive inflows into stocks and bullish sentiment extremes rarely seen.  That suggests a correction of some type should not be a surprise.  What complicates things is both stocks and bonds falling at the same time.  There is a lot of money in risk parity funds.  They normally own stocks and bonds and use a lot of leverage.  If both assets continue to fall margin calls will surely be coming.  That would exacerbate losses.  Leverage in the stock market is the highest it has been since 1929.  There is significant downside risk, but I have no way of knowing whether now is the time it unwinds or not.  Maybe we just get the typical 5-10% correction and it is off to the races again.  That is what everybody seems to expect at this time.  I can understand that.  The technical condition of the market at the high was strong.  It would be very unusual for something truly bad to happen without a retest of that high first.  Unfortunately unusual does not mean impossible. This would be a good time to ensure you have a plan of action should things get worse then expected.

Next week will be interesting.  I don't have any idea what happens on Monday.  The market is short term oversold enough to bounce.  On the other hand, big down Fridays are sometimes followed by big down Mondays.  While internals were negative there was no sense of panic in the air.  It seems unlikely today was the final bottom even if we bounce.

Have a great weekend.


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The information in this blog is provided for educational purposes only and is not to be construed as investment advice.