The Bull is Just Resting

ANG Traders
5 min readApr 25, 2018

Last week, we presented the chart below which shows the long-term patterns of the Fed funds rate, the SPX, and the rate differentials of three parts of the yield curve.

The pink areas, highlight past and future (possible) market tops. All three rate differentials inverted (went negative) ahead of the market tops of 2000 and 2008. This fact makes it likely that the same will happen again ahead of the next top but does not guarantee it.

The fact that everybody is watching the yield curve has us concerned because, in the market, if something is obvious, it is obviously wrong. This old market adage is ‘truthy’ because the components that create the market are conscious entities who change their behavior (and therefore the market) according to the thoughts in their heads. (See here for a more complete discussion of this idea).

Unfortunately, it is impossible to predict what effect these individual thoughts might have on the collective; complex/chaotic systems are more than the sum of their parts, thereby, making it impossible to isolate the effect of just one variable. It might even be the case that these thoughts are what caused the rate inversions in the past and will do so again, but there is no way of knowing. All we can do is study historical patterns that repeat and, based on the assumption that these patterns represent immutable human behavior, use these patterns to project likely outcomes into the future.

We have been watching the present replication of a correction pattern from 2000 and, as the two charts below demonstrate, the similarities continue to develop. We may be at the start of the R4 rally that should take the market to new highs like it did in 2000. We expect to see higher average AAII investor bull sentiment as the market cycles through waves 4 and 5 on its way to the next bear (2019?).

We expect two things to happen in the lead-up to the next recession: the 10-year minus 2-year bond yields will invert, and a consensus will develop that Central Banks’ actions from around the world have made things “different this time”. Confidence will be running feverishly high before the bubble bursts. We do not believe we are there yet. The bull is just sleeping.

The CNN Fear and Greed Index has backed away from extreme greed, but remains fearful (chart below).

The AAII investor sentiment survey came in more bullish this week with bullish sentiment increasing +11.7% to 37.8% (historical average is 38.5%), and bearish sentiment declining -13.5% to finish at 29.2% (average is 30.5). This type of increased bullish sentiment is what occurred in 2000 as the R4 rally got under way. This continues to support the similarity between 2000 and today. We expect the bullish sentiment to reach a higher average reading as we move through R4 and R5 (chart below).

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he NAAIM 50MA (blue line), which had started to turn down, has reversed to the up side (visible in the zoom panel). If this sentiment indicator continues to move higher we can deem it to be bullish (chart below).

The 36MA of the RYDEX bear-to-bull asset ratio has made a small move upward (visible in the zoom panel), but it is too early to assign any meaning to this small move. Overall, the ratio still has a negative slope and, therefore, remains positive and bullish (chart below).

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Up-spikes in the VIX (volatility fear index) correspond with market bottoms. As we noted a month ago, the combination of a spike in the VIX and a bounce in the SPX off the Fibonacci 62% retrace line makes it probable that the bottom is in for this correction (chart below).


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Gold continues to trade within its 2018 trading range. A break and close above $1365 would be required for us to be bullish on gold. We are of the view that inflation is not the serious threat that many commentators write about and, further, we believe that the Fed’s tightening policies are likely to strengthen the dollar and keep inflation at 2%, neither of which is gold positive.

Technically, gold has dropped back to meet the Fibonacci 50% retrace line, the MACD has made a bear cross-over, the stochastics have made a series of bear cross-overs, and the ADX is neutral (chart below).

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ANG Traders

Forty years of private equity trading, and still learning.