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2/5/18
Thomas Thornton
info@hedgefundtelemetry.com

Hedge Fund Telemetry Daily Note


Today I'm starting with a new improved email system so please bear with me as there is some teething going on.  

Last week was very important as it was obviously the first correction to note after such a strong unrelenting run.  My cautious call to have a decent percentage of cash, hopefully softened the down move for you.  What I found over the weekend and today is the chorus of perpetually bullish people suggesting this move is really nothing to worry about as it's either buyable now or soon.   When I was at my hedge fund, I would do a summary of sell side technical analysts - from Jeff DeGraaf to Phil Roth to Rob Slymer. (They no longer work at their old sell shops)  Today, there are fewer sell side technicians but some of the quotes I saw were "Patience need but further weakness is buyable"  "Stay patient, correction not over yet" and "Backdrop remains bullish."  Two out three of them are excellent thoughtful analysts who I have a lot of respect for over the years.    One of the bullet points of the super bullish technician  "93% NYSE Downside Volume consistent with climax; contrarian. Down Vol 942 Up Volume 69."  Often times when coming off of a low there is a "breadth thrust" up that signals a powerful change in direction.  What happened last week was the opposite as breadth and many other indicators dropped hard from an extremely overbought condition. S&P RSI was at 86% and finished the week at 51% and is not oversold.  There was also a large number of stocks last week making a buying climax - new 52 week high but closing down on the week.  Another couple readings that are not indicative of an oversold condition.  There were only 138/500 new 20 day lows within the S&P on Friday.  Good lows typically see 50% make a 20 day low.  The S&P 500 percentage of stocks above the 50 day was at 58% whereas a good low is closer to 20%.  Put call data showed late last week a decent amount of people still buying more calls suggesting people were not that fearful.  There were many people also referencing credit spreads that still looked bullish for stocks.  One talked about the JNK ETF vs TLT ETF spread as bullish for stocks risk appetite.  Meanwhile, JNK made a 14 month low, HYG an 11 month low, TLT an 11 month low, IEF a 4 year low, and LQD with an 8 month low. When all of these are dropping, I can't understand how broad based loses equate to continued risk appetite for stocks.  

I've been showing the longer term monthly upside DeMark signals that have triggered as well some recent shorter term signals.  Bullish sentiment on every poll hit extremes and on some record highs but when they started to break the 10 day moving average it was evident to me that a drop was imminent.  This week I will go over some scenarios that could involve some lower high bounces.   I hope you all like the new format.  It will be evolving in the coming weeks.

 
US Equity Market Overview

SPX bullish sentiment is at 39% down from the recent all time high peak of 96%.  I'll get into sentiment a bit deeper this week and how I expect to see this play out.  
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SPX index had quite a cluster of daily upside DeMark exhaustion signals that combined with the weekly and monthly was one of the main reasons I felt a top of significance was at hand.  What is important now is that people will be looking for support at the 50 day 2718 and then the December lows of 2673.  Considering people have been rewarded buying the 50 day, I expect a lot of people will be making that call.  What is important is that many of the the US indexes now are on the first of five waves down.  That's the little yellow 1.  I will get into more analysis with the wave patterns and what to expect later this week.  
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SPX speculator positioning was UP last week and shouldn't give anyone comfort if long.   Hedgopia.com puts out these nice charts each week.  
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As I mentioned the percentage of stocks above the 50 day moving average for the SPX was still relatively overbought at 58% after Friday.  I showed this chart of the NYSE stocks above the 200 day moving average in late December with an upside DeMark Countdown exhaustion.  It's found a bottom around 50% in the past couple years and that's a period without a 5% correction.  Breaking the 50% level with some vengeance likely will usher in a much deeper correction.  
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Nasdaq bullish sentiment is at 42%.  Note one of the ways I get confirmation of a turn in sentiment from extreme levels is when the 10 day moving average of sentiment is broken.  That's why I post the 10 day moving average of sentiment on the sentiment chart page on the website.  
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The Dow Jones Industrial Average also had a recent cluster of upside exhaustion signals, has a new first of five waves down yellow 1, and is homing in on the 50 day.  
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The SPX bullish sentiment vs VIX bullish sentiment ratio has reversed lower after a couple weeks ago I posted this with a record high in the ratio.  Despite the VIX ripping higher VIX bullish sentiment is only at 30%.  When the market is very oversold this ratio will be much lower in the green.  And much lower than that last spike down after the election.
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Currency Update
US Dollar bullish sentiment is at 19% and has seen a positive divergence vs price.  This means the low in sentiment on 1/24 at 8% bulls was ahead of the new low in the DXY Index.  It can be seen on other currency cross sentiment charts too.  
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US Dollar Index DXY did get it's daily downside DeMark red Countdown 13 on Thursday and today has a price flip up (green 1 on top as it's trading higher than 4 previous closes)  
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The weekly however remains on week 12 of 13 but it still could happen this week or next.  
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Euro bullish positioning with speculators is at record highs.  There is a lot of risk when this breaks.  

A look at Bonds and what to expect next
Bond Bullish sentiment is now at 7% - deeply oversold.  
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Late in the year there were several DeMark exhaustion signals with minor reactions slowing the flattening curve.  The reversal now shows the curve steepening and has a potential first wave up of five.  Banks and financials tend to like a steeper curve however, they also didn't mind the flattening in the past year too.  What I think they were excited about was the sell off in the 2 year.  
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Here's the US 2 year yield simply embarrassing the DeMark signals but that was important because when a signal fails what you learn from it may matter more.  I do think there is evidence of a turn and I would buy the 2 year now.

Here's the 2 year yield on a 30 minute time frame that now has completed an upward five wave pattern twice.  When I see this choppy action near tops or bottoms after such a run there is potential for a reversal. 
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But here's the chart I am keying off of now.  This is the weekly of the 2 year yield with a recent upside weekly red Countdown 13.  There have been several other upside exhaustion signals.  6 weeks ahead of the election saw a minor risk off period and then another in late November 2016 which sort of capped the upside  in financials as they went sideways for a while.  The recent run starting last September remember had elevated bullish sentiment in bonds and the 2 year yield shot up.  There was one false signal but bond sentiment was not oversold but oddly bid.  Now that bond bullish sentiment is at 7% it's giving me conviction of a decent long 2 year bond trade.  


The US 10 year Yield 60 minute time frame has some upside exhaustion but the daily does not have any evidence of an upside exhaustion to note. 
The weekly of the US 10 year has a Setup green 9 and the last two worked well as an inflection point.

US 10 year bond positioning shows an 11 month high in net shorts.  We've seen short interest higher and that was ahead of a pretty good rally in bonds.  

The German 10 year Bund Yield had a daily upside red Countdown exhaustion last week and is on day 8/9 with a green Setup which has been good in the past year at inflection points
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Credit Spreads - Is there really a risk appetite?

I read this weekend on Twitter about  how the spread between Junk and Govt's is very positive for the stock market suggesting there is a risk appetite.  OK I can understand watching spreads as historically it's good when Junk outperforms however Junk is going down on an absolute basis and like I said earlier many of these bond ETF proxies are making multi month lows which doesn't make me think there's much of a risk appetite.  

Here's the daily of the JNK vs TLT - sort of simplistic rather than using actual credit indexes I know but let's just examine it.  Currently this spread has not broken out but has had a nice run from the December low.  I don't have an upside Countdown currently 


The weekly shows this still in a range while the upside and downside DeMark signals have been very good at inflection points. 


Another ratio I've been highlighting is between SPY and TLT.  There was a recent upside exhaustion after a sharp (what I would call blow off top)  
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Checking in with a few indexes around the world
British FTSE 100 had a recent upside exhaustion and now is on day 9 of 9 with a downside Setup.  There could be a bounce very soon as it's also at support.  

The Nikkei is now down nearly 6% from the recent upside exhaustion.  I believe it can go 10% lower if 22,000 breaks.   That would be nearly a 20% drop.   
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Bitcoin Update

Bitcoin XBTUSD continues lower and is now on day 7 of 13 with it's downside Countdown.  
 
DEMARK SCREENS

Daily/Weekly DeMark upside/downside exhaustion signals (Sequential) Weekly updated on Monday.  Price flips are more actionable.  I would use a stop at slightly above peak/slightly below trough.  

S&P 1500 Universe:
DAILY UPSIDE 13:   ETN, EZPW, FBP, SMP, VRTX
DAILY DOWNSIDE 13: BCPC, GPRE, GXP, HSC, HVT, NEW, OSIS, PNM, WIN

DAILY UPSIDE WITH PRICE FLIP REVERSAL DOWN:    BC, COL, ETN, FICO, IVC, MAR, MSFT, NYT, RUTH, SCI, TDC, UHS, UTX, VRTX, XOM
DAILY DOWNSIDE WITH PRICE FLIP REVERSAL UP:   ADTN, MAT
Updated: 2/5/18
WEEKLY UPSIDE 13:   ABMD, AON, AXE, BF/B, BIIB, BOFI, BR, CSCO, DGX, GD, LMT, MAR, RL, ROST, SGY, SPPI, STT, SYY, UFS, WAT, WSO

WEEKLY DOWNSIDE 13:   BELFB, EGOV, FSP, INT, RRC
Updated: 2/1/18
MONTHLY UPSIDE 13:     CHD, CLGX, CLX, CNMD, DVA, FICO, IDCC, MSCI, ORLY, PAYX, TFX, VMC, XYL

MONTHLY DOWNSIDE 13:    GPOR

Euro Stoxx 600 Universe:
DAILY UPSIDE 13:   ITV LN
DAILY DOWNSIDE 13: ABI BB, HIK LN, MCRO LN, PHIA NA, SMDS LN

DAILY UPSIDE WITH PRICE FLIP REVERSAL DOWN:    ITV LN, MC FP, NRE1V FH
DAILY DOWNSIDE WITH PRICE FLIP REVERSAL UP:   ETL FP, SPD LN

Updated: 2/5/18
WEEKLY UPSIDE 13:    ELM LN, JE/ LN, MC FP, TDC DC
WEEKLY DOWNSIDE 13:   AA/ LN, NG/ LN, SGC LN

Updated: 2/1/18
MONTHLY UPSIDE 13:    COFB BB, GAS SM, GKN LN, ING FP, KINVB SS, OML LN, VIS SM
MONTHLY DOWNSIDE 13:   NONE

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