Are We There Yet?

Despite yesterdays  572 point collapse of the Dow Jones Industrial Average, and 2% declines across the board for the main indices the market is nearly right where it was two weeks ago.


Had you went away two weeks ago and come back today, you would have thought the market was back to its boring days of yester-year.   Sideways, dull price action.  A Vix trading under 10.   No risk..... wrong!

Inside these two weeks, we've seen some tremendous volatility,  large price swings, and a lot more reasons to sell.   And yet a channel remains.  Is it ready to break?

The market collapse in February was blamed on volatility products.  In March it was inflation and interest rates.  Now the excuses you can add to that massive reasons to sell list since 2009  is Tariffs and China trade war.  Yet its the market collapse without an excuse that I would be a lot more concerned about.

We are nearing some record breaking action and still only a little over 25% of the way through the year.

Some great info is already out this weekend.  Some bearish and others decidedly market crash-ish.   Not too many bullish pieces.  Those are saved for record highs.

A great share here showing that action thus far this year has been abnormally abnormal.

And of course we have those 1929, 1987, 2018 chart comparisons still floating about.  Perhaps 2018 is truly the year of the bear.  Maybe that 1929, 1987 crash chart correlation will finally work this year.... And if so, we will gladly put our bear suits on.  Just like fighting the seemingly endless and relentless upside since 2009 was a terrible idea, fighting the law of gravity when asset prices collapse is also a terrible idea... unless you like losing money of course.

I've got my eyes on a host of stocks I think are headed from hero $200's back to $15 a share.  However we know in each instance this market has come to this point, (a nasty sell-off, negative headlines, bears touting the end of humanity) the market has reversed course sharply.   Let's save trading for the ultimate demise of the financial system as we know it until the price action dictates doing so.  We aren't there quite yet.  However now isn't a bad time to start making a list of those over-levered high growth stocks for when the bow does break and baby does fall.

Those of us who were lucky enough to survive the great Ebola epidemic of 2015 can attest to the fact that these sell-offs backed with excuses have been a buying opportunity.  The question that needs to be answered, is if this tariff trauma, and  trade war wadi, are indeed another named excuse to buy, is it time to buy yet?


I think this coming week we will get our answer.... finally.   And hey, let's make sure this answer comes with more 1%-2% intra-day swings.  We don't want the boring action coming back, we want a resolution of the recent action  to give us a short to medium term trading bias.

The VIX is telling us the days of large price swings are here to stay for a while.  Which isn't a bad thing.  And a high VIX doesn't imply a 1987 style market crash is on the horizon either, it just means participants are paying more for S&P500 options, something you would expect with the intra-day price swings we have seen recently.  All that market complacency talk is  gone.   And that's good.  Risk is back.  And that's good.  A market that goes up almost everyday isn't healthy.  The pull back we have seen from record highs, is very healthy.  A VIX that isn't at record lows, is not such a bad thing either.

Oh yeah.  Speaking of the VIX.  Happy Birthday!  25 years old!


Yes and that VIX.  Even with yesterdays action, the VIX is putting in lower highs and lower lows, although still stubbornly above that 20 level.  A VIX from 15-20 would be more welcome for the bulls.

The fact that we are not seeing a surging VIX despite the large pull backs, to me, means this is just a correction from record highs and not the end of the financial world as we know it... yet.  A move and hold under that 20 level will be an excellent signal that we have seen the market lows for now.

SMALL CAP Support - Momentum Shift?

As I mentioned two weeks ago, small caps have been a nice proxy for the market for price recoveries.    Again the election support/resistance line is in play as is that $150 level for $IWM.  Momentum has turned and in each case a robust rally has come with these momentum turns.  Will the 4th time be different?  Perhaps.  Maybe that 1987 crash will come Monday and every chart I post here can get thrown out the window.  However since the lows in 2009 these momentum turns have been great buy points.

$SPY Getting Some Momentum

The same holds true for the S&P500 ETF $SPY.   We had a momentum trigger last week, which came amid a serious pull back on Friday.  However each of these triggers has also seen prices rise afterwards.  And each trigger has seen momentum move decidedly higher in the days and weeks afterwards.  The last trigger was at the 2018 lows.  The $SPY embarked on a near $28 reversal from ~$252 to almost $280

10 Year Relief

Treasuries where the headline amid the first pull back in 2018.  From there market participants mused that a move over 3%  would signal an end to the stock market.

All that headline was missing was a graphic of Jason from Friday the 13th..... I took care of it.....


Ok much better.

And of course what has happened since?  Why the 10 year is on the mend.  All that talk about the 10 year has moved to a trade war.  Just like the talk from Ebola moved to the Sequester.  Remember that?  or the countless debt ceiling and government shutdown talk.

The 10 year will come back in play again.  They usually do.  Even Greece is still in the headlines 10 years later.  The excuses may change but the result remains the same.

Trade War Tantrum

I don't think the trade war headlines will signal the end of this bull market.  I think it's just another excuse to shake the tree.    I see $50 and  $100 billion being thrown around for these tariffs and then I think that Apple is going to spend upwards of $60 BILLION just on share buybacks this year.    That kind of puts it into perspective.  Corporations are buying back more stock than ever before, and now , after this recent market correction, they get to do it at a discount.  Those automated share buyback programs are so freaking excited right now.  Speaking of earnings, JP Morgan and few other banks are the headliners as earnings season kicks off.  What does that mean?

Share Buyback Blackout

Share buyback blackout

Share buyback blackout

Share buyback blackout

Share buyback blackout

Share buyback blackout

Say that five times as fast as you can.   Corporations are not allowed to buyback their stock as earnings approach.    If you've been following the market the last 5 years, corporations have become the biggest buyers of their own stock.  They look in the mirror each day and say "Yep, you are so pretty".  They don't care what Trump is Tweeting, or who is testing nuclear warheads... they just buy.  When those corporate share buyback machines are off  some of the biggest buyers in the market are gone!  With earnings season kicking off, the share buyback machines will get flipped back on, and those machines are going to be shopping at a 10-15-20% discounts.  It's like a computer in a graphic chip store.

What's the concern going forward?

The massive debt bubble fueled by an untested Global Central Bank liquidity experiment  will finally pop.  The pin being modestly higher interest rates.  That's all it will take to make debt become unserviceable for those corporations who took on piles of unnecessary debt, with many using that cheap debt to finance record share buybacks and payouts to shareholders.  But who can blame them, with the debt so cheap, even the ECB was buying junk bonds.  And at the end of the day, the executives and CEO's will still get paid.  They always do.

Interest Rates, Jobs, and Inflation

The good news is, if you are a bull, interest rates have not sprung higher yet, and the most recent market moves may even get the FED to put more rate hikes on hold.  Imagine that.  With an employment rate at 4.1% the FED still is walking a tight rope.  What happens if we head into another recession with the employment rate at 4%?

Low interest rates forever is the only answer to get out of this unscathed.  And while interest rates remain low, stocks will remain the place to be, assuming we don't see a sharp spike in inflation, which will probably mean higher interest rates......

Longer Term?

We had a similar pull back to the one we are seeing in 2018 during the beginning of  2016.  The bull market was dead.  Growth was done and then we witnessed one of those strongest two year rallies in history.  Strength rises out of weakness. Clearly the market is weak right now.  The morning rips aren't lasting long.  Price action tires in the afternoon.  Overnight futures action has been going lower not higher.  All signs of a market correcting.

Longer term, and after the recent trading action, my eyes are opening up more to the prospect of a market possibly moving lower in the months ahead.  I think this earnings season is going to be great.   Remember in 2009 earnings sucked.   You didn't want to buy terrible earnings.   And yet stocks rallied on the back of terrible earnings.  In 2018 we are going to see great earnings.  But what will the price action be.  If we start seeing great earnings reports getting sold, that will be one possible sign that this market has... dare I say it........ let's wait for this earnings season to kick off in earnest first.

However this is one possible scenario I see coming later this year:

If you remember the big sell off started with a tech head and shoulders: Right after Yellen was out at the FED

A head and shoulders top to rule them all you say?

Are we there yet?  No.   I don't think we are.  Of course it doesn't matter what I think, the price action of the market does all the talking.  We will be watching key support this week as earnings season kicks off, and  those share buyback machines finally get  kicked back on.

Have a great weekend and see you in the chat room!

Known to most as Uranium Pinto Beans, Jason has more than 15 years under his belt of trading stocks, options and currencies. His expertise primarily lies in chart analysis, and he has a strong eye for undervalued stock. Because he’s got the ability to identify great risk/reward trades he usually enjoys taking the path less traveled and reaping the benefits from the adventure.

He is a co-founder of Option Millionaires, and he is best known for his weekly webinars with Scott, as well as his high level training webinars and charts found in the forums.

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