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5/8/18
Thomas Thornton

Sideways is the new up

It has been nearly four months since the S&P hit its all time high.  Since then we saw a sharp drop followed by several lower high bounces.  The magical 200 day moving average has contained each drop.  Bullish sentiment has been going sideways albeit under the 50% majority line on the Daily Sentiment Index.  A few other sentiment polls have shown similar patterns and some like Investors Intelligence has not reached extreme levels yet.  The people on CNBC and social media still are vocally bullish as they rotate from one story to another as a stock or sector goes up.  Earnings growth and earnings beats were exceptionally strong in Q1 however the market did not reward investors as everything has moved sideways without any gains.

Companies such as Amazon, Facebook, Netflix, and Apple did reward investors with positive responses after earnings.  As I have highlighted in the past, the mega cap technology and consumer discretionary leaders have done a disproportionate amount of the heavy lifting.  Back in Q3 2007 when I was with my hedge fund, I was highlighting the attribution narrowing with the "Four Horseman" tech stocks and within a quarter then started declines that on average went down by 50%.  The current attribution is even more concerning as these mega cap stocks are much bigger by market cap and if they drop by 25% or even just stall out, it will be notable.  

I am making important changes to my bias on a few things today.  I had a low conviction long bias on gold and silver that moves to neutral.  On the US 10 year, I have been expecting a short term bounce and I now can make a case for higher rates.  I will explain more below.  

I remain cautious on the US equity markets although I could see this latest bounce continuing to S&P 2710 if it doesn't fail in the next couple days.  As for support levels I am watching the VWAP levels calculated from the employment report last Friday.  SPY 266.00, QQQ 165.25, IWM 156.50, DIA 242.75 and Emini futures 2665.  A break below these levels will bring out sellers as they will start to get underwater after the recent bounce.  


Notable:

  • US Markets - Sentiment slight tick up.  No change to thoughts on downside potential on indexes
  • Hedge Fund Telemetry Trade Ideas  - Removed GLD, SLV, TLT, JPM
  • European Markets - Italy upside exhaustion, UK closer
  • Currencies
  • Asian Markets - Korea might be at risk and a warning on exports
  • Gold Change of Bias
  • Trouble South of the Border
  • Crude Update
  • Bond Update - Changes to bias on US 10 year.  More new lows in Investment Grade while people can't get enough corporate debt.  
  • DeMark Screens - Daily, Weekly, Monthly upside/downside exhaustion signals within the S&P 1500 and Euro Stoxx 600

US Markets


Here's a link to the Hedge Fund Telemetry market sentiment page with 40 charts of sentiment including equities, bonds, currencies, and commodities updated each day.   

SPX bullish sentiment is at 38% and only gained 1 point from the previous day


Commitment of Traders report from last week showed an increase in long exposure by speculators.  Rule of thumb is to be concerned with the action of speculators.  ie:  People are set up very long.  That implies it will be difficult to move the market up further if people are already positioned long.  


SPY daily shows the chop fest.  


SPX monthly chart is one I have shown since late last year as the SPX hit the monthly upside Wave 5 price objective and had both pink Combo and red Sequential upside exhaustion signals.  Other monthly signals have seen pullbacks, some really significant pullbacks too.


Nasdaq bullish sentiment is at 44% up from 40% the previous day


QQQ is back above the 50 day yet still below the April high.  Below you'll understand why


The NDX attribution year to date shows the amazing amount of % attribution the top weights have contributed.  Again, just as these have done the majority heavy lifting they also can weigh on the markets in a very severe way if they pulled back 10% -20%.  


Dow Jones series of lower highs with support at 23,500

 
Hedge Fund Telemetry Trade Ideas


Trade Ideas:  Removed SLV  -1.50%, GLD -1.24%, TLT +.60%, JPM +3.08%.  Details below on metals and bonds.  JPM just wanted to reduce a little in Fin sector

 
European Markets


Italy has been the best market in Europe and had an upside exhaustion signal today.  The reaction down needs to be followed by another down day.  


My friends at Nautilus Research do excellent work and they posted this seasonal chart of Italy.  May also happens to be the month of the Giro d'Italia 3 week cycling race.  Coincidence?  


Euro Stoxx 50 still has an upside red Countdown and the strong lift might need to consolidate some of the gains


Euro Stoxx 600 is a more broad index and there is a downside Wave 3 downside price objective of 338.69   A move to a new high would negate this.  


UK FTSE 100 had a pink Combo 13 and has a red Sequential Countdown on day 10 of 13.  This index has a very good track record with the DeMark indicators.  

 
Currencies


US Dollar bullish sentiment is at 85% and it's extreme.  Can it go higher?  Yes


Despite the bullish  sentiment the COT data does not correlate as speculators are set up neutral to short


Dollar Index is on day 3 of 13 with an upside Countdown.  My guess is that will move above 95


The weekly DXY had a downside exhaustion 13.   A move over 95 is needed to change up the downside Wave pattern.  


Euro bullish sentiment is at 10%.  This is very extreme yet I've seen it a little lower


COT shows Euro long exposure finally started to come down from overly bullish.  There is a lot of fuel for the downside on the Euro and upside on the USD


Euro has exceeded the downside Wave 5 target and is on day 3 of 13 with a downside Countdown

 
Asian Markets


Hang Seng had an up day however this one has also been going sideways for months


Korean Kospi also sideways however if it breaks support at ~2400 there is a downside Wave 3 price objective at 2218.  


My friend Greg sent this to me showing how Korean exports have turned negative.  Semiconductors tend to follow this trend.  Follow Greg on Twitter at @GS_CapSF   He's good

 
Gold - Change of bias


Gold bullish sentiment is at 26%


COT data showed a large decrease in long positioning last week and it isn't at levels where it's overly bearish yet


Gold futures could not get going with much of a bounce with the green Setup 9 and now there is a red Countdown on day 2 of 13.  When I went long both GLD and SLV it was with a small position and I was clear I did not have an idea set up to get long thus I hope you understand when I have less conviction, I'm going to bail quickly.    

 
Trouble South of the Border


Mexico looks terrible.  Sort of like me when in college when I drank tequila in Cabo to try and cure Montezuma's Revenge (bad water).   It wasn't pretty.


Argentina has been weakening too however it has reached the downside Wave 3 price objective and has downside exhaustion signals today


Brazil has been on the daily note for a while and is nearly at the downside Wave 3 target

 
Crude Update


Crude bullish sentiment is at 79% and has come down from the recent high of 84%


COT data shows continued very long positioning.  This is one reason why I've been less than bullish with the run up.  


Yesterday I said give the long side a shot for a trade and then the Iran news and wham!  Today more Iran news and wham!  Let's say my read isn't good although there is an upside Countdown in progress.  

 
Bonds


Bond bullish sentiment is at 33%.  I've been thinking this works higher although I've changed my bias


The daily of the US 10 year yield today now is on day 3 of an upside Countdown.  The upside Wave 3 price objective is 3.20%.  Considering how currencies have been overshooting I could see a move over 3% and to that price objective.  


Yesterday there was a huge inflow into the short term SHY ETF 1-3 year


COT positioning with 10 year remains set up very short.  This goes counter to the DeMark Countdowns and change to my bias but I feel more weight needs to go to the upside breakout in yield


US corporate bond sales have been HUGE however...


Investment Grade ETF LQD is hitting new lows.  People who have been buying all of the issuance in the past few years are underwater.  

 
DEMARK SCREENS - Daily, Weekly, Monthly Upside/Downside Exhaustion Signals

Daily/Weekly DeMark upside/downside exhaustion signals (Sequential) Weekly updated on Monday's.  Price flips occur when a stock closes higher/lower than four previous closes.    

S&P 1500 Universe: 

DAILY UPSIDE 13:   AAT, AXP, CHE, HFC, HST, IART, LSI, MAA, OGS, RHT, SRDX
DAILY DOWNSIDE 13:  DLTR, INGR, JACK

DAILY UPSIDE WITH PRICE FLIP REVERSAL DOWN:   NONE
DAILY DOWNSIDE WITH PRICE FLIP REVERSAL UP:   AGCO, AMWD, C, ESE, MD

Updated: 5/7/18
WEEKLY UPSIDE 13:   AMZN, BRO, FLIR, LH, LYV, TJX
WEEKLY DOWNSIDE 13:   FTK

Updated: 5/1/18
MONTHLY UPSIDE 13: CTXS, HSII, SYK, UFCS, WBS    
MONTHLY DOWNSIDE 13:     AKRX, HLX, HVT, MNK

Euro Stoxx 600 Universe:

DAILY UPSIDE 13:   ATL IM, GALP PL
DAILY DOWNSIDE 13:  NONE

DAILY UPSIDE WITH PRICE FLIP REVERSAL DOWN:    KER FP, SDF GR
DAILY DOWNSIDE WITH PRICE FLIP REVERSAL UP:   NONE

Updated: 5/7/18
WEEKLY UPSIDE 13:   ATL IM, BKG LN, COLOB DC, DWNI GR, KINVB SS, LEG GR, RACE IM, STL NO
WEEKLY DOWNSIDE 13:   BMPS IM, VWS DC

Updated: 5/1/18
MONTHLY UPSIDE 13:     HNR1 GR, HWDN LN, MHG NO
MONTHLY DOWNSIDE 13:  AGK LN



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