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LT wave for January 2019

Posted by Danny on January 2, 2019

Our LT wave had a good month. Expected strength in the first week did not pan out and hardly kept the market up, leading into the expected weak period which took the market significantly lower. The rebound in the final week came right on target. This is the LT wave for January:

ltwaveJan2019

The month is projected to start with a weak period until the 5th. And after that we enter a period of cross-currents which are difficult to read because the quicker blue line starts moving countercyclical to the slower yellow smoothed average line. Normally they move more or less in tandem, but that’s not the case this month.

What will take priority? I don’t know. Maybe it will be a sideways month, with the market looking for its next major direction, testing both the upside and the downside alternatively. Going on the blue line we see projected peaks on the 8th and the 27th. Bottom values come on the 5th, the 16th and the 30th. I am curious what will come of it.

Posted in Market Commentary | Tagged: | 1 Comment »

Outlook for Dec 31

Posted by Danny on December 29, 2018

Outlook for world markets with my brief comments for next week.

Click the “Expand” button (bottom right) to watch in full screen mode.

If you have any trouble to see the presentation below, then click here.

For shorter term trading and more optimal entries there are daily reversal levels, which are available by monthly subscription. It comes as a daily html file covering over 3000 stocks and ETF. Instructions for use are included. Give it a try.

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How to trade after huge up days

Posted by Danny on December 28, 2018

The S&P 500 surged about 5% on Wednesday and had another huge intraday move to the upside yesterday. What does it mean? Bullish investors see it as the start of a new move higher, and bearish commentators are out in full force to declare that this doesn’t happen in a healthy market. Who is right?

My interest was picked by this chart posted on Twitter:

We could say that 4.8% is a rather arbitrary value, but using a 4% or 5% threshold wouldn’t change much to this study. The author concludes that there is no predictive value in it, which is true in the sense that market has demonstrated nearly equal chances of being up or down 1 week, 1 month or 1 year after such a huge up day.

But the thing that picked my interest is the average 14.8% gain 1 year after a monster up day. That’s almost twice the historical average 8% annual gain for the S&P 500. Even if we leave out the 1930s (which dominate the results in that table) and consider the post WW2 examples, we see the tendency for strong 1 year gains holds up very well. Out of the 18 >4.8% up days since WW2 the market was up 16 times a year later. In fact it was up double digit % gains a stunning 14 times. You could have done a lot worse than buying after a 4.8% up day in S&P 500.

To understand why that is the case I took a look at the charts for those monster up days. Here is May 27, 1970:

sp1970

Stocks climbed 5% on this day and it was the very first day of a 30 month bull market. A major buying opportunity.

October 1987:

sp1987

Stocks climbed 5.3% on October 20 and it was the exact intraday low of the 1987 crash. A few more huge up days followed suit. Bull market continued for another 12 years, so it was a historic buying opportunity.

September 8, 1998:

sp1998

Stocks climbed 5.1%. In this case the correction low was revisited a month after the huge up day, setting a double bottom, but then the bull market powered on. It was a good buying opportunity.

January 3, 2001:

sp2001

Stocks climbed 5% on this day. This one came in the midst of an ongoing bear market and was clearly not a buying opportunity.

July 2002:

sp2002

Stocks climbed 5.7% on the 24th, followed by another huge up day a week later. The market did retest the lows a few months later, setting a double bottom, and a 5 year bull market followed. Again the huge up day was a major long term buying opportunity.
Note how strong up days also followed right after the October 2002 and March 2003 lows. Those days saw gains of 3-4%, not making the 4.8% threshold used for this study, but still quite remarkable anyway.

2008-09:

sp2008

The big bear market of 2008 gave us a string of huge up days. The market surged 5.3% on September 30, 2008. But in this case it only recovered about half of the previous day’s 8.8% loss, which would have made the surge more suspect. A series of huge up days followed from October to December. All were early, but would have been profitable buy signals for a >1 year hold.
On March 10, 2009 the market surged 6.4%, followed by another huge up day a few weeks later. This surge marked the start of a multi-year bull market. One of the best buying opportunities ever.

The law of small numbers applies. But it doesn’t look like huge up days are showing an unhealthy market, on the contrary. They most commonly appear in the late stages of a bear market and in the very early stages of a bull market advance. More often than not it’s a sign of health.
More than a few times those 5% surges have come just days after a major low. There are a few obvious reasons for such days. It’s probably a combination of bargain hunting and short covering that causes a buying panic as soon as selling dries up after a significant decline. The big surge traps shorts, who keep hoping for further declines. If that doesn’t happen those shorts become forced buyers that fuel the early stage bull market.

How to trade it? The logical conclusion is to buy on the heels of those huge up days. How do you know you are not buying the first of a series of huge up days in an ongoing bear market like 2008 or 1930? Well, you don’t. There is no way to tell. But a few things can help.
1) A really healthy big surge day usually closes above the highs of the previous day. If the surge breaks out to a multi-day high it is even better.
2) Use a stop loss somewhere below the most recent major low. It’s ok for the market to retest the lows. But a sustained close below the low set just before that huge up day puts major question marks behind the bullish thesis.
3) You want to see follow through. A proper surge day that marks the start of a major advance will be followed by other good up days. As bears are forced to close short positions it will create more +2% days. If the market fails to advance with closes above the high set on your big surge day then something is wrong.

Good luck.

Posted in Market Commentary | Tagged: | 1 Comment »

Outlook for Dec 24

Posted by Danny on December 22, 2018

Outlook for world markets with my brief comments for next week.

Click the “Expand” button (bottom right) to watch in full screen mode.

If you have any trouble to see the presentation below, then click here.

For shorter term trading and more optimal entries there are daily reversal levels, which are available by monthly subscription. It comes as a daily html file covering over 3000 stocks and ETF. Instructions for use are included. Give it a try.

Posted in Market Commentary | Tagged: , , | Leave a Comment »

Outlook for Dec 17

Posted by Danny on December 15, 2018

Outlook for world markets with my brief comments for next week.

Click the “Expand” button (bottom right) to watch in full screen mode.

If you have any trouble to see the presentation below, then click here.

For shorter term trading and more optimal entries there are daily reversal levels, which are available by monthly subscription. It comes as a daily html file covering over 3000 stocks and ETF. Instructions for use are included. Give it a try.

Posted in Market Commentary | Tagged: , , | Leave a Comment »

Outlook for Dec 10

Posted by Danny on December 9, 2018

Outlook for world markets with my brief comments for next week.

Click the “Expand” button (bottom right) to watch in full screen mode.

If you have any trouble to see the presentation below, then click here.

For shorter term trading and more optimal entries there are daily reversal levels, which are available by monthly subscription. It comes as a daily html file covering over 3000 stocks and ETF. Instructions for use are included. Give it a try.

Posted in Market Commentary | Tagged: , , | Leave a Comment »

LT wave for December

Posted by Danny on December 3, 2018

The LT wave was close to perfect for November. S&P 500 peaked on the 8th and bottomed on the 23rd, very close to the high and low indicated in the LT wave chart.
For December the wave projects a very similar pattern:

ltwaveDec2018

Strength in the first week (with a peak value on the 6th) is again followed by mid-month weakness that ends at an important low on the 21st. The final week of the year shows stronger again, but that will probably come in thin holiday trading so I wouldn’t bet the bank on it.
Don’t get carried away by LT wave doing very well for a month or two. There will always be months when it is doing a lukewarm job, if not worse.
Good luck.

Posted in Market Commentary | Tagged: | 15 Comments »

Outlook for Dec 3

Posted by Danny on December 2, 2018

Outlook for world markets with my brief comments for next week.

Click the “Expand” button (bottom right) to watch in full screen mode.

If you have any trouble to see the presentation below, then click here.

For shorter term trading and more optimal entries there are daily reversal levels, which are available by monthly subscription. It comes as a daily html file covering over 3000 stocks and ETF. Instructions for use are included. Give it a try.

Posted in Market Commentary | Tagged: , , | Leave a Comment »

Outlook for Nov 26

Posted by Danny on November 25, 2018

Outlook for world markets with my brief comments for next week.

Click the “Expand” button (bottom right) to watch in full screen mode.

If you have any trouble to see the presentation below, then click here.

For shorter term trading and more optimal entries there are daily reversal levels, which are available by monthly subscription. It comes as a daily html file covering over 3000 stocks and ETF. Instructions for use are included. Give it a try.

Posted in Market Commentary | Tagged: , , | 2 Comments »

Putting the QE toothpaste back in the tube

Posted by Danny on November 19, 2018

Last year I wrote an article on what to look for when the Fed unwinds its QE program: Quantitative squeezing – what you need to know.
Since the start of QT (quantitative tightening) the stock market is more or less flat and long term bonds are down about 10% yoy.

Let’s have a look at how the unwind is progressing and detect possible implications for investors.

The Fed’s balance sheet remains the main chart to watch (https://fred.stlouisfed.org/series/WALCL):

Fed_assets

From $4.46T a year ago the balance sheet is down to $4.14T, or an unwind of $320 billion. At this rate it would take about 10 years to get to a balance sheet that is back in line with the levels prior to 2009. As I pointed out last year, that’s not going to happen. Trying to put all the QE toothpaste back into the tube would create an economic crisis that is worse than the one they claim to have “solved” with their QE program.

I pointed to excess reserves held by commercial banks as the prime candidate to pay for the unwind. Here is the current situation (https://fred.stlouisfed.org/series/EXCSRESNS#):

excess

From $2.2T excess reserves a year ago the banks are down to $1.75T. That’s a reduction of $450 billion. It does look like those excess reserves are indeed picking up the QT tab. But the interesting thing to note is that a $320 billion QE unwind came with a $450 billion reduction in excess reserves. A reduction at this rate could continue for another 3 years, bringing the Fed balance sheet to around $3T, but that would still be three times higher than it was before the crisis. Essentially, the excess reserves of banks are back down to late 2011 levels already, with the Fed’s balance sheet still $1.3T above its late 2011 levels. This is a strong indication that only a partial unwind of QE will be possible.

I also keep an eye on commercial banks’ holdings of government paper (https://fred.stlouisfed.org/series/USGSEC#0):

banks_treas

There is only a small rise from $2.49T a year ago to $2.56T now, an increase of $70 billion. This means banks are not showing much appetite for the debt paper that the Fed is unwinding, which is what I expected.
How about foreign buyers? Official foreign holdings of US treasuries were around $6.3T a year ago and are down to $6.2T now. Largest holders China and Japan have reduced their holdings and Russia has sold almost all its US treasuries. Predictably, those foreign buyers are also refusing to become QT bagholders: http://ticdata.treasury.gov/Publish/mfh.txt.

This weak demand by major participants is why longer term treasury bond prices are down 10% over the year:

tlt

How about cash on the sidelines held by stock investors? The data are now here: http://www.finra.org/investors/margin-statistics
Stock investors have about $340 billion in cash and $650 billion in margin debt. Not much change. With those numbers we can’t expect stock owners to play much of a role in a $3T QE unwind. If anything they may panic alongside bond holders at some point, because margin interest rates go up together with rising Fed funds rates.

The question becomes: how much more QT can be done before it causes global bond market stress and starts choking the economy? We may be reaching that point already. If Europe and Japan start their own QT it could become even more interesting.

My guess is that QT in the US will be stopped (paused) as soon as excess reserves at commercial banks approach zero. It may be stopped even before that point. Stock and bond markets could show a very positive response to any such announcement. That’s going to be a wild card for investors in the year(s) to come. At some point it will be concluded that it is more desirable to freeze central bank’s balance sheets at their elevated post-2010 levels. Europe, Japan and China may never start their own QT (or only do a small symbolic reduction) because their economy remains too weak to take it.

A possible side-effect of doing too much QT would be an unexpectedly strong US dollar because it makes dollars more scarce.

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