Buy the breadth thrusts and FOMO stampede?

Preface: Explaining our market timing models
We maintain several market timing models, each with differing time horizons. The “Ultimate Market Timing Model” is a long-term market timing model based on the research outlined in our post, Building the ultimate market timing model. This model tends to generate only a handful of signals each decade.

The Trend Asset Allocation Model is an asset allocation model which applies trend following principles based on the inputs of global stock and commodity price. This model has a shorter time horizon and tends to turn over about 4-6 times a year. In essence, it seeks to answer the question, “Is the trend in the global economy expansion (bullish) or contraction (bearish)?”

My inner trader uses a trading model, which is a blend of price momentum (is the Trend Model becoming more bullish, or bearish?) and overbought/oversold extremes (don’t buy if the trend is overbought, and vice versa). Subscribers receive real-time alerts of model changes, and a hypothetical trading record of the those email alerts are updated weekly here. The hypothetical trading record of the trading model of the real-time alerts that began in March 2016 is shown below.
 

 

The latest signals of each model are as follows:

  • Ultimate market timing model: Sell equities
  • Trend Model signal: Neutral
  • Trading model: Neutral

Update schedule: I generally update model readings on my site on weekends and tweet mid-week observations at @humblestudent. Subscribers receive real-time alerts of trading model changes, and a hypothetical trading record of the those email alerts is shown here.

Subscribers can access the latest signal in real-time here.
 

Breadth thrusts are bullish

Last week, technical analyst Walter Deemer pointed out that the market had flashed a “breakaway momentum” buy signal. He did qualify the condition, “Supposed to get it near the beginning of a powerful move, not after a 42% advance (altho did have late signals Jul 12 2016 and Nov 20 1950). Definitely not its finest moment…”
 

 

As well, Deemer reported on Friday that the market achieved both a Whaley Breadth Thrust and a Whaley Volume Thrust.

Could this be the start of a new bull leg? On one hand, the market’s animal spirits are stirring, and breadth thrusts like Deemer’s breakaway momentum signal have historically been bullish. There are usually signals of a full-fledged Fear of Missing Out (FOMO) stampede, especially in light of the surprisingly strong May Jobs Report (see May Jobs Report: Back from furlough). If you only believe technical analysis is all that matters, then you should be bullish.

On the other hand, the market is trading at a stratospheric forward P/E of 22.4, and at a 2021 P/E of 19.5. To buy now means adopting the late 1990’s go-go mentality that earnings don’t matter, and all that matters is price momentum.

Careers were made and severely damaged during the dot-com era. Should traders throw caution to the wind?
 

Analyzing market psychology with factors

To answer that question, we use factor analysis to delve into market psychology. The dot-com bubble of the late 1990’s was characterized by the frenzy of the belief in a new era. Earnings didn’t matter, what mattered were eyeballs and addressable market for a product or service. Low quality stocks with negative earnings and cash flow outperformed high quality stocks with positive earnings and cash flows.

A similar effect can also be observed at the recessionary market bottoms. The shares of beaten down nearly dead zombie companies stage a furious rally as they act like out-of-the-money call options. I made a speculative call to buy the so-called Phoenix stocks a week before the ultimate bottom in March 2009 (see Phoenix rising?).
 

 

An analysis of current factor rotation reveals an anomalous story of market psychology. As a reminder, our primary tool is the Relative Rotation Graph (RRG). Relative Rotation Graphs, or RRG charts, are a way of depicting the changes in leadership of different groups, such as sectors, countries or regions, or market factors. The charts are organized into four quadrants. The typical group rotation pattern occurs in a clockwise fashion. Leading groups (top right) deteriorate to weakening groups (bottom right), which then rotates to lagging groups (bottom left), which changes to improving groups (top left), and finally completes the cycle by improving to leading groups (top right) again.
 

 

In light of the strong market rally, some factor returns were no surprises. Large cap growth, which were the FANG+ market leaders, is starting to falter. So was price momentum, which is also dominated by FANG+ names. Up and coming leadership consisted of high beta and small cap stocks, though the emerging leadership of small cap growth stocks is a minor surprise.

Here is the bigger surprise. Why are the high quality and shareholder yield factors performing so well if Phoenix stocks would normally outpace the market in a recessionary rebound?
 

 

We can see a similar set of circumstances at play in small caps. The bottom panel shows the now familiar small to large cap ratio (black line) indicating a small cap revival. The Russell 2000 (RUT) to S&P 600 (SML) is a quality, or junk, factor at play within the small cap universe. The S&P 600 has a much stricter profitability criteria for index inclusion compared to the Russell 2000, and the RUT/SML ratio therefore represents a small cap junk factor. So why were the small cap junk stocks tanking on a relative basis since the market broke out through its 61.8% retracement level since mid-May?
 

 

Here is a long-term perspective of the small cap junk, or low quality, factor. Low quality small caps unsurprisingly lagged as the market fell from the dot-com market top, and turned up coincidentally with the market at the 2002 bottom. Low quality bottomed ahead of the market bottom in 2008, and coincidentally with the market in 2016.
 

 

Recently, some anomalies have appeared. Low quality bottomed in 2018 just as the stock market topped out. We saw a second bottom in September 2019 just as the market began its melt-up. From a strictly technician’s perspective, the combination of the  latest parabolic rise of this factor from September 2019. along with the stock market could be interpreted as just a sustained bull market. The COVID-19 crash and subsequent recovery was therefore just a correction within a secular bull.

In that case, the S&P 500 point and figure upside target ranges from 3384-3779, depending on how the analyst sets the parameters.
 

 

A go-go melt-up ahead?

How realistic is the melt-up scenario?

The intermediate term bull case depends on accepting the thesis of a go-go mentality as manifested by the breakaway momentum signal. This breadth thrust is unusual inasmuch as it was not accompanied by low quality stock leadership that accompanied past recessionary equity market rebounds.

In addition, sentiment is becoming frothy. The normalized equity-only put/call ratio is at a crowded long extreme, which is contrarian bearish. Similar past reading, even during the dot-com bubble era, resolved themselves with short-term pullbacks. None of the bullish sentiment extremes coincided with breakaway momentum signals.
 

 

Helene Meisler wrote a RealMoney column analyzing the recent incidence of low put/call ratio extremes: She concluded:

In the big picture, out of these six readings, four of them were part of a topping process. One gave you an immediate plunge and nice rebound (2010) and one gave you a mild correction that then went on to rally for months (2009). It’s a matter of whether you think now is like August 2009, August 2010 or some other time.

Another sign of excessive speculation is the spike in the ratio of Nasdaq to S&P volume. There have been reports of Robinhood traders buying low priced Nasdaq stocks, which is a reason for the skew in this ratio.
 

 

Estimates of hedge fund positioning indicate that global macro and long/short hedge funds are roughly neutrally positioned in equities, and CTAs are in a crowded long. Fast money retail traders are stampeding into the market, encouraged by the zero-commission regime offered by online brokers. The analysis of the stock/bond ratio shows that it has returned to above its 52-week moving average, indicating that a portfolio which did little or nothing in reaction to the COVID-19 crash would have roughly the same asset allocation as pre-crash levels. Therefore there is no need to rebalance, and little demand for equities from long-term investors.
 

 

In conclusion, the breakaway momentum and breadth thrust bullish thesis just doesn’t feel right. It is difficult to reconcile a breadth thrust, which is built on the idea of a FOMO stampede by investors jumping on a bullish bandwagon, with the observation of the lack of low quality and zombie stock participation, and extreme bullish sentiment. A FOMO stampede depends on drawing in more traders who can pour money into the market, but the put/call ratio is signaling a bullish sentiment extreme. In that case, where are the buyers?

Consequently, it is difficult to buy into the breakaway momentum bull case. My base case scenario calls for a corrective period to begin in the next few weeks. How the market behaves after the correction is highly dependent on news flow, but at a forward P/E of 22.4, and a 2021 P/E of 19.5, the market is priced for perfection. The bulls better pray that nothing goes wrong.
 

The week ahead

Looking to the week ahead, it’s difficult to know how far the market’s animal spirits can carry stock prices. Don’t forget that, even before last Friday’s Jobs Report shocker that propelled the stock market higher, equities were advancing even as riots were erupting in American cities. The Fear and Greed Index closed Friday at 66, which is well below the giddy greed levels of 80 or more. Arguably, this rally has more legs.
 

 

On the other hand, the percentage of stocks above their 50 dma is topping and it’s starting to roll over. The last two times this happened, the market topped out soon after. The 14-day RSI is overbought, and coincided with short-term tops when the % of stocks above their 50 dma weakened. Should the market push higher, watch for negative divergences from the 5 and 14 RSI as warning signs.
 

 

The analysis of breadth also presents a mixed picture and some nagging doubts. While the A-D Line was strong and confirmed market strength, both NYSE and NASDAQ new highs weakened even as the market surged on Friday.
 

 

I outlined on Friday some of my reservations about the blowout Jobs Report (see May Jobs Report: Back from furlough). I would also like to add that we don’t know whether the job gains were artificially boosted by PPP incentives for employers to rehire workers while keeping them idle, which would be negative sign that demand isn’t there, or a genuine need to reopen businesses. As well, government jobs fell by -585K in May after declining by -963K in April. This is a worrisome trend, indicating strains on state and local government budgets, which will ultimately show up in the muni market.
 

 

In the short run, none of the Jobs Report details matter. The next major market moving event to watch for is the FOMC meeting on Wednesday. The market will be watching closely to see how the Fed reacts to the employment surprise. Trump economic advisor Larry Kudlow stated on Fox that the third quarter “could be the fastest-growing quarter in U.S. history.”, which would reduce the urgency of further fiscal stimulus. Will the Fed feel the same way?

Watch the USD, and bond yields for important clues. The USD Index is testing a key support zone, and the 10-year yield is testing a key resistance level.
 

 

My inner investor is neutrally positioned. While my bias is to call for weakness in the next few weeks and into Q3, I would guesstimate a 30% chance that the surge continues and the S&P 500 continues rising to test its old highs.

My inner trader is confused by the cross-currents. He does not see a trading edge, so he has stepped to the sidelines for now.

 

154 thoughts on “Buy the breadth thrusts and FOMO stampede?

  1. ‘Days of Rage’ definitely brought back the Sixties/Seventies. The dark underbelly of leftist politics. The Patty Hearst kidnapping/conversion to SLA fugitive happened during my time on the streets of SF.

    Free love (I know we’re all joking) – no such thing. Herpes/ chlamydia->later risk of ovarian cancer / HPV (now there’s a vaccine) failed to stop the trend – it was probably HIV that finally killed it off. If you ‘missed out’ you were lucky.

    I would agree that the ‘breakaway thesis’ doesn’t feel right. ‘There’s something happening here but we don’t know what it is, do we?’ – Bob Dylan paraphrased.

    1. So what was the conclusion of the book Days of Rage for those who did not live through those times?

  2. In the U.S., we are seeing the unwinding of a secular stock market bubble with all the day-to-day unpredictability that causes. There is an associated social and political upheaval that has a negative or worse future unfolding. This is a difficult, no impossible, investment playing field.

    A rational bull market is possibly starting where social common purpose is rising not splintering. That is Europe. On May 18, Germany and France proposed a 750 billion Euro Coronavirus Bond issue for forgivable loans to EU member countries. This is the first EU wide bond issue. Previously each country would borrow independently. This is an enormous leap forward in solidarity. The pandemic was threatening to split up the EU. It looks like, with this bond, unity will be strengthened.

    Every developed market in the world, had major upthrust starting on May 18 and the surge keeps coming and coming unlike anything my factor work has seen. Remember also, the Powell’s bullish 60 Minute interview was on Sunday, May 17. Japan has announced massive QE since then as well.

    When you rebase the investment world to a May 18 start, you see the normal rotation of an early bull market. Value and small cap are leading while growth and low volatility lag. NASDAQ is lagging badly. Europe is the solid leader region-wise and International-ex US is outperforming the U.S.

    Europe is reopening more thoughtfully from the virus. Stocks are cheap. No police cars are burning in the streets. No polarizing election is coming.

    Don’t get me wrong. I’d be shocked if May 18 was the start of a global bull market with Europe leading. All I can say is that my factor research indicates that is the case. I’ll go with it with protective guardrails and hope rather than expect great things.

    BTW as always, this is not financial advice for anyone since I don’t know your circumstances or risk profile.

    1. Ken-

      How do you position your accounts based on factor research?

      I think Cam did the right thing sticking with a reluctant but disciplined move to Neutral in the Trend Model in May.

      I used to read Paul Merriman’s articles when he wrote regularly for Marketwatch, and admired his La-Z-Boy approach to investing. I’ve tweaked his approach over the years to add a little market timing.

      (a) The ultimate La-Z-Boy portfolio comes down to one position – the total world stock market (ie, no bonds). It was formerly possible to invest using a single Vanguard fund->VTWSX. For some reason, it was discontinued about a year ago (VT, the corresponding ETF is still available). It’s possible to replicate the fund using a 50/50 combination of VTSAX (all US) + VTIAX (all ex-US). Narrowing things down to two funds simplifies the buy/sell decisions.

      (b) When it’s time take a portfolio approach (and I’ve been using Cam’s trend model as a guide), I move my investment accounts to a 70/30 mix of the total world stock market/ a flexible combination of what I think will outperform (in this case, a mix of small-caps/ industrials/ banks/ emerging markets/ energy).

      (c) With respect to the trading account – anything goes.

      (d) Not sure why I avoid bonds – I’ve probably never gotten over having missed out on buying 15% risk-free Treasurys in 1981. If/when interest rates begin to climb above 7% I’ll think about owning a few.

      1. How a person positions their portfolio is very personal to their circumstances, confidence and risk tolerance.

        If a person knew for sure that the general market would turn and shift down 20% in two months, what would they do?

        A buy and hold investor would do nothing.

        A relative return investor that stays fully invested and would shift to less risky stocks.

        An asset allocator would sell stocks and buy bonds to a greater or lessor degree.

        A hedge fund would short stocks or buy inverse ETFs to make big money.

        If one knew the market would go up 20% flip the various responses.

        So, even knowing exactly what would happen, people would buy or sell (position) differently.

    2. I had a thoughtful video conference with Ken, and find his factor work very interesting. His work shows the difficulty of reconciling this rally with any past patterns. The past might not be a good guide to the future. The future worries me.

      1. Understood. When nearly all investors and analysts are baffled, it makes sense to be worried.

        A couple of data points culled from this weekend’s reading and/or recent articles:

        (a) Ciovacco Capital points out that the 20-year annualized real rate of return (with dividends reinvested) on the SPX is currently only 3.49% (relative to >11% in 2000). That makes sense to me – we’ve experienced major bears in 2000, 2003, 2008-9 + a killer bear in emerging markets in 2015 + the drawdown in December 2018 and the -35% selloff this year. In other words, not exactly a ‘bad time’ to be invested.

        (b) In order to reap gains in the market, one needs to be IN the market.

        (c) The incredible power of compounding. I would need to search for the research article, but it comes down to this: [i] given a lump sum to invest, putting it all in immediately outperforms a dollar-cost average approach, and [ii] the outperformance holds even when the lump sum is invested at a ‘top,’ and one dollar-cost averages at ‘bottoms.’ That’s a mind-blower.

  3. There has been much discussion about the alphabetic nature of an eventual recovery: “V”, “U”, “L”, “I”, swoosh, etc. I don’t remember where I heard this, but my favorite letter is “k”. And it’s how I have been investing my own funds.
    A “k” recovery is a sharp down followed by a bifurcated recovery with accelerated divergence between winners and losers depending on operators with agile, resilient, digital and capital efficient business models.

    1. Nice way to boost returns, jyl087. A little more work than the La-Z-Boy approach 😉

    1. Perhaps at a higher level, we should just accept the fact that the market is doing it’s job – which is to fool most of the people most of the time.

    2. Reading further, I like Deppe’s ultimate response:

      ‘Putting it all together, uncertainty is the mother of volatility, both in markets and in the emotional aspect of investing. Don’t allow present-day uncertainty to trick your clients, or yourself, into thinking you’re certain about what lies ahead. Find peace in the brilliance of saying, “I don’t know”; focus all your efforts on what you can control; and help your clients stick to the process and plan they’ve entrusted you to execute.’

  4. Does anyone have insights into the current and possible future trajectory of the dollar? I think dollar weakness has driven some of this 3 week rally.

    1. I’m no FX expert by any means. My guess is that with the trillions in fiscal and monetary stimulus plus political unrest and the abdication of US leadership on the world stage, the dollar should weaken in the intermediate term. The antipathy that the world has towards the US is only growing as the share of global GDP that the US represents shrinks.

      1. Thanks! Dollar was strengthening until fairly recently. Like you I am not an FX expert but learning about how it fits in.

  5. A longer term perspective on real return cycles:
    https://twitter.com/saxena_puru/status/1269170347053445120?s=21

    Market goes up roughly 85% of the time.
    If not in the market on ten best up days, the return would be extremely poor.
    Technology has fundamentally changed the economy. If the pandemic had occurred twenty years ago, the economy would be in depression. So analogs to earlier episodes are interesting but not entirely applicable.
    DCF valuations focus on ten year forward earning forecasts. Risk free real rates are almost zero. Valuations are not out of line based on that.
    Yes, pullbacks are inevitable. Fear and Greed are primal factors.
    Within the context of overall asset allocation, risk is favored.

    1. Yes, thanks – that’s the chart Ciovacco was referencing. So the 20-yr annualized real rate of return was actually >13% (rather than 11%) in 2000. And of course, further declines this year could take us to the 0.4% range or lower.

      1. Out of this recession, there would be winners and losers. JYL087 has put it succinctly with the K model. The winners would likely include some existing leaders as well as new. The QUAL in the leading group is intuitively appealing. So are small/mid cap leaders (IWO).

    2. As I think Deppe pointed out, there is no easy trade at this point. Either endure the pain of patiently waiting for a significant decline that may not happen for some time (or at all) – or accept the pain of chasing prices that have already run up substantially. And that’s the market I know.

      1. Well said!

        I think in short-term the pain trade is still higher because the liquidity provided by the Fed and now the ECB and European governments as Ken pointed out. However, can you get out before the next downturn (if and when it comes)?

      1. Joyce, I used to like Lance Roberts analysis back when I though Zero Hedge might have a clue. But you are right – everything on ZH and from Roberts is bearish. I stopped even occasionally visiting ZH when they went all in supporting Russia and Putin. I made a couple negative remarks about Putin and was practically banned and beheaded!! That’s when I saw the light. LOL

  6. So, let us focus on what we know and ignore what we do not know.
    1. There are breadth thrusts we are seeing.
    2. Markets go up 85% of time (Puru Saxena and Urban Carmel). In fact Urban Carmel’s numbers are even higher than 85% from memory.
    3. Liz Ann Saunders: Markets do best when unemployment is screaming as though the world was in a severe depression.
    4. A 5-10% correction is par for the course (Cam). If you cannot stomach a garden variety 5-10 % correction, stay out of the market (Cam).
    5. FOMO, MOMO, Robinhoods, of this wold, Greed and Fear meters, Put to call ratios are all screaming to an extreme overbought market. So sure enough, we may have a shallow correction here. Let us pencil in 3020 on the S&P 500 (200 DMA; break out high after triple top circa October 2019).
    6. If ten year horizon is what we are looking at, why worry, based on #1 above? Not to sound flippant, but based on 6, a person reading this at age 25, may choose to have 100% capital in the market, at age 60, they may choose to have 25-40% in the market. At the age 60, a person may have had a disciplined approach, like Ravindra, and may have 7–10% of their net worth in stocks, and may decide to cut back to say 40%. Someone who may have not enjoyed such gains, may cut it back to 25%.
    Makes sense?

    1. To RxChen’s point: Paul Merriman’s tables were spot on. Even with a 4% withdrawl, money left in the stock market, for the longer term, will keep growing.
      His tables are worth checking out (Financial freedom forever).
      Yes, you may tweak Paul Merriman’s formula by using a combination of VTI and VT.

    2. To RxChen’s point: Paul Merriman’s tables were spot on. Even with a 4% withdrawl, money left in the stock market, for the longer term, will keep growing.
      His tables are worth checking out (Financial freedom forever).
      Yes, you may tweak Paul Merriman’s formula by using a combination of VTI and VT. It will work.

    3. It makes eminent sense, which is the problem. If it makes sense to us, then everyone else is thinking the same thing.

      Maybe it comes down to developing a comfort level with pain. The reason BTFD works so well (on a psychological basis) is that it alleviates the pain of being left behind while also addressing the pain of overpaying. I should probably say it gives one the delusion of buying at a bargain – the real bargin hunters were scooping up shares in March and April (a different kind of pain experience).

      So perhaps one should scale in over time, as opposed to going all in – despite the finding that
      going all in handily beats dollar-cost averaging (although I suspect the time intervals used in the studies were much longer than let’s say a few days or a few weeks).

      A 5% to 10% correction? Not so easy! While it’s happening it feels like -15% to -20% (and in many cases that’s exactly where it’s headed!). How do you know it stops at -10%? Maybe it progresses to -12%, stops you out, and reverses on a dime to finish the day @ -5%!

      One point I agree with is the need to be at least partly IN the market at all times – we have upside exposure when the market rallies (85%+ of the time). It’s also easier to ADD to positions than it is to OPEN positions.

      1. If you are in individual stocks, a 5-10% dip will feel like a 15-20% dip. I know from years of experience (Lol). More seriously, equal weighted indices compared to $&P 500 will prove this point.
        2. As long as you have current income, and do not need retirement funds for say ten years or longer, BTFD, at least with some part of your cash reserves.
        Nick Colas, has penciled in a 3450 here, 7% higher.
        Venerable investor, John Markman, has penciled in 11K on S&P 500 in ten years (13% per annum from 2200 bottom).
        Would we retest the lows? Yes, we could.
        3. There is a higher probability here of a retest of 200 DMA of 3020 than a retest of 2200. What is the caveat here? IF we get new lock downs, we retest 2200 (Ken). What is the inverses of this idea? We get a vaccine or a drug that works, and we get a uuuuuuge rally (Lol).
        4. Going all in: I have a better suggestion. With each 10% correction, put more money to work. At minus 50-60%, I stop. After -50-60% we may may be looking at the Great Depression. In my living years, I have only seen -80% on the NAZ (see, I am still young, and not quite a dinosaur, Lol; Was not quite born during the civil war!).

      2. “If it makes sense to us, then everyone else is thinking the same thing”.
        With due respect, I beg to differ. If it makes sense to us, then no one else is thinking the same thing!

          1. Right, well that’s a pretty good answer – at least in terms of (a) we may have already seen the lows for the year and (b) we should keep our eyes on at least a 5-yr horizon. But…what if -35% didn’t really do it and we need to actually hit that -39% on December 31?

          2. “Right, well that’s a pretty good answer – at least in terms of (a) we may have already seen the lows for the year and (b) we should keep our eyes on at least a 5-yr horizon. But…what if -35% didn’t really do it and we need to actually hit that -39% on December 31”?

            The statistical averages are just that, but the date is there. Study the 5 year, 10 year, 20 year block returns. These are regardless of -10, -20, -30, -40, -50 corrections.

    1. Well, the ES is only +15 now 🙂

      That’s the problem with permabears. How many of you read (more likely, used to read) John Hussman’s weekly market notes? Ex-Michigan business school professor, so of course they were meticulously researched, well-written, and full of articulate arguments. At the height of the GFC, which was the last time he got it right, he had $5 billion in AUM and was king of the fund world. I remember one guy posting something along the lines of ‘I’m leaving for a one-year sabbatical and not worried – all my funds will be managed by Hussman’s black box.’ Over the past ten years, his flagship fund has averaged MINUS -6.79% annually – and AUM has declined to $300 million (how much due to withdrawals versus performance hard to say). Hussman claims not to be a permabear, and in fact he was quite bullish prior to the GFC. So what happened? I don’t know.

    1. Right, I watched Ciovacco’s video last night and was temporarily heartened by the odds. Then as I got up and walked into the kitchen it occurred to me that despite his comments about chart patterns representing the ‘net aggregate behavior of all investors over time,’ and the observation that homo sapiens tend to react in somewhat predictable patterns to similar stimuli – well, few market moves in 2020 has fallen within the bounds of past ranges. Who’s to say it won’t blow away expectations and set a new record for Max Six-Month Drawdown following a Deemer 10-Day Breakaway Momentum Thrust in 2020?

      1. Then again, 2020 may set a new record for additional gains following a breakaway thrust.

  7. I’m pretty sure that Plan A for Monday will come down to taking a breather/ watch for clues from the sidelines. I’ve already fed the FOMO beast, and have enough skin in the game via the ‘Trend Model’ account.

    A distant Plan B might be reopening SPY ~313. That’s a long shot.

    1. Personally, I think the market is setting up a bull trap. It will keep futures green all night long – guaranteeing a sleepless night for under-invested longs and shorts. Trap springs in the first 30-45 minutes on an even higher gap up at the open. After running stops all the way up to let’s say SPY 322, it then grinds lower to close unchanged – thus guaranteeing another sleepless night for all.

      1. If/when we see SPY 313, it transitions into a bear trap. Ideally an undercut to 309 which then recovers quickly above 313.

        In any case, as of tonight that’s how I see it.

          1. No options. No futures – so I don’t trade the ES. I’ve never felt the need, and prefer to keep things simple.

            1. In the trading account(s) – I generally use ETFs with an occasional foray into stocks.

            2. In the 401(k) – I’m only allowed to trade funds. As you know, most companies offer a very limited selection. So I opted many years ago for what Fidelity refers to as a Brokerage Link account – which basically opens up the entire fund universe. This still leaves me restricted to trading end-of-day in most cases, which often leads to frustrating challenges. However, I’ve learned to live with it. I will occasionally use one of the Rydex funds if I need access to their 730 am est trading window.

      2. I also think a mini-second wave has already begun in California – no surprise based on the many photos/videos taken over the Memorial Day weekend. Probably true for many other states as well. May provide the catalyst needed for the dip traders are looking to buy. 322 sounds ‘high’ now. But 299 sounded high just two weeks ago, and as you point out 340 or even 360 are potential targets. I remain open to all possibilities, and will simply react to what’s in front of me each day.

        1. Thanks. So, when Caliphornia starts locking down, please let us know.
          A second wave without lockdown, is a yawn in my books.

          1. You are right about the yawn factor, DV. Unless and until the second wave starts getting everyones feet wet. If the wave is not controlled by a lock down, then probability is it will get larger until a lock down (local or wider) will have to be implented to get control back.

            Think nuclear reactor, boron rods and uncontrolled feedback loop. Runaway or controlled reaction.

            Many US states appear to be starting to go uncontrolled havong not brought the first wave under control yet.
            CA, TX, FL, GA, LA, IN – the list goes on.

            https://gisanddata.maps.arcgis.com/apps/opsdashboard/index.html#/bda7594740fd40299423467b48e9ecf6

            Select US then Admin1 tab and go down the states – a bit unsettling, I think.

        2. I always remind myself – my batting average is only 0.500. In addition, my takes can and will change in the blink of an eye – several times a day even. Always have an escape plan and be prepared to reverse positions on a dime. That sounds like a pretty good CYA 🙂 – just being honest!

  8. BA/ UAL/ XLE/ XLI/ XLF.

    Versus-> QQQ/ XLK.

    The rotation into banks and tanks continues.

  9. Hate to say it, but based on what I’m seeing right now – we’re not going back down anytime soon to allow easy boarding.

  10. As of today’s close, I’m positioning the trading account to match the investment accounts.

    Positioning will take the form of 78% VT (ie, the world market, replicated using a 50/50 mix of VTSAX/ VTIAX) + 5.5% allocations in EEM (emerging markets)/ XLF (banks)/ XLI (industrials)/ XLE (energy). I may rebalance from time to time.

    I have no interest in trying to time the decision, and I’m OK paying up (most likely ~1% overall) to open the positions today. After all, I skirted much of the damage on the way down, and also fully participated in last Friday’s rally.

    1. The market is likely to be resilient in the face of a second wave – in fact, I think it already expects a second wave and has given us its response.

      1. I agree with DV that we’ll have a second wave but no lockdown. That should have limited effect on the market.

        Need to keep an eye on the Fed. That’s all that matters for now.

    2. If you’re bullish but under-invested, it’s far from ‘too late.’ VT, for instance, is -6% below its ytd high and VXUS -15% below. XLF -15%, XLI -11%, XLE -18%.

  11. Cam – i’ve enjoyed your analysis for a few years now and respect your depth. However, i think it’s important to remember to not fight the tape. You’ve missed out on a 40% rally and continue to argue against it. Why not just hop on for the ride and set stop losses at 200 DMA?
    If John Hussman has taught me anything it’s that you can be brilliant and completely right in your analysis but the market does not care.

    1. I agree with you assessment. If Druckenmiller can be humbled by the market, then so can I.

      In the past, I have found the greatest trading success when my long/intermediate term view has lined up with my short term view. Today, the long term outlook is cloudy mostly on valuation concerns. The short-term outlook is a combination of strong tape, but a crowded sentiment reading.

      That’s why my inner investor is neutral, and my inner trader has stepped to the sidelines awaiting a better entry point.

      1. Cam-

        ‘but a crowded sentiment reading’

        That might be the piece that’s throwing us all off. Jason Goepfert keeps coming out with studies that show historically high sentiment readings – mainly among retail investors. I’m not sure that’s correct.

        (a) Are we all bullish here? I don’t think so. Just the opposite.
        (b) The guys at work? They’re all either complaining that they’re not long enough, or that they’ve missed the boat.

        Even institutional investors aren’t fully loaded. Wasn’t it just two weeks ago that Buffett, Tepper and Druckenmiller all pronounced the market overvalued? I don’t think the response from fund managers would have been to back up the truck.

        It’s now June 8, and I’m betting most funds are lagging the indexes by a substantial margin. They’re starting to worry about Q2 statements and what they plan to tell their clients. I think most of them are dumping Covid-19 plays and scooping up airlines/ cruise ships/ financials/ energy/ industrials. ‘We’re pleased to report a stellar quarter due to prescient rebalancing into tanks and banks.’ ‘So I own JPM and BAC?’ ‘That’s right!’ ‘What about XOM?’ ‘Ohhh yeah.’ ‘UAL?’ ‘Damn right!’ ‘Well ****in’ A son – keep it up!’

        1. I’m sort of leaning into thinking we are going to see a 5% or 10% correction that looks like the perfect place to hop aboard but then it is going to turn into a 20%, 30% or 40% correction now that we are on-borad.

          1. OK, Wally – I have you marked down as ‘non-bullish.’

            Question-> if the market pulls back -5% to -10%, it sounds as if you’ll continue to sit on the sidelines, anticipating further declines – what if the first pullback is a buying opp?

        2. As someone who’s sentiment is mostly off of price-action, I am bullish, but for all the dumb reasons retail is bullish.

          Price action does not show red bars – so therefore more green bars in the future.

          Its not widely understood why the stock market is rallying, until someone really figures it out – its going to keep rallying.

          DT is rigging the markets in a bid for re-election

          TINA. – interest rates are forecasted to be near 0 at end of year

          NDX 100 is holding above the 100% retracement …etc.. etc.

          All the usual jibberish and BS on twitter.

  12. A new announcement from the Fed:

    “The most significant thing in the Fed’s new announcement is that highly-levered entities are now effectively treated the same as, if not better than, lower-levered entities: Same 5% “skin-in-the-game” for lending banks, same repayment schedule, same interest rate, bigger loans.”

    https://twitter.com/R_Perli/status/1270078041721573378

  13. Fear and Greed. Yin-yang in investing. A challenge to keep both in balance.
    Investing is a long term game. Patience is hard but necessary. Luck plays a part, IMO.
    No one has been right all the time. WB apparently passed great opportunities. Sold Airlines almost at the bottom.
    Cam’s analysis forces you to think and research.

  14. I remain wary of these massive swings in the market. Ken is on record that until November 2020, stay the course and stay in the market, though that was before Covid.
    That said, I wonder if the elections are a big threat to the market. Along the road to the elections, we may have a new trade war with Europe and reimposition of tariffs on China. I am trying to see the black swans that could derail this euphoric market. Did I miss any other black swans?

      1. I suppose time will tell. Your point is well taken. Your counter opinion of a V shaped recovery (white swan event) could well be what we are peering into.

        1. To me, a second wave is hardly a “black swan”, as it’s completely predicted. The only question is how does policy respond? I doubt that re-lockdown is in the cards; just more money printing.
          Although there’s been pushback from the medical community, the WHO apparently came out with news that asymptomatic spread of CV is “rare”. If true (and I’m not sure I believe it), it would be a “white swan” game changer.

          1. The WHO comment was poorly worded. If you are infected, you can spread the virus before you show symptoms. That’s called pre-symptomatic. Pre-symptomatic spread is quite common.

            If you are infected and you don’t show symptoms, ever, then you are asymptomatic.

            The WHO didn’t explain those differences in definitions.

          2. Yes, you’re right, Cam. I was more using that as an example of a “white swan”. There are so many efforts ongoing in the epidemiology and pathology of this virus that the possibility of a “good news swan” can’t be ignored. Anything that allows humanity to turn down the (r) of this bug would be a welcome development.

    1. If the economy improves and the employment returns, the Fed may decide to pull some liquidity out of the market. That won’t be viewed positively by the market.

      Stephen Roach is getting concerned about the USD because of American exceptionalism melting away (in a Bloomberg opinion piece). Ken thinks the recent QE in Europe was noteworthy. The growth differentials between the US and the European may narrow. If those factors materialize, the USD and our stock market won’t fare well.

      I think the virus will return, not sure how big a deal it will be. I don’t expect a lock down again.

      Social unrest will likely continue for some more time, I think. I hope it doesn’t get out of hand.

    2. I would define a black swan as something entirely unpredictable. They just show up, and there’s nothing you can do about it.

  15. Up six days in a row. A pullback is absolutely needed, and is in fact (IMO) the most bullish move the market can make right now.

      1. LOL: the QQQ has already turned positive. Guess the “buy the dip” window has already closed 😉

    1. RX, it seems like the consensus is that about 25% of small businesses won’t be coming back. I see that quite a few are still closed around here in Northern Texas.

      1. Under a capitalist system, many of those probably should be shuttered. Out of the ashes, new businesses WILL rise. Unfortunately, politicians of all stripes have gone full socialist and decided to prop up companies (especially politically connected ones) that should probably be allowed go under.

        1. But that takes a long time. We are only 3 months into this recession and don’t know if there will be a second wave or what.

  16. I hope the NYSE has a moment of silence if I get murdered. Of course, I’m not a criminal so probably not.

    1. Cam would definitely dedicate an entire post as a memorial, Wally. It’s not all about the markets.

    2. that’s a disgusting comment hiding behind flippancy. If you don’t know what I mean, try posting that in social media.

        1. Wally,

          I agree with Martin. See the problem with your comment isn’t that you are trying to be funny about a person murdered in view of the world. The issue is that you are also adding, “I am not a criminal.” As if you are sure that Floyd was a criminal, or that it’s okay to kill criminals on the road in front of other people by chocking them. The cop being the Judge-Jury and the literal Executioner.

          The problem with so many people protesting is just that, People saying, even as you contend in Jest, that it’s okay, So what if he was killed. And that in itself is the issue.

          Sorry, I know Cam tries very hard in keeping this place Apolitical. But sometimes we all need to see things from a different prespective, and not be married to political ideologies or seeing things from those perspective only. Humanity is a prespective, regardless of Political affiliations. A Man was killed for the skin of his color. Never funny.

          1. I apologize to anyone here that I offended. I was just thinking the NYSE having a moment of silence was a bit over the top. The cops have been indicted and reforms are coming to police departments. But the riots and other deaths didn’t need to happen over this incident.

            BTW I don’t use social media but I did post the same comment on a Fox story about Floyd just to see if anyone objected. There were no negative comments and so far 7 likes.

            I’ll have nothing further to say about this.

        2. But, I also think I see your perspective, I.E. NYSE is just virtue signaling. What kind of concrete action are they going to take for any injustices? Just doing things for “looking like they care”.

        3. Wally,

          No harm and no foul buddy. I was just trying to show you a different prespective. I know, I have said things in Jest sometimes which can come of as insensitive, just showing how your comment can be misconstrued. We are all always learning. Love your constant contribution to this blog. Always looking to hear others.

    1. The estimates of CTA positions make no sense. I worked at a CTA and they use trend following models. If the market is rising, they should be buying.

      If someone is regressing CTA performance against the S&P 500 to estimate a beta, then they are capturing the CTA’s other positions (FX, fixed income, commodity prices) against the stock market. A negative beta doesn’t mean that the CTAs are shorting the market even as it rises. Their models simply don’t work that way.

      Other estimates (from prime broker reports) indicate that CTAs are in a crowded long.

      https://humblestudentofthemarkets.com/2020/06/03/trading-the-energizer-bunny-rally/

    1. sorry, here’s the headline so you know what you’re clicking on… “No new COVID-19 cases after infected Missouri hairstylists worked with over 140. How?”

  17. https://www.sfgate.com/news/editorspicks/article/George-Floyd-protests-coronavirus-spike-COVID-know-15325903.php

    “Pick any day of protest, and then look seven, eight, nine or 10 days after the protest,” he said. “I think the easiest thing to look at is case counts, which is not a perfect metric since you have to factor in increased testing. We’re finding more asymptomatic cases now, so it’s not exactly comparable to March and April, when most detected cases were symptomatic. Now in May and June, we’re catching more asymptomatic cases so it can be hard to interpret since we’re finding more infections.”

    Rutherford believes that up to 60% of infections are either asymptomatic or so mild an individual does not think to get tested — which means that increased testing will yield more confirmed cases if you expand testing to be available to anyone regardless of symptoms. Because of enhanced testing capabilities, Rutherford believes hospitalizations and percent positivity of tests are the best metrics to use when measuring spread.

    However, even when looking at confirmed case counts, Rutherford is encouraged by what he sees in Minnesota, which is where the protests started on the week of May 25. It has been almost a full two weeks since the protests began, and the number of new confirmed cases statewide is actually trending downwards.

    “Minnesota (is) falling steadily; there’s one slight uptick on June 1 but that may be because of weekend reporting lags,” he said. “But it’s all trending down. If you look back seven to 10 days, you would expect to be seeing a significant jump by now.”

    1. Infections rates are going to vary state to state.

      http://rt.live shows 13 states with a r0 value above 1. An r0 value above one means the infection rate is increasing.

      1. Right. That means 37 states where the rate is flat or decreasing – and of the 13 with r)>1, in the majority of cases (at least, to my eye) there’s a downward trend.

        Actually, one reason I linked the above article in particular is because it quotes George Rutherford, the no-nonsense UCSF epidemiologist who has thus far been rather pessimistic – now he’s ‘encouraged.’

    1. I think Millenials will change the game (to some extent they already have) in ways we can’t foresee. Did brokerages really see no-commission trading take the industry by storm? Fifty years ago Boomers changed the world – and I’m betting Millenials are about to do the same. I don’t really understand why people are dismissing Robinhood investors as naive neophytes who have no clue what they’re doing. Maybe they do – and we’re the ones who don’t have a clue what’s transpiring right in front of us…

  18. Meant to say ‘did they really see zero-commission trades coming?’ No, they were absolutely blindsided! What would Sun Tzu say?

    1. The pandemic was a black swan. Perhaps we’re looking at another (even larger) black swan in the form of this rally – you know, which of the two events blindsided investors the most? I don’t think it was the selloff – I think it’s the rally!

      1. As long as traders/ investors insist the rally is unsustainable and that ‘it won’t end well-‘ the indexes will keep climbing. How much more confirmation do they need? Obviously the Naz at an all-time high isn’t good enough.

      2. I am not meaning to dis the RH crowd – but what can you say constructively about the scaling up (and down) of near bankrupt entitiies?

        What one can say is that at the moment the traditional “technical” indicators may not mean as much as we would like them to.

        I agree about the blindingness of the rally. Missed it, dammit.

        Oh well, onward and upward.

        1. ‘what can you say constructively about the scaling up (and down) of near bankrupt entities?’

          What can we say about Boomers driving near bankrupt dot-com companies to parabolic heights in 1998-2000?

          Schwab 1998 = Robinhood 2020. History rhymes, and we may see the 2020-21 version of 1999-2000.

          1. In other words, markets just be getting off the ground floor and you haven’t missed much.

        2. Well, you can say that the dot coms declared bankruptcy after the run up, not before. One likes to think that the current SP500, DJIA and Naz at least have known value (we think), even if the prices are inflated. Dot coms we didn’t know til later (ish).

          1. Wrong choice of words. Should have replaced
            ‘near bankrupt’ with ‘unprofitable.’ In some cases, outright fraudulent.

    1. I’ve seen a couple articles recently on marketwatch warning of drop, RX.

      Something I watch are 5 minute comparison charts of the high volatility fund and the semi conductor ETFs to the S&P. The latter often will take off before the S&P index. The high volatility ETF has been less reliable but useful. However, lately, the semi index has been making totally unreliable moves and moves opposite to the high volatility. It’s almost like someone is manipulating it to screw up those of us watching it.

      1. I hear you, Wally.

        From a short-term perspective, I agree that taking the other side of what appears to be a volatile rebalance trade makes sense. But then I need to step back and ask why I’ve just opted for a longer time horizon. I think it comes down to the following:

        (a) There is no precedent for trading the aftermath of this current black swan. In other words, no one really knows what they’re doing. We’ve heard a lot of fund managers basically say just that. Under that scenario, I prefer the default option; and the default option that has always worked over long(er) period of time is to remain invested.

        (b) The one emotion that kills most portfolios is panic. Drawdowns are part and parcel of investing. I accept that, and view most pullbacks/ declines as the necessary fuel for further gains.

        (c) I’m not sure why we’ve rallied this far, and I’m having a hard time anticipating the next move. What Ciovacco refers to the as the ‘net aggregate opinion’ of billions of investors is a lot smarter than I am. So I’m going to remain long and let the market do its thing.

        1. Let me change (b) above and say that ‘the one emotion that kills most portfolios is FEAR.’

        2. So true, RX. My gut tells me that the stimulus and the Fed are the drivers of the market ever since the March low. They have everyone confused about what is going on and that’s because this rally is mostly artificial. That doesn’t mean it won’t keep going. Even for years, maybe.

          1. Try eliminating the adjective ‘artificial’ from your market assessments. There’s nothing artificial about price movements – they’re very real. The balance in your retirement account isn’t artificial, despite the many times you may have decided prices were out of whack with ‘fair value.’

            Don’t let the thought that this rally is ‘artificial’ keep you from participating in the markets.

        3. By the way, there will ALWAYS be articles on Marketwatch warning of a drop. They appear at market bottoms, market tops, and everywhere in between. Apart from attracting page views, their only purpose is to instill fear- which induces investors looking for an excuse to sell to then transfer their shares to stronger hands waiting for a pullback.

        4. The fact that we saw ‘panic-like selling’ this morning on a modest -200-point drop in the DJIA? That’s about as good as it gets!

          If the market is a train, it’s analogous to seeing riders jump off ahead of a slight dip in elevation simply because it’s started to rain.

          1. I took an FX trading course some time ago. The guy giving it was an expeienced trader. He had very few rules for trading:
            Technicals:
            Peaks and valleys
            Columns
            Pitchforks

            News:
            Never trade on big news days (NFP, etc.)

            He said he used to be big on technicals, but got tired of every time something happened that the technicals had not predicted / forecast / indicated, the tech crowd go looking for another (new) technical that would indicate the “unexpected” event. He also noted that if you look at too many technicals, it’s easy to get into analysis paralysis. This one says this, that one says that ARGHHH!!! what to do?

            Use the KISS priciple? I think so.

          2. When you reach the point where you have too many rules – you need a black box to execute the trades. That may be how algo traders do it.

          3. Aren’t all algorithms based on unittime? 5 minute chart, 4hr chart, etc. There’s the HF crowd who are on the nanosecond, but that’s not really algo trading. This FX guy only used the 15 minute chart for trade decisions and played a 3 to 1 risk reward with short stops.

  19. Looking for an inflection point. Today the Fed’s statement will be announced at 2pm and then Powell will give a briefing. This market has been riding on Fed liquidity and much will be expected by the market for strong continuance.

    1. Let’s see if the 1130 press conference provides enough fuel to close SPY above Monday’s high of 323.41…

      1. Fed projects NO rate increases through 2022. They have been somewhat reluctant to say that but the fact that they came right out with it moved the market up to yesterday’s high were it is bouncing so far.

      2. It’s funny how often it all comes down to the same old trading rules, summarized so well by the late Marty Zweig.

        1. Don’t fight the tape. The trend is your friend.
        2. Don’t fight the Fed.
        3. We’re all at the mercy of the markets. If we fail to understand that (ie, insist that we know more than the markets) – it’s going to be a tough slog.
        4. If we fail to act on partial knowledge – then we will never act.

  20. Nasdaq, or at least FAANG, starting to feel like 2000 again. It’s not pet.com overvalued, but I think irrational exuberant for sure!

  21. The government is stepping up its efforts to fund vaccine studies and production for at least three of five frontrunners — something that Dr. Anthony Fauci told Yahoo Finance will be worth its weight in gold in the long run.

    The timeline Fauci outlined includes starting the third and final phase of clinical trials in July, with results expected early in the fall. That may result in a vaccine ready for use — first for the most vulnerable of patients, and frontline and essential workers— by the end of the calendar year.
    https://finance.yahoo.com/news/fauci-spedup-coronavirus-vaccine-production-is-costly-but-worth-it-182224187.html?.tsrc=rss

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