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Friday, January 24, 2020

Update 1/24

There was a tick distribution signal today.

This is the first signal since the Oct. low.  The breadth was -69%.  New highs were 231 and have been over 200 lately.  New lows were 63 which is elevated this close to a high.  The number of new lows was low as is normal during a strong rally, but started up four days ago.  I am not sure what to make of that exactly.  The lows spiked up a bit back in Nov. during the tax loss selling season.  This is probably not tax loss selling this time. 

The futures found support at the 50 SMA.  The -DI line reached 34.99.  I consider the 35 level opening the door to a 5% or greater pullback.  The bears don't always step through that door, but the market almost never goes down more than 5% from a new high without a signal.  This is probably close enough to consider it a signal.

The green count did not quite cross below the red line.  We have had two crosses already on this rally.  Generally the third one is the charm for bears.  There are always exceptions of course.  The rally into the Jan. 2018 top took a 4th cross for the bears to strike.  The market does not necessarily collapse right away after a third cross.  It sometimes goes sideways for a bit before getting enough of a pullback to get the red line up near the oversold threshold.

With a tick distribution signal this is the most serious attempt by the bears to take control of the market.  One day does not make a trend so the bears need to follow through on the downside next week. 

What happens next week might be determined by the coronavirus.  I did some research during the ebola scare back in 2014.  That did not become a global pandemic because people had to get sick enough to need treatment before they spread the virus.  Once the systems became well known it was possible to track down everybody that was sick before things went totally wild.  We do not have enough information about this new virus to be able to determine whether it could become a global pandemic or not.  I think the risk is much higher this time.  The last I heard China is trying to lock down over 30 million people.  This is a much bigger response that we saw to SARS back in the last decade.  The question is whether this is because of what they learned back then or because they are more scared this time.  The last numbers I saw suggests the mortality rate of those seeking treatment is 2-3%.  That is similar to a bad flu.  There are generally two ways a virus might spread globally.  The first is that it is contagious without any serious symptoms.  The other is some people become contagious, but do not get sick enough to seek treatment (this is why the flu always spreads around the world).  They just run around spreading the virus.  In either case the virus must be spread easily.  At this point we do not know if we are dealing with either of these cases.  We do know there has been human to human transmission, but not much else (at least publicly). 

The first time a virus circulates there are less people around with immunity. The last big pandemic was in 1918.

The Spanish flu pandemic of 1918, the deadliest in history, infected an estimated 500 million people worldwide—about one-third of the planet's population—and killed an estimated 20 million to 50 million victims, including some 675,000 Americans.

The global economy is showing some signs of a pickup, but not enough to say we have started sustainable growth.  A shock could send us into a global recession from here.  What do we know about the media these days.  They love to cause hysteria.  If this virus starts going global the media could turn that into enough fear to severely affect the economy even if the virus is no worse than the flu.

Money managers did considerable selling for the first time since back in Sept.  Everybody knows the market is overvalued, but nobody wanted to be the first to sell.  Now they have an excuse to take profits so further downside would not be a surprise.  We could come in on Monday with some kind of all clear sign and it is up and away again.  However, I think that is the lower odds scenario with the way China is trying to lock things down.  Put yourself in the money managers shoes.  They are sitting on big profits from last year with an unknown that could seriously impact the economy.  Taking some money off the table would seem to be a logical reaction.

Have a great weekend.


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