Big Change In Bull-Bear Spread

In challenging times when trying to interpret the market's message I love to check in with respected analysts whose opinion and body of work I value, as you know, Tom McClellan is always near the top of my list. His Friday's post on investor sentiment when at extremes was interesting, and worthy of a repost.

February 09, 2018

The latest data from Investors Intelligence showed a huge change this week.  Bulls dropped from 66% to 54.4%, and bears rose from 12.6% to 15.5%.  That means the spread between bulls and bears dropped by 14.5 percentage points, which is the biggest one-week drop since July 2011.  Drops of more than 6 percentage points usually mark washout bottoms for prices. 

That July 2011 drop in the bull-bear came as prices crashed down 19%, following the sudden cutoff of QE2.  And there was a similar 14.5 percentage point drop in May 2010, the week of the Flash Crash which occurred after the sudden end of QE1.  The Fed learned from its mistakes, and it wound down QE3 much more slowly.

But all of that extra money was left within the banking system, and investors got used to the plentiful liquidity and low volatility that the excess liquidity brought.  So now, when the Fed is starting to drain the bathtub, the smallest little drop in the Fed’s balance sheet has brought an outsized drop in stock prices, and a corresponding sudden drop in analyst bullishness.

The $10 billion per month in reduction of Federal Reserve holdings of T-Bonds and mortgage backed securities (MBS) which was in effect in Q4 of 2017 has now accelerated to a target of $20 billion a month for Q1 of 2018.  But they did the month’s allotted drop all in one week at the end of January, setting up the illiquidity situation that the stock market is going through now. 

The Investors Intelligence sentiment data is very sensitive to price movements.  So it is natural that a big drop like what we have seen would bring a big drop in the bull-bear spread.

The change from the prior week takes the bull-bear spread down from above the upper 50-1 Bollinger Band to below the lower one.  It is still not a “low” spread reading, meaning that the value is not as low as what we have seen at important price lows over the past 2 years.  But it is a drop well below the lower band, which is where price lows are found.  And the big one-week change suggests that the down move we have seen in stock prices is exhaustive, meriting a rebound

Does Diversification Matter?

When markets are rising diversification can help investors from putting too much money in the wrong places. On the flip side, performance will always be just average and those who are able, can outperform.

But, unfortunately when it matters most, as markets decline in earnest, diversification fails. The chart below shows how correlated an in lock step the global markets are when in a steep decline. If you are looking for the solution to manage portfolio risk, diversification does little at the times it is needed most. As such, you better have a plan.

January 2018 Charts on the Move Video

January - in like a lion and out like a lamb. Volatility is back what's it mean for the markets in the short term? This and a look at parabolic blowoffs in this months Charts on the Move video which can be seen here

https://youtu.be/U8bZ_fex0rQ

Lightening II

Back on November 20 of last year I wrote about the possibility of lightening striking twice on ASND stock. The stock was setting up to break out of a cup and handle pattern right after reaching its upside target out of an inverse head and shoulders.  The cup and handle pattern pointed to a 15% upside move. Remember this chart?

As you can see in the chart below, It took 20 days of price grinding sideways before the buyers eventually overwhelmed the sellers and price climbed higher. Much higher. In fact it blew right past the pattern’s target and peaked ~48% above the close on the date of my blog post. 

As you would expect after such a big move in a short period of time and being massively overbought, the stock will need to digest its gains before we are likely to get a clue on what may lay ahead for ASND. The good new is that biotech is on a roll and I expect, once done consolidating, ASND may be ripe for another rip higher. If you took this trade, congratulations. Consider selling ½ and letting the rest run.

Uh Oh

It should be no surprise to anyone bond yields are rising. What may be of surprise is that we MAY have just turned the corner and entering our first bond bear market in more than 30+ years.  As you can see in the 5-year weekly chart of 10-year US Treasury bond yields that we just broke out from a rounded base which target projects up to 2013’s high water mark, labeled T1.

While this chart may not look as if it has formed a bearish reversal (bear market), turning to the much longer-term view of Treasury 10-year rates we see they have broken and closed above their downtrend line for the first time in 30+ years. Breaks of downtrends are interesting but carry less weighting without higher highs and higher lows being formed. Without them, its more than likely to turn out to be just a counter-trend bounce.

While this is definitely a HUGE yellow caution flag, my interpretation is that until they break and hold above (not just rise up to) 2013’s peak, I would not be overly concerned. Why? Because virtually everyone is aware (the FED has been telling us they will be raising rates for eons) and the smart money is positioned accordingly. Markets move most when most involved are surprised, which is not the case here. As such, I fully expect the market to do exactly what you would expect it would do when everyone knows what is coming … the exact opposite of what is expected. So, until this reversal question is finally resolved, because of bonds effect on other investments, there are potential major changes on the horizon. I don’t need to say it but we are in interesting times and investors need to keep a close watch on what unfolds with intermediate and longer-term bonds in the weeks and months ahead.