In some ways, the market is like a projectile; it launches, it reaches a maximum height, then it falls. The maximum height reached by a projectile depends on its initial conditions: angle of inclination, initial velocity, and to a lesser extent, wind dynamics. The maximum height reached by the market, likewise, depends on its initial conditions, however, the complexity of the factors that can affect the market poses a problem. While the projectile has only two variables making up its initial conditions, and only one variable , wind, that can affect it during flight, the market has an unknowable number of variables contributing to its initial conditions, and an unknowable number of factors affecting it during “flight”.

Even if we could (which we cannot) know all the initial conditions of a market, we still would not know how these variables interact to produce the market’s “flight”. These limitations make the market’s complex nature look like chaos, which mathematically it is. From Math Insights: “ A dynamical system exhibits chaos if it has solutions that appear to be quite random and the solutions exhibit sensitive dependence on initial conditions.”

So, while we can predict with exceptional accuracy how high and how far a projectile will go — we can hit a moving target that is hundreds-of-thousands of kilometers away, such as the moon — we are embarrassingly inaccurate when we try to predict how high a market will rise, or how long a market will last. Markets are too complex and too chaotic to predict, yet, there is a $Billion industry devoted to trying to do just that. The most successful members of this industry are those that concentrate on the historical “behavior” of the market rather than selecting just a few of the nearly infinite number of fundamental variables that affect the market’s “flight”, and then use that incomplete knowledge to paint a prediction on the market.

The market’s behavior is guided by the same emotional instinct as any human behavior is: fear. Just as all human behavior can be traced back to some aspect of fear, the market’s behavior can also be explained by the level of underlying fear.

We continue to search for repetitive patterns that correlate with fear in the market.



The AAII survey took a bearish turn this week (see Thursday’s Update for more detail). The higher-level of fear, decreases the chances that the market is making a top. Tops rarely happen when bull sentiment is less than 50% and bear sentiment is more than 30% (chart below).

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The volatility index (VIX), by itself, has a strong inverse correlation with the S&P 500; down-spikes in the VIX correlate with market highs.

Last week, since the VIX had moved up to meet the down-sloping trend-line, we stated that the “… VIX now has even more room to drop (and the SPX rise) than it did a couple of days ago.” This week, that is exactly what happened; the VIX fell, and the SPX rallied.

The VIX pattern is very similar to the trading during the powerful August ’17 to January ’18 rally. However, one difference is that the VIX is elevated compared to that time period, which means there is room for it to move lower and, therefore, the SPX to move higher (chart below).

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The long-term (monthly) technical situation continues to be positive:

  • The 8-month MA remains above the 12-month MA.
  • The RSI has stabilized .
  • The S&P 500 continues above its 8-month MA.
  • The MACD continues to diverge away from a bear cross-over.
  • The ADX +DI has started to turn back up, and the -DI has started to turn back down.
  • The stochastic continues to move higher .

This pattern is similar to what happened during the 1998–2000 trading period (shaded areas on the chart below). The only worry we have is that the ADX trend strength (black curve) has moved above the down-sloping trend-line (dashed blue-line) which has acted as a turning point for the trend strength in the past. This indicator can, however, continue to rise above the blue dashed-line like it did in 1998 (chart below).

Having closed the gap at 2875–2885, the SPX then took the most optimistic of the four paths we illustrated last week.

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No two market periods are going to be exactly alike, but since human emotions do not change over time, all bull markets (and bear ones too) will have repeated similarities. We have been tracking a period of the tech bull market of 2000 which has similarities to today’s late-stage bull market; specifically, the periods we have labeled C3 and R4 in the charts that follow.

The two charts below compare the weekly technical and sentiment profiles of correction 3 (C3) and rally 4 (R4) in both 2000 and 2018. Notice how closely the MACD, stochastic, and sentiment profiles match (pink highlight)


The similarities do not stop at the technical. Notice the similarity in the PE ratio patterns from these two periods.

The dividend yield of the S&P 500 also seems to be replicating the pattern from 2000.

And finally, the Net Yield (yield minus 6-month Treasury rate) has the same general pattern as in 2000.

The time dimension of the two sets of similar patterns are different enough that they could be considered as fractal in nature; the R4 rally of the tech bull took 1.5-years to develop after the double-bottom, while the current R4 rally has taken 2.5-years, and is not yet finished. The tech bull ended five months after the completion of R4, but the current situation is likely to take much longer. The bottom line is, we are not about to enter a bear market.

There is much ‘hand-wringing’ and concern about overvaluation in the stock market, but the metrics being used to support the argument do not, in our view, address the core value of investment in stocks. Measures such as PE, or price-to-sales, or even price-to-GDP do not take interest rates into consideration and, therefore, do not allow for relative comparisons.

We think it is more reasonable to look at risk premium (Net Yield) and how it has behaved during past expansions. Specifically, we look at the difference between the S&P 500 dividend yield and the risk-free 6-month Treasury rate (Net Yield) in order to gauge when valuations are in danger of decreasing.

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We took some profit (+51%) on our October calls, but continue to hold a 5% allocation in SHOP. Technically, SHOP has room to move higher.


BZUN took a hit this week, but is now at support from the 50% Fibonacci retrace of the September ’17 to June ’18 rally, as well as the 200-day MA at $46. There should be a bounce from here.


JD is in a major support zone and technically over-sold. We expect a bounce this coming week.


OLED has some short-term technical weakness to work though, but this is a long-term hold for us so pull-backs are not a concern.


Nike keeps making higher-highs and higher-lows, and is in excellent technical shape.


QTRH is creeping up slowly in anticipation of the mediation which is due to begin September 21. The market does not trust the situation (burned too many times in the past) and is waiting to ‘see the money’. Having been handed a jury settlement of $145 million dollars, however, the odds are better than 50% that they get at least that much — one way or another.


This week, we are taking a look at the connection between gold and copper.

The price of gold continues to correlate positively with that of copper; copper and gold have been dropping in tandem. However, over the past few weeks, a divergence has emerged in the way copper is trading on the daily-scale. There is now a divergence between copper’s price change and its technical indicators where the technical indicators are improving as the price of copper weakens (blue dashed-lines).

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Interestingly, at the weekly-scale, the copper/technical divergence disappears and the price of both copper and gold maintain their downward biases (chart below).

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The long-term technical picture for gold continues to be biased to the downside. As long as the bearish pattern from 2012–2013 continues to replicate, we can expect weaker prices for gold (chart below).

The short-term technical situation is more mixed than the long-term picture. On the bull side: the MACD is rising after making a bull cross-over (although, it is converging back on itself), the -DI is decreasing and the +DI is increasing (although, no cross-over yet), the RSI is neutral.

On the bearish side: gold has failed twice to get past resistance at $1210-$1220 and continues to make lower highs with each attempt, the RSI has made six failed-attempts in the past four months to move above the 50 level, the MACD has stalled and has started to converge back down. On balance, the short-term technical situation is neutral (chart below).

Gold continues trading inversely to the dollar which itself has been range-bound. If the dollar does not move higher, it could still develop a bullish reverse head-and-shoulders pattern. The $1210-$1220 zone continues as overhead resistance (chart below).

The Yuan is trading sideways just under the resistance/support zone. Technically, the Yuan could move in either direction, so we cannot take much guidance from it at this time (chart below).

The Euro continues to maintain its strong positive correlation with gold. The MACD is attempting another bear-convergence, the RSI is weakening, the stochastic is no-longer over-bought, and the ADX is neutral. We see the series of lower-highs that the Euro has been making since June, and the inability to get past the 38% Fibonacci retrace of the May to August correction, as a sign of potential weakness in the Euro and, therefore, potential weakness in gold (chart below).

Technically, the USD/JPY pair is starting to strengthen: the stochastic has turned up, the MACD has abandoned the potential bear cross-over and is now diverging away, the ADX and RSI are both neutral. This strength could put pressure on gold (chart below).

TIP has been falling along with inflation expectations. If this continues, gold will be pressured further to the downside like it was in 2016 (chart below).

One of our members commented this past week that they would like some further discussion regarding the commitments of gold futures traders, so we have spent more time than usual thinking about the unprecedented positioning of all the four types of traders. As the chart below demonstrates, every class of trader is extremely extended in their positions.

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Forty years of private equity trading, and still learning.