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5/25/18
Thomas Thornton

Lost Leadership

Recently I've been making a big and very vocal point about the Energy sector showing all the signs of a top.  As a view into my process, let me review what has been happening.  First, Crude sentiment hit extreme bullish levels, positive seasonality peaks in May, every major Energy ETF had upside DeMark exhaustion signals on a daily time frame, and the ETF's gravitated to the top of my PPO monitor.  The PPO monitor a force ranking system that ranks sectors by percentage above/below the 50 day moving average.  All three energy ETF's were at the top for weeks and reached well above 10% above the 50 day moving average as compared with the S&P which only could get 4% above the 50 day.  Some of the rotation started to become evident when they started to tick under the 10 day moving average.  The exact opposite happened in late March when the sector started to move up.  Sectors now taking over the top spot are tech, small cap, and transports.  Sectors starting to show signs of bottoming are Consumer Staples, Home building related, Utilities, and Biotech. 

The overall risk in the equity markets could start to pick up again with an old favorite catalyst:  "Euro Crisis."  Many of the indexes have already started to roll over with the new populist Italian Government taking power.  Italian yields have soared in recent weeks and other "PIGS" (remember that moniker?) yields have started to moved up too.  The Euro VIX has started to move higher while the US volatility indexes are on recent lows.  (charts below)  Back in the US people have been complacent about spreads behaving but if the energy sector starts to weaken, I would bet we'll see those spreads widen and perhaps quite fast.   Of course, I'll keep you up as developments occur.  Lastly, the market has rotated back into the familiar large cap tech and consumer names as a safe haven.  I've been stubbornly short some of these prematurely and as I examine them each day I feel holding through at this point will pay off soon.  As I showed the other day the amount of assets that moved into energy (crowded long) and the 4% drop today, the same sharp response can happen with the FANGS etc.  

Have a great long three day weekend and I will be putting out the Week Ahead Sunday and a Currency Focus on Monday.   

Notable:

  • US Markets - Sentiment back to midpoint, Sideways action continues
  • Hedge Fund Telemetry Trade Ideas  - Covered JPM, BRK/B for profit, Doubled up NFLX short, PG long ideas
  • PPO Monitors - Then and Now.  Showing the early signs of sector rotation
  • European Markets - Italy and Spain.  Lovely places to visit at this time of the year but terrible places to be long both stocks and bonds
  • Currencies - Still very stretched.  Prepare for a turn soon
  • Asian Markets - China and Japan both should work lower while Korea trades sideways
  • Energy Update - Big reversal down after upside exhaustion signals and peak sentiment
  • Bond Update - Pullback in yields as risk off move.  
  • 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 50%


S&P Futures showing a clear sideways pattern.  2700 or 2750?  We can make adjustments when one breaks.


Nasdaq bullish sentiment is at 50%  


QQQ has acted better than the other indexes but we know that's due to the large weights of the top 5 stocks


Dow Jones has lost some mojo and breaking 25,130 or 24,400 will be important to make changes to positioning


Russell Micro Cap starting to top.  

 
PPO Monitors - Then and Now


Here's the PPO monitor from a few days ago.  Notice XOP, OIH, XLE were at the top but were dipping under or near the 10 day moving average.    I had already been warning of a top here but this was another confirming early signal.  If you would like this monitor and you're on Bloomberg, please let me know.  


This is today's PPO and you can see only the XOP remains on the top.  It's only 5.44% above the 50 day moving average after peaking at around 16% above.  The other energy ETF's have fallen into the middle.  Consumer Staples is at the bottom and it's now above the 10 and 20 day moving average.  Another 2% and it will be above the 50 day.  I promise you'll see it near the top soon.  

 
Hedge Fund Telemetry Trade Ideas


Trade Ideas:  Doubled up short with NFLX as it's on day 12/13 with secondary upside Countdown and doubled up long with PG as it has an upside Countdown on day 3/13.  Covered both JPM and BRK/B shorts for a profit.   

 
European Markets


Italy has been a mess.  The DeMark signals have worked well on both the upside and downside


Spain too


Italian vs Spanish yield spread doing a familiar move again.  2011 was such a fun Summer.  


Italian Yields have moved a massive amount and there still is an upside red Countdown on day 4 of 13.  

 
Currencies


US Dollar bullish sentiment is at 80% and remains in the extreme zone


DXY US Dollar Index now has a green Setup 9 and is on day 10 of 13 with red Sequential Countdown.  A pullback is due.  


Euro bullish sentiment is at 13%


Euro also has green Setup 9 and is on day 10 of 13.  


British Pound bullish sentiment is at 17%


Same story with the Pound... a bounce is due

 
Asian Markets


Shanghai Composite is on day 12 of 13 with a downside Countdown.  Keep in mind for this to trigger is has to trade under the 8th red bar.  


Nikkei at short term support but I feel this will work lower.  


Korean Kospi sideways with an upside Countdown in progress.  2419 is support

 
Energy Update


XLE upside exhaustion and reversal


XOP same story


OIH ditto


Crude bullish sentiment yesterday was 72% and peaked at 87%

 
Volatility making a comeback?


Euro Stoxx Volatility starting to lift


Nasdaq VXN some downside exhaustion to note.  Could what happened with energy crowding happen to the the mega cap NDX?


VIX no changes

 
Bonds


Bond bullish sentiment is at 36% and making a run higher.  Let's see if 50% will happen


US 10 Year Yield retreated after the green Setup 9 despite the upside red Countdown.  Often the green Setup's work even better than the red Sequential Countdowns.


TLT sideways and I'm not ready to make any change to my neutral call

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

S&P 1500 Universe:

DAILY UPSIDE 13:    data feed issue with US 13's today.
DAILY DOWNSIDE 13:   

DAILY UPSIDE WITH PRICE FLIP REVERSAL DOWN:   AGYS
DAILY DOWNSIDE WITH PRICE FLIP REVERSAL UP:   NONE

Updated: 5/21/18
WEEKLY UPSIDE 13:   BRS, CNMD, CUB, CVG, GHL, GWR, HP, MASI, MRO, NSC, MNK, QNST, RJF, SGMS, WPX
WEEKLY DOWNSIDE 13:   ALK, PZZA

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:   BAB LN, EXPN LN, GXI GR, SSE LN
DAILY DOWNSIDE 13:  BBVA SM, CON GR, HUH1V FH, JMT PL

DAILY UPSIDE WITH PRICE FLIP REVERSAL DOWN:   ABF LN, DC/ LN, DMGT LN, EDP PL, LGEN LN, SAN FP, SSE LN
DAILY DOWNSIDE WITH PRICE FLIP REVERSAL UP:   JMP PL, PROX BB

Updated: 5/21/18
WEEKLY UPSIDE 13:  AAL LN, AMS SM, BP/LN, FP FP, GN DC, RMG LN, SAF FP, STM IM, UBM LN, UMI BB
WEEKLY DOWNSIDE 13:   FER SM

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


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.    

The upside 13's are sell signals and downside 13's are buy signals.  Price flip's are confirmation signals that increases potential for a price trend change. For example, if you are long a stock and there is an upside 13, you will want to take cautious action by selling down or out of a position.  If initiating a short sale with the upside 13's, we tend to start with a 1/2 size and add with the downside price flip.  The opposite is true for when there are downside 13's.  Take a 1/2 size position and add with the upside price flip.  The DeMark Indicators are designed to assist the user with buying into weakness and selling into strength to anticipate trend exhaustion. Selling into a rally and buying into a decline often afford the opportunity to exit a trade without too serious a loss if wrong.

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