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InvestmentHouse - Embracing the Bear Market (Weekend Newsletter)

https://news.investmenthouse.com/2018/12/the-daily-part-1-of-2-12-22-18.html

- Early bounce is sold as Fed jawboning cannot overcome Navarro's China trade comments.
- Government shutdown adds some downside spice, but not a major market obstacle.
- VIX finally starting to breakout on the selling, the last piece of the oversold puzzle.
- Market could flush out now that VIX is breaking higher, but a holiday week may not provide the needed action.
- Embracing the bear market.

Stocks started higher, DJ30 rallied almost 400 points. The 'Dow-type' stocks were rallying, e.g. PG, AEP, MCD. Kind of back to the stocks that rallied and trended higher as NASDAQ struggled.

New York Fed president Williams appeared on CNBC and stated the Fed was not committed to the rate hikes for 2019, clarifying what Powell muddied up in his post-rate hike press conference. The market liked what he said and jumped, pushing the market higher.

After that interview stocks tested. Then more stories hit regarding a government shutdown today as Trump was not giving on the wall, wanting McConnell to dump the Senate rule requiring a filibuster proof number to even bring a bill to the floor for a vote. So, McConnell started calling senators back in. Collins of Maine complained that this was 'ruining her life.' Then QUIT! That is your job. It can happen. If you don't want to do it, then just resign. I am so tired of our elected officials, there to supposedly serve the electorate, complaining when the job calls. This kind of stuff happens. It is in your job description. You accept having your 'life ruined' by having to spend part of a holiday in DC. You asked for that. The rest of us voted you in to do that. Do not ruin our lives because you cannot sip some eggnog with cousin Eddie while he wears his black dickey under a think cream colored sweater.

Okay, Fed worries were somewhat calmed down but a government shutdown caused some worries. Then the real trouble started. Anew.

Mr. Navarro opined it would be difficult to construct a deal with China in 90 days because China would have to affect a 'full trade overhaul' in where it does not depend on stealing IP from the US, Japan, Europe.

The market tanked then tanked some more. It closed on the lows with DJ30 swinging 808 points high to close. NASDAQ 254 points high to close. Sure it was expiration and volatility runs hand in hand with it, but there was obviously more here, and that triumvirate of economy/Fed, trade, and government shutdown added more weight to the current selloff.

SP500 -50.84, -2.06%
NASDAQ -195.42, -2.99%
DJ30 -414.23, -1.81%
SP400 -2.01%
RUTX -2.56%
SOX -1.47%
NASDAQ 100 -3.15%

VOLUME: NYSE +134%, NASDAQ +39%. Massive surges on the triple witch. The fast moves downside also contribute to huge expiration volume as positions are rolled, shuffled, etc.

ADVANCE/DECLINE: NYSE -3.5:1, NASDAQ -3.8:1. Not blowout on the day, but it is the days of very negative breadth that tell the tale of a weak market.

NEW LOWS: Down, but even so, still very impressive. NYSE 1058, NASDAQ 1101. Again, NASDAQ new lows topped NYSE, something that rarely happens. These are screaming oversold.


It was a lot more of the same. Volume surged thanks to expiration. Internals are still extreme. Stocks are another day, another 2+% lower in price. Impressive selling. The economy was turned from a slowdown in an uptrend to a likely recession given the market leading indicator. The Fed is flabbergasted by it; 'but everything is so strong' they say. Yes, it is strong until it is not. If you only look at the economic numbers you are late to the game. There are leading indicators. Those are SCREAMING not that there is trouble ahead (the WERE screaming that), but that we ARE IN trouble. Because the Fed looks at the wrong indicators by virtue of its incorrect economic theories, they missed it. Again. Just as they did before that, and before that, and before that -- do I need to go on? Of course not.

Stocks that jumped early gave the move back. Stocks that have performed poorly were up modestly but then imploded. AMZN blew out the bottom of its range as did GOOG. They are just examples; many tech stocks were torched. Interestingly, the same stronger tech stocks held up decently, e.g. TEAM, AVGO. That is consolation: a couple of strong stocks did not get wasted. Okay, about 50 out of 8,000 held up. High praise indeed.

What are the market people saying? Well, you have heard my side for quite some time, about how we were in a slowdown many, many months back and that the Fed had better tread carefully. Of course it did not. Art Cashin today opined that the Fed won't hike again on this hiking campaign and that in 2019 there is an "outside chance" the Fed actually cuts rates. Not crazy, not stupid, just historically based. The markets are saying the Fed has caused a recession. The 2018 index patterns show that; they did not have to complete the top, but they started building it with the Fed hiking, and when the Fed did what the Fed always does, they completed the topping patterns. The markets are leading indicators of economic activity. The small and midcaps have led the way lower, big time, and they are economic indicators. The Fed has hiked into an inverted yield curve. Historically that all adds up to recession, necessitating the Fed cut rates. Thus, Cashin has a very good basis for his comments.

I said it before and it is clear: the Fed should have been hiking 5 or more years ago. Instead, Bernanke was gutless and Yellen was just dumb -- her questions to Greenspan when he was the Fed chair indicate she is a cookbook, stencil using, paint by numbers economic fraud, also with no guts. Then Powell comes in, a person with some guts, and he does what he felt needed to be done years ago. Problem is, he did it just as all other Fed chairs do: he hiked late in the cycle and right into recession. It is like those movies that try to change the past but no matter what they do, the events lead back to what was supposed to happen. As if the Fed is supposed to cause recessions. If aliens landed and studied US economic history they would conclude the Fed was established IN ORDER TO CAUSE PERIODIC RECESSIONS when the US citizens actually started making progress in creating their own wealth.


THE MARKET

The stock indices continued blowing lower to new selloff lows. All are now below the 2018 lows, giving up all of the gains that were logged through early fall. SP400 and RUTX gave up all of 2017 as well. A massive selloff as the tops consummate and break sharply lower. Bear market is here and the question is when will the periodic bounces set up and deliver those upside rips that set up the next downside slide.

Friday the market started decently with a move to provide one of those rips, but great moves by PEP, PG, AEP, MCD, AVGO were undermined by the negative news. The downside is still too ugly to provide that rip despite some extreme internals.

Sentiment is weak and VIX hit 30.1 on the close, moving past all second half 2018 highs. It is starting to make a break higher. Once the moves get going, they build momentum rapidly and then hit a peak rapidly as in early 2018. Thus, it is a good thing to see VIX break above 30 on the close, but it is not there yet as measured by its history. Just as bears have been EXTREMELY slow in rising, VIX has held itself in check. If both spike, then the market is set to put in those bear market rips.

They are both on the verge of making the moves as noted above. They have not made the moves, however, and this market does not appear to have enough upside impetus without a major clearing of near term sellers. Despite the selling to this point, there are still enough in the market to sell into rallies. Typically when conditions are this oversold a bounce ensues and a more standard procession downside takes place, i.e. selloffs then sharp bounces, followed by another leg lower, etc. Basically the opposite of the uptrend that was in place for so long. At this juncture, however, the market is still on that initial selloff phase from the break lower in the tops and, as noted, not enough have sold out yet to allow a relief move.

CHARTS

There is not much to add to the discussion on them: all are breaking to lower lows for the selloff, the year. Three weeks in a very sharp dive has VIX starting to generate some upside breakout action, something VIX has simply refused to show. As all other sentiment indicators and internals are at extremes, that is likely the last piece to the puzzle of a significant relief bounce to test the breakdown from the yearlong tops. A selloff after Christmas likely is the last part of this particular dive lower that yields to some sort of relief move.

Note NDX (NASDAQ 100). It is at some support form 2017 consolidation highs and lows. It is in a ripe position to rebound.

To view, click on the following links:

http://investmenthouse1.com/ihmedia/f/charts/sp500.jpg
http://investmenthouse1.com/ihmedia/f/charts/NASDAQ.jpg
http://investmenthouse1.com/ihmedia/f/charts/DJ30.jpg
http://investmenthouse1.com/ihmedia/f/charts/RUTX.jpg
http://investmenthouse1.com/ihmedia/f/charts/SP400.jpg
http://investmenthouse1.com/ihmedia/f/charts/SOX.jpg
http://investmenthouse1.com/ihmedia/f/charts/nasdaq100.jpg
http://investmenthouse1.com/ihmedia/f/charts/VIX.jpg


LEADERSHIP:

While the internals and sentiment are in line and VIX looks as if it will reach a level to trigger a relief bounce with some additional selling, the critical element of any sustainable rally is missing: leaders.

Friday showed some life in the more defensive areas such as personal products (PG) and utilities (AEP), but early surges in these stocks soured as Navarro's trade comments hit. It appeared the market was setting up its 'Powell-Fed Plan' by going into the defensive sectors, then one of the other shoes bothering the market hit and that scuttled those moves.

Some FAANG looked to be in position to possibly attempt a bounce (AMZN, GOOG, NFLX), but that was blown up Friday as they all knifed lower.

Individual software, tech, and semiconductors are hanging in (e.g. TEAM, AVGO), but they are likely on borrowed time given the market's propensity for tearing down nearly all groups at this juncture.

Precious metals are not bad but they are not just screaming as buys across the board. A couple to consider based upon their patterns are AUY and SA.

That said, we are making money on our downside plays, e.g. CRM, FFIV, NVDA, ULTA, SLAB, Z and we are banking some of that gain -- sharp downside can turn to sharp upside quite rapidly. Once the market bounces in relief, likely this coming week, we will enter more when the bounce hits resistance. The next leg down will likely be ugly yet again, but very nice for the downside plays as seen to end the past week.


MARKET STATS

DJ30
Stats: -414.23 points (-1.81%) to close at 22445.37

Nasdaq
Stats: -195.41 points (-2.99%) to close at 6332.99
Volume: 4.56B (+39.02%)

Up Volume: 654.61M (+47.42M)
Down Volume: 3.82B (+1.19B)

A/D and Hi/Lo: Decliners led 3.78 to 1
Previous Session: Decliners led 3.41 to 1

New Highs: 8 (+1)
New Lows: 1101 (-52)

S&P
Stats: -50.80 points (-2.06%) to close at 2416.62
NYSE Volume: 3.244B (+133.53%)

Up Volume: 422.386M (+176.071M)
Down Volume: 2.796B (+1.668B)

A/D and Hi/Lo: Decliners led 3.47 to 1
Previous Session: Decliners led 4.22 to 1

New Highs: 2 (-2)
New Lows: 1058 (-212)


SENTIMENT

VIX: 30.11; +1.73. As noted, VIX closed at a new closing high since February, and though it is nowhere near as rambunctious as early year, ironically its closing high is not that far off the February high (37.32). Typically, the intraday spikes are the really high readings as they are often immediately followed by some sort of recovery such as an intraday reversal.

CHART: http://investmenthouse1.com/ihmedia/f/charts/VIX.jpg


VXN: 33.87; +2.87
VXO: 32.11; +2.06

Put/Call Ratio (CBOE): 1.43; -0.39. Logged many consecutive closes above 1.0 and is one of the indicators in position for a market bounce.

Bulls and Bears:

Falling and rebounding to where they were four weeks back. Starting to converge. This coming week's numbers should show a bull dive and bear jump, converging the two to levels not seen since 2016.

Bulls: 39.3 versus 45.5

Bears: 21.4 versus 20.4

Theory: When everyone is bullish and has put all their capital to work, where does the ammunition to drive the market come from? There is always new money to start a new year. After that is used will more money be coming? That is the question.




Bulls: 39.3 versus 45.4
45.4 versus 46.7 versus 38.3 versus 39.6 versus 42.9 versus 42.5 versus 50.5 versus 51.9 versus 56.3 versus 61.8 versus 60.6 versus 59.0 versus 57.7 versus 60.1 versus 59.6 versus 57.7 versus 57.3 versus 54.9 versus 54.5 versus 54.9 versus 55.3 versus 52.4 versus 47.1 versus 47.6 versus 52.0 versus 55.5 versus 52.9 versus 50.0 versus 49.1 versus 46.6 versus 43.1 versus 43.6 versus 48.0 versus 43.6 versus 42.2 versus 49.5 versus 55.5 versus 54.9 versus 48.6 versus 48.1 versus 48.5 versus 41.9 versus 54.4 versus 66.00

Bears: 21.4 versus 20.4
20.4 versus 21.50 versus 20.6 versus 19.8 versus 19.0 versus 19.8 versus 19.8 versus 19.0 versus 18.3 versus 18.5 versus 18.6 versus 18.3 versus 18.1 versus 18.3 versus 18.1 versus 18.3 versus 18.3 versus 18.6 versus 18.8 versus 18.6 versus 18.5 versus 18.5 versus 18.6 versus 18.4 versus 17.6 versus 17.8 versus 17.7 versus 19.2 versus 19.2 versus 19.4 versus 19.4 versus 20.6 versus 20.8 versus 19.6 versus 19.8 versus 18.6 versus 17.5 versus 16.8 versus 15.7 versus 15.5 versus 14.4 versus 14.6 versus 14.4 versus 15.5 versus 12.6 versus 12.8 versus 12.7 versus 13.5 versus 15.2 versus 15.1 versus 15.2 versus 15.1 versus 15.1 versus 15.4 versus 15.4 versus 14.4 versus 14.4 versus 15.1 versus 15.2 versus 15.1 versus 17.0 versus 17.1 versus 19.0 versus 20.2


OTHER MARKETS

Bonds: 2.788% versus 2.803%. Ten year yields fell as bonds were purchased as a bit of a safe haven trade. Bonds have surged off the lower low set in early September, with TLT now just below the July and August highs. This despite the Fed tightening. Clearly the market believes the Fed does not have a handle on the selling.

Historical: the last sub-2% rate was in November 2016 (1.867%). 2.803%. versus 2.762% versus 2.821% versus 2.855% versus 2.895% versus 2.913% versus 2.908% versus 2.884% versus 2.863% versus 2.854% versus 2.892% versus 2.915% versus 2.979% versus 2.993% versus 3.032% versus 3.061% versus 3.058% versus 3.059% versus 3.048% versus 3.065% versus 3.074% versus 3.056% versus 3.065% versus 3.116% versus 3.127% versus 3.147% versus 3.186% versus 3.239% versus 3.228% versus 3.222% versus 3.201% versus 3.22% versus 3.146%


EUR/USD: 1.13708 versus 1.1452. After bouncing on the week, Friday the euro flopped back to the 50 day SMA. Broke out over its 2 month lateral range, but that breakout might get reversed.

Historical: 1.13828 versus 1.13755 versus 1.13533 versus 1.13049 versus 1.13604 versus 1.1376 versus 1.13244 versus 1.13657 versus 1.1404 versus 1.1376 versus 1.13970 versus 1.13360 versus 1.13199 versus 1.13934 versus 1.13682 versus 1.12973 versus 1.13325 versus 1.13380 versus 1.13829 versus 1.13818 versus 1.14484 versus 1.14172 versus 1.13308 versus 1.13264 versus 1.13124 versus 1.12348 versus 1.13475 versus 1.1364 versus 1.14329 versus 1.14228 versus 1.14090 versus 1.13881 versus 1.14019 versus 1.13394 versus 1.13455 versus 1.13760 versus 1.14042 versus 1.13757 versus 1.3972 versus 1.14682 versus 1.14626 versus 1.1538


USD/JPY: 111.223 versus 111.21. Checked up the selling Friday by not selling harder. Did not recover the 200 day SMA broken Thursday in that plunge.

Historical: Last below 109 in June 2018: 111.21 versus 112.521 versus 112.477 versus 112.653 versus 113.382 versus 113.634 versus 113.634 versus 113.385 versus 113.022 versus 112.66 versus 112.71 versus 112.813 versus 113.581 versus 113.474 versus 113.402 versus 113.559 versus 113.781 versus 113.510 versus 112.972 versus 113.007 versus 113.077 versus 112.617 versus 112.831 versus 113.585 versus 113.576.


Oil: 45.59, -0.29. A less and less influential OPEC, even OPEC-Plus (with Russia included) cannot withstand world economic slowdown. Oil broke the key $50/bbl level Tuesday.


Gold: 1258.10, -9.80. Down, but holding at the 200 day SMA after that sharp Thursday break above that resistance. Likely just a quick test.


MONDAY AND CHRISTMAS WEEK.

Monday is a half session closing at 1:00ET. Tuesday the market is closed. The rest of the week is usual hours, but after the Friday volume surge on expiration, many will be gone for the week. That doesn't mean anything other than there will be less people around to sell stocks.

Okay, a bit tongue in cheek, but the obvious bias is downside. The thing I don't like is that the lack of people at work on Wall Street could mean the market doesn't show that additional selling that spikes VIX and sets up the relief move. If few are there to sell then buy, will that defer the climactic selling, at least climactic in terms of delivering a bounce? As noted, that is a concern.

Well, we will play it out as if they will be there because these kind of selling events usually follow a script, more or less. More selling early week and we take much of our downside off the table, particularly if it is the kind of selling seen to end the week.

Then we play for a bounce. Likely AEP, PG -- both sporting good patterns even after coming back from big gains early Friday -- are add-to's as they bounce off support. Perhaps some of the gold noted earlier (SA, AUY), but I am not planning on putting much of my money there. I would prefer the other names mentioned, and when they are done with a bounce, then we will see what stocks are set up best for the next leg lower.

That is the bear market mentality. Bear market; you now start thinking in terms of downside as predominant, upside as something to play on really, really good setups and for not very long. As noted, we have several downside plays working well (duh). Have banked some gain on them and will bank more on any significant selling this coming week, anticipating that if the selling gets bad enough it will spike VIX, the last holdout signal, and spark a bear market rebound. Then we play as noted above.

Have a great weekend and Christmas! We will be here, or at least I will, Monday, but the report will simply be market stats, updated play tables, and a note on anything significant occurring -- if anything significant occurs.