Fear is All That Matters

News, or any broadly-reported information, simply does not drive the market. The most recent and obvious proof of this comes from the insane (in the literal sense) behavior of Donald Trump. Trying to start a trade war and acting as if he is a Russian operative controlled by Putin himself, has had no serious effect on Mr. Market — although it does mark the death of irony and even fiction itself. Widely accessible knowledge, no matter how outrageous or bizarre (stranger than any fiction, ergo, the death of fiction), is not what moves the market. Fear moves the market; fear of losing and fear of missing-out.

Determining the causes of the fear that underlies the market, is not something that we (or anyone else) has had any consistent success at. But that is okay, since profiting from the market does not require explaining the fear that is in the market. It only requires a means of measuring that fear, and there are several ways to accomplish this. The entire field of technical analysis concerns itself with measuring the market rather than explaining it. And although no measurement can predict the future, the right measurement can provide a probabilistic assessment of the future.

By way of simple analogy, imagine that you measure the correlation between speeding and car accidents and you find that the higher the speed, the higher the number of collisions. This would allow you to say that, in general, if a car is speeding, there is a higher probability that the car will be involved in an accident. There is no need to explain why the car was speeding in order to predict a higher probability of an accident. The same goes for the market; we do not need to know the causes of the underlying fear, only the level of fear.

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Equities

Sentiment

As reported in an update on Friday, the AAII sentiment survey shifted toward the neutral (uncertain) camp and the bull-minus-bear differential remained below the +15% level which indicates only a 25% chance of a market top.

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The put-to-call ratio, which had turned down to form an up-spike in the 8-week MA, has turned back up (chart below). This increases the probability of a local top forming, followed by a pull-back. Here again, like in the PE:VIX discussion above, a pull-back (if it occurs) would not be deep and would not alter our over-all bullish assessment.

The 50-week MA of the NAAIM index normally leads going into a downturn, and lags during a recovery (chart below).

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For some time now, we have been following the trading patterns from the tech rally of 2000 and comparing them to today’s market patterns. The two charts below, show the various rallies (R) and corrections © for both bull markets at the weekly level. The pink rectangular areas highlight the C3 and R4 patterns that are similar in nature. This pattern-similarity suggests that we are heading toward new highs in the SPX despite small pull-backs along the way (charts below).

Technical

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Fundamentals

The big tech heavyweights, Facebook, Alphabet, Amazon, Intel and Twitter will be reporting this week and although earnings are expected to continue to show strong growth, we think there is a fair chance that the market will pull-back anyway. We suspect (based on the above discussions) that participants may use this week to book some profits. Again, we emphasize this would not be the start of a bear market, just a temporary pull-backThe 10-year minus the 2-year Treasury rate differential continues to march lower at a constant slope. At this pace, inversion would happen before the end of the year. Inversions lead recessions by between 6-and-18-months, making the earliest likely start date for a bear market as the Spring of 2019 (chart below).

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GAAP earnings correlate strongly with the SPX. There are no warning flags here (chart below).

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Gold

The long-term technical picture has become interesting. The current pattern is very similar to 2013:

  • The RSI has dropped below the rising trend-line and is almost over-sold.

In addition to the 2013 similarities, today’s pattern has some unique features; the head-and-shoulders pattern has been maintained, the 200-week MA has been breached, and the long-term upward-sloping trend-line has been breached (although not on a close-basis).

If the pattern similarity continues, then further weakness in the gold price is to be expected (chart below).

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Gold continues to trade inversely to the dollar. The dollar grinding slowly higher, but there is a chance that it may drop temporarily to form an inverse head-and-shoulders.

A couple of weeks ago, gold returned to some “fairly-odd behavior” by trading in positive correlation to interest rates, but recently has come back to the normal negative correlation (chart below).

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Last week, we wrote, “Gold has completely (and bizarrely) disconnected from TIP (inflation expectations). At some point, either TIP starts dropping along with gold, or gold rallies along with TIP (chart below).” This week, the former happened bringing the correlation back to the normal positive. The pattern continues to form like the 2016 trading which suggests that gold has further to drop (chart below).

In conclusion:

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We wish our subscribers a profitable week ahead and ask that email be monitored for Trade Alerts.

Regards,

ANG Traders

Forty years of private equity trading, and still learning.