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Thursday, February 8, 2018

Daily update 2/8

Another big splat.

I have studied the Dow price for the last 100 years I can tell you I have never seen anything like this.  The low volatility sharp run up and sudden splat just did not happen to the index before.  I have seen similar things with individual stocks, but not the broad market.  This is exactly what I have been afraid would happen.  Whether this is really the end of the bull market remains to be seen, but I fear more and more that might be the case.  Today closed below Tuesday's gap down low that the bulls piled into.  Now they are underwater.  Breadth was -87%.  New highs were a paltry 16.  New lows were 198. 

The futures tried to get back into the channel overnight, but failed again.  Even though SPX made a new low the futures are still above the prior overnight low.  I do not know if we need to test that low to make a bottom or not.  After the 4 PM close the futures rallied furiously over 20 points.  I don't have a clue why that would be.  Yesterday they sold off hard right after the close, but were back up by the open.  They have settled back some now up about 12 points from the close.  There is no telling where they will be by morning.

No divergence in the red count yet.  It is extremely oversold though.  Also note the drop below 50 of the intermediate indicator in the bottom panel.  The last time it did that the market bottomed and shot up like a rocket.  That is actually unusual.  The normal action is for any low to be retested before a good bottom is made.  Should today make a short term low it is likely to be retested after a bounce.

The rebound after Monday's splat was greatly helped by the TRIN being over 3 at the close.  Today we had a TRIN of only 1.1.  That will be no help for the bulls tomorrow.  I am sure this sell off will echo around the world just like it did on Monday.  If we have a big gap down again they might not be in such a hurry to buy it.  Since SPX closed right near the low a gap up has high odds of testing today's low.  Today's close was about 2.5% below Monday's close.  We should have cleared the margin calls from that close today.  I wonder if that was what drove the futures up after the close.  People thinking the forced selling was over so the market might bounce.  The question now is whether today's lower close will cause more margin calls or not.  I am hearing some talk of Value at Risk (VAR) models making some money managers needing to de-risk a lot more.  This is not margin call selling so it does not have the same urgency, but it will certainly be a drag on the market.  SPX is also close enough to its 200 DMA that it could act as a magnet.  Another down Friday could lead to another big down Monday.  The bulls would like to see a bounce tomorrow.  I just don't know whether they will get it or not.

I heard on guy on TV suggesting this is a good time to raise some cash and maybe buy some gold.  Everybody else was saying don't worry the economy is good.  The volatility is unpleasant, but we should look through it.  Have a list of what you want to buy and don't panic.  I can understand that advice from the point of the view of the economic data.  It looks fine.  The problem is that a large part of the strength is likely from last year's natural disasters and will be winding down as the year goes on.  That includes the entire world.  We don't make much stuff here in this country anymore.  All these repairs require stuff to be imported.  This is what caused this headline just the other day:

"U.S. trade deficit rises to nine-year high on robust imports"

This same thing happened after hurricane Sandy hit NYC.  The entire globe saw a pickup in economic activity.  While the global economy looks just fine today it might not look nearly as well in six months.  This dip may end up being a great buying op and the market may go on to new highs.  However, it is possible this is the start of a bear market.  This does not look like any pullback I have seen in my 19 years of market study.  I don't have a clue how this works out and neither does anybody else.  All I can say is there is a risk of serious downside from all the leverage.  I have no way of knowing if this is the beginning of the great unwind.  It certainly could be.  However, we have broken the 200 DMA a number of times in this bull market and have rallied on to new highs.  We could still do that again.  I don't really know of anything near by that says this is where all hell breaks out.  Maybe the 500 DMA (2320).  The last important low was Nov. 2016 (2083).  That is a long ways from here.  Breaking that would likely confirm a bear market.


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