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10/30/18
Thomas Thornton

Three Scenarios

The US equity markets have been hammered in October joining the global markets which have not seen green all year.  I'm appreciative of all the nice emails and calls congratulating me on being ahead of this move (I'd say I was too ahead of the move) but lets remember one has to stick the landing to get the perfect score.  We have to stay focused and today I'm going to go over three possible scenarios for equity markets with emphasis on the US market.  A lot of other markets such as rates and especially currencies will play a vital role (maybe even be the catalyst) but lets focus on equities today.  

First, the US market bounces this week on better Apple earnings on Thursday and there is a resumption of the upside trend. There's plenty of downside oversold conditions although I can't say there has been a real capitulation type of day to call a bottom.  Volatility has increased as has volume yet not enough in my view as I recall capitulations.  They are really scary and bring out real fear and I conversations with buyside or sellside traders confirms there hasn't been fear.  The seasonality after the US midterm election tends to be very strong although I  can't recall a more polarized and outright hostile electorate.  The odds for the Republicans keeping the Senate seem good while the House leans towards the Democrats getting the majority.  A mixed Congress will likely cause some concern for growth policies (tax cuts, lower regulations) stalling the momentum.  A positive surprise outcome for the market would be if the Republicans retain both the House and Senate.  As we have seen in recent years, the polls can often be wrong.  Probability:  25%

Second, this current move lower isn't the end or "the one" but the start of a longer prolonged choppy pullback continuing into 2019.  One has to think that the current market pullback around the world will hit consumer spending and generally slow growth.  This current market could be more of a deleveraging event as long short fund performance has been terrible in October telling me they haven't been hedged setup short but rather have taken down long exposure.  Consumer Confidence polls are showing upside DeMark exhaustion signals which have been prescient at other peaks and lows. Probability: 50%

Third, the markets are about to crash.  In 1987, 1998, 2011, 2015 the market had considerable pullbacks with some outright crashes and some that took a little longer.  Could a crash like 1987 happen in a generally strong economy which lasts a few weeks and the uptrend resumes?  Yes indeed.  In 1998 the tech market got killed and resumed higher weeks later or 2011 which saw several sharp drops a few months apart staircase step down before resuming higher.  And in 2015, China devalued its currency causing a selloff that carved out five waves lower into February 2016 until the Central Banks came to the rescue.   Probability:  25%

My current exposure remains very cautious with 50% in cash, a relatively small net short positioning, with some SPY and QQQ puts and put spreads that will pay off big with scenario number 3 and if scenario 1 happens then my defined risk play will have nominal losses.   Sorry for the late note, been working with programmers all morning.  We are working with the new site to have stuff out a lot earlier especially for our European clients.  

  • US Markets -  Sentiment is low and I have a lot of looks if this market is oversold enough.   
  • Hedge Fund Telemetry Trade Ideas - Sold GOOGL
  • Erlanger Short Interest Thoughts
  • US Election and Consumer Confidence Peak
  • FAANG Custom Index Update
  • PPO Monitor - Percentage Price Oscillator Force Ranked Sector Rotation - yesterday had a lot of new 20 day lows
  • Bloomberg Technical Pattern Recognition Screen
  • Currency Update - New 52 Week High for USD
  • European Market Update - Yesterday's gains lost
  • Global Market Update - Getting oversold but in Wave 3 means a lower high bounce is ahead
  • Asian Market Update - Nikkei holding support and Hong Kong new lows
  • Crude Update -  Should continue lower
  • Gold Update - Stalling
  • Bond Update  - Stalling but expect lower yields
  • DeMark Screens - Daily, Weekly, Monthly upside/downside exhaustion signals within the S&P 500 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.  When the new website launches we will be adding new charts and historical sentiment data for Euro Stoxx 50, UK FTSE 100, German DAX, French Cac 40.  We will be adding Japanese Bonds, German Bunds, and a few more.  
SPX bullish sentiment is at 10% and yes this is low but it can and might stay low for a while.  Remember sentiment is a condition and one needs a trigger to buy and right now the DeMark signals are not yet there


SPX daily on day 7 of 9 with green Setup


SPX 60 minute tactical time frame loitering at the lows near wave 5 price objective


Bloomberg had this one today showing how far below the 200 day the index has moved.  In 2011 it went 17% below and in 2015/16 it was only 10%


I started scrolling back and found 2007/2008 which makes the 2011 near 20% pullback seem like a blip


Then I went back further to look at 1998 which if this is scenario number 1 we snap back up from here but what if we spend a considerable time like 2000-2002 under the 200 day?  


Robert Prechter from Elliott Wave International is one of my favorite authors and when you get past some of the calls he's made that didn't work he's really brilliant.  By the way he's calling for a crash scenario number 3.   Not sure if you recall but he did say go all in leveraged in February 2009 and to cover all shorts.  That one was pretty good.  


Nasdaq bullish sentiment is at 10%


NDX Index also on day 7 of 9 with green Setup


NDX 60 minute tactical time frame still down at wave 5 target.  


Dow Jones Industrial Average also on day 7 of 9 with green Setup


IWM Russell 2000 stabilizing somewhat after being blasted lower giving up all gains for the year in a month.   In this case, better to be a few months early that one month late.  

 
Hedge Fund Telemetry Trade Ideas

Trade Ideas Sheet - Long and short US equity ideas including ETF's.  We will be overhauling the Trade Ideas Sheets for long only, short only, ETF's when the new website rolls out soon.  There will also be a clearer email distribution with changes.  
Trade Ideas Changes:  SOLD GOOGL -6% Just way too heavy in a bad NDX tape and FAANG looks lower too
Stops on everything.  TSLA 360, GDX 17.35 , FEYE 16.00, NVDA 235,  QQQ 170, XLK 68, SPY 270, XLY 113,  XRT 50, IWM 163, DIA 260, XLI 77 IBB 116,   AMZN 1650 DXJ 56 , GLD 111, IEF 98  TLT 112 , BA  350, (RECENTLY ADJUSTED STOPS)   ITB 28

 
Percentage of NYSE stocks above the 200 day


This daily chart had the most obvious negative divergence from the previous peak.  My dog could see this one coming.  Now there is a downside red Sequential Countdown 13 at 25% and this is pretty oversold BUT...


The weekly shows it oversold but it can and might go even lower like 2008 when there was .5% above the 200 day or 2011 at 10% or 2016 at 15%

 
Erlanger Sector Short Interest Data


I've been showing Phil Erlanger's data on sectors that are heavily shorted (type 1's) and those sectors that are crowded longs (type 4's).  The Purple sectors under type 4's were prevalent in recent months and now there are a lot of 'dumb' shorts in green with sector ECOS column.    


This is the chart of total market type 4's and I showed this when over 10% it gets dangerous as the market was lifting on traders chasing with very little short interest involved.  Examples:   AMZN, GOOGL, IBM, AAPL, MSFT.  

 
The Midterm Election and Consumer Confidence Peak


The house has a lot of toss ups


The senate has only 6 toss ups


Consumer confidence monthly


Consumer Confidence Quarterly

 
FAANG Custom Index


FAANG update

 
PPO Monitor - Percentage Price Oscillator

The PPO Monitor is a proprietary monitor developed to force rank Indexes, Sectors, and Stocks.  It ranks top down by strongest to weakest by percentage above/below the 50 day moving average.  Shorter term signals can be seen when the 10 and 20 day moving averages turn up (green) or down (red) which often are followed by the 50 day moving average.  This is useful to watch for historically overbought/oversold percentage above/below the 50 day moving average.  It is non correlated with the DeMark Indicators however we have found upside/downside exhaustion signals often occur when something rises to the top or drifts to the bottom of the monitor - increasing the timing aspect. We share this monitor with clients with Bloomberg Terminals.  An added feature is that each market/ETF can be expanded with each component force ranked in the same way.  A couple other features include price deviation from intraday VWAP (useful for intraday reversals) and new 20 day highs/lows on right side.  Please inquire if you would like to be permissioned to use the PPO Monitor.  

A lot of 20 day lows yesterday (this was taken late yesterday).  


Today's action shows a lot of green but many sectors are under the VWAP's which could lead to later day weakness.  Shows supply is hitting the market

 
Bloomberg Automated Technical Pattern Recognition Screens


S&P 500 Members/Absolute Price Performance and Relative Price Performance vs S&P 500 and Sector ETF's.  ETF's vs Index Sectors.  Pair Trades.  Long side  is first symbol, short side is second symbol.  If you would like a PDF from Bloomberg with full details of how this is formulated, please email.  We will be doing a webinar in the coming weeks specifically on this system.

 
Currencies


US Dollar bullish sentiment is at 90% and it's likely going higher later today


US Dollar Index a new 52 week high today


Euro bullish sentiment is at 14%


Euro Spot holding here


"Seven Dolla Yuan" nearly here.  Hat tip to Tony Greer for that one.   

 
European Markets


Euro Stoxx 50 gave back.  Shocked face!


German DAX same


Euro bank remain terrible

 
Global Markets


Bloomberg World Index nearly with a Sequential Countdown but in a wave 3 isn't "THE LOW" but a shallow bounce wave 4 is ahead then wave 5 lower lows.  Good time to move somewhere without internet


EEM Emerging Markets ETF no bottom yet


India still has a little more work on the downside

 
Asian Markets


Nikkei holding 21,000


Hong Kong new lows

 
Crude Update


WTI Crude Futures bullish sentiment is at 64%.  This looks lower still

 
Gold Update


Gold bullish sentiment is at 31%


Gold slipping today on stronger USD


Gold Miners GDX ETF back to the 50 day

 
Bond Update


US 10 Year Yield should work lower


US 30 Year Yield holding here


TLT ETF here are two scenarios

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

Daily/Weekly DeMark upside/downside exhaustion signals (Sequential)  updated daily, Weekly signals on Monday's and monthly on the first day of the new month.  Price flips occur when a stock closes higher/lower than four previous closes and increases conviction of a price turn.

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.

S&P 500 Universe:
DAILY UPSIDE 13:   AON, WBA
DAILY DOWNSIDE 13:  AOS, CELG, DWDP, FBHS, HIG

DAILY UPSIDE WITH PRICE FLIP REVERSAL DOWN:    NONE
DAILY DOWNSIDE WITH PRICE FLIP REVERSAL UP:   BLK, CRRE, GWW, PNC

Updated: 10/29/18
WEEKLY UPSIDE 13:  CME
WEEKLY DOWNSIDE 13:   ALXN, AMG, BHF

Updated: 10/1/18
MONTHLY UPSIDE 13:    ADSK, ALL, CCI, CME, DE, DLR, DTE, ETN,  GLW, HPQ, INTU, PH, TPR, TXT, UPS, XLNX
MONTHLY DOWNSIDE 13:    NONE

Euro Stoxx 600 Universe:
DAILY UPSIDE 13:   NONE
DAILY DOWNSIDE 13:  AZM IM, EKTAB SS, PUB FP

DAILY UPSIDE WITH PRICE FLIP REVERSAL DOWN:    NONE
DAILY DOWNSIDE WITH PRICE FLIP REVERSAL UP:   AENA SM, DANSKE DC, HEXAB SS, INVEB SS, ITRK LN, JM SS, MAERSKB DC, OERL SW, PHNX LN, SMDS LN, STJ LN, STMN SW, SUBC NO

Updated: 10/29/18

WEEKLY UPSIDE 13:   AZN LN, DRX LN, TOP DC
WEEKLY DOWNSIDE 13:   BME SM, DANSKE DC, FPE3 GR, HSBA LN, KN, FP, PNL NA, SAN SM, VOE AV

Updated: 10/1/18
MONTHLY UPSIDE 13:     BNZL LN, EXPN LN, FPE3 GR, SBMO NA, SECUB SS, SWEDA SS
MONTHLY DOWNSIDE 13:  BAYN GR, HMB SS, TEF SM




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