If there is anything I have learned over the past 34 years, when everyone calls for a meltdown crash and depression, it tends not to happen. Don’t get me wrong; there are always some extreme bears and extreme bulls. It sells. Call it simply greed and fear – the engines of the markets.
But here is how it really works; by Friday, the talking heads were talking gloom and doom. If everyone is doom and gloom, they have already raised cash. Typically that means that the selling is over, or nearly over, at least for the short-term. A good way to measure this is to follow the VIX or volatility index. It gives you an instant snapshot of fear.
Friday, the volatility index was not nearly as low as it was on the dip we experienced on Tuesday. Simultaneously, the S&P 500 index’s price went lower as traders ran the stops under Tuesday’s lows. This was one among several divergences indicating that a short-term low likely was in. Another indication that Friday could mark a short-term low momentum. Few stocks fell below their 50-day moving averages.
Having gone into Friday’s low with 100% cash, we stuck our toe back in the water. If the futures are any indication, we made a good decision. As we get more confirmation, we may deploy more cash.
Is there a major peak coming? Absolutely. How soon? That depends on where we are on the roadmap. The most important roadmap for our purposes is the 18-month cycle. That cycle splits into two nine-month cycles. In turn, that cycle splits into two 40-week cycles. In turn, that cycle splits into two 20-week cycles. Got that? More math than you need early in the morning.
The related concept to understand is that I have listed the “nominal” cycle lengths. Over time, the lengths vary, not unlike your EKG – to visualize the concept. Nevertheless, using the nominal lengths and a baseball analogy, we are in the ninth inning of the 18-month cycle. The cycle’s real-time length has been averaging about 16-months from trough to trough over the past 10 years. Since the last cycle low was last March, adding 16-months guestimates the next low to occur in July.
Distilling the math of the nominal lengths, there are four 20-week cycles in the 18-month cycle. We are bottoming the third 20-week cycle now and heading into the last 20-week cycle of the larger 18-month loop. Given that it is the last 20-week cycle in the series, it tends to peak a bit earlier than its preceding cousins. In my best estimates, that peak is still a few weeks to a month ahead of us. As well, what we are currently experiencing may be the beginning stages of that process.
Could this last phase have already peaked? Sure, it is possible, but I deal in probabilities, not possibilities. Interest rates moved into a surprisingly quick acceleration last week. If rates continue sustainably past that 1.5% inflection point on the 10-year Treasury Note, the nominal 20-week could peak earlier than normal. That is why we use stops. For now, our stop is two ticks under all the lows from Friday on all four of our positions. If I raise the stops later today, I will publish the change.
We need to give the XLE and XLF a bit more room as they just started a pullback. I would put those stops two dollars below last Friday’s lows on the ETFs. We are trying to scale into these positions as they pull back to the 21-day EMA. We started scaling early because they may not pull back as much as we like.
We have the February jobs report and factory reports out on Friday. Perhaps that will give us more insight. However, the data this week promises more volatility. Based on weekly options expiration on Friday, the S&P 500 projects a 104 point range on either side of last week’s close at 3811.15. So the index could go as low as 3707 or as high as 3915, based on the market maker option pricing.
So interest rates are the wild card here. They went almost vertical last week, typically a sign of short-term exhaustion. Rates will be a big focus on my radar.
I have an end-of-month video coming out later today. It details the important issues in our windshield. It is published for the Founders Group, but I will share it with everyone as we are late in the 18-month cycle and expect a significant correction associated with the mark-down phase.
Today’s Plan
As most of you know, I don’t typically day trade on Mondays for various reasons. Nevertheless, if you decide to do so, here are the key issues.
Value (where 70% of the volume occurs for the day) was unchanged on Friday from Thursday, and while there was some price action lower, it did not fill the large gap. This, coupled with the break higher out of the diamond pattern overnight, may give buyers the edge in today’s session. I would focus on where value develops this morning and how far down into the value area we trade. The top of the value area is about 3847, and the bottom is about 3814.
The Globex high and Friday’s high are close to each other, around 3858. Given the context, assume short-covering (force buying) will accelerate if the levels are cleared. Then you would need to monitor for continuation.
While early indications point to lower odds of downside activity today, anything can happen. I am noting that the Globex low is at 3812.50 is close to the Value Area Low at 3814.50. Acceptance below the two levels puts the gap from last week back into play.