The bears’ chance to make a stand

Posted by Cam Hui -

Mid-week market update: As the S&P 500 pushed to another fresh high, more cracks were appearing in the market internals, indicating that it may be time for the rally to take a pause. Negative divergences, such as the 5-day RSI and a trend of falling NYSE new 52-week highs, are warning signs for the near-term outlook.
 

 

While the intermediate-term trend is still up, the bears have a chance to make a stand here, at least in the short run.

 

 

Frothy sentiment

Sentiment indicators continue to exhibit signs of froth. The Investors Intelligence survey shows that both %bulls and the bull-bear spread haven’t seen these levels since the melt-up top of early 2018.

 

 

Option sentiment is equally exuberant. The 10 day moving average of the equity put/call ratio has fallen to levels where the market has experienced difficulty advancing in the last year.

 

 

As well, call option volumes are still exploding. The Robinhood retail traders don’t seem to have lost their enthusiasm for single-stock call options.

 

The powder is set. The bears just need an event to light the fuse.

 

 

NFP report the bearish trigger?

The trigger might be the November Non-Farm Payroll report due Friday morning. An abundance of evidence is appearing that the report is likely to miss in a big way.

 

The first sign is the ADP private market sector jobs report, which came in at 307K, compared to an expected 410K. However, ADP has shown itself to be a noisy predictor and has experienced wide variations with the actual NFP figure.

 

The current consensus forecast for November NFP is a gain of 480K jobs. The latest ADP figure  is pointing to a weak but positive NFP print, but there is evidence that we could see an actual negative jobs number. The biggest headwind is a seasonal gain of retail jobs that are unlikely to appear, and won’t be offset by online worker hiring. As well, over 90K in temporary census workers will be lost in government jobs, and state and local employment will continue to come under pressure in the absence of help from the federal government.

 

High-frequency data from outfits like Homebase, Kronos and UI claims point to negative growth in November employment.

 

 

The Census Bureau’s Household Pulse Survey is also calling for a negative NFP print for November.

 

 

In the absence of a positive catalyst such as another vaccine breakthrough or fiscal stimulus package, my best-case scenario is a weak but positive NFP headline report. There is a significant chance that we could see negative job growth for November, though the gains shown by ADP report has mitigated that risk.

 

My inner trader has taken a short position in response to weak technical internals, frothy sentiment, and the downside risk to Friday’s NFP report. At a minimum, traders should not be long risk going into the report.

 

By contrast, my inner investor remains bullishly positioned. The intermediate-term outlook remains bullish, and he would regard any weakness as an opportunity to deploy more cash.

 

Disclosure: Long SPXU

 

19 thoughts on “The bears’ chance to make a stand”

  1. Nothing to do with today’s update but I must share this article with everyone entitled ‘Making Sense of Sky-High Stock Prices’ By Robert Shiller

    https://www.project-syndicate.org/commentary/making-sense-of-soaring-stock-prices-by-robert-j-shiller-et-al-2020-11

    In my opinion he is the best. His books on Irrational Exuberance at the peaks of 2000 and 2007 where incredibly timed. Now he is saying there is RATIONAL Exuberance when you calculate his Shiller PE with real interest rates. That makes markets cheap today.

    I sent this article to David Rosenberg who keeps quoting the high valuation of the market because of the Shiller PE and how that keeps him bearish. Well Shiller just skewered that idea by adjusting his Shiller PE by interest rates.

    Cam is longer term bullish and this gives a solid reason why things could turn out well.

    1. The interesting thing about the CAPE is that it’s based on a ten-year average, which is somewhat arbitrary. Why not 12 years, for instance – in which case the P/E numbers from 2009 continue to be relevant.

      In any case, glad to see Shiller continues to refine his valuation indicator.

      1. You make a good point. Ten years was chosen as an arbitrary number and we know the results of this research. One could change it to 12 years as you say, and see the results.

  4. I have the sense that many traders are sitting out the Thursday session – preparing game plans for Friday.

    I’m sticking with the small-cap names in play. CRON/ NIO/ FCEL/ REZI/ SNAP. SNAP has been the big winner so far.

  5. The great thing about growth stocks is that they never go down, and if they do, they go up the next day.

  6. Meanwhile Ross Gerber is talking NIO vs TSLA with a 12-year old live on youtube. We have an entire generation of investors who are telling themselves they are never going to miss out on the next TSLA.

    1. covered a short and went long per Cam’s rec.

      Doubled up on XLE here from 36. Crossing my fingers for a santa rally.

  11. Bad news = good news
    Stimulus odds this month just went up

    Mitch responds to “his people” when it comes to stimulus. As the 1% start getting worried, Mitch will come around. That is the only thing that will prompt him to action, and I think that is starting to happen.

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