Mid-week market update: The stock market has seen a remarkable recovery. After a -2.7% wipeout on Friday, the S&P 500, the equal-weighted S&P 500, and the Russell 2000 all recovered back above their rising trend lines.
Are the bulls back in town?
The Bull Case
Here is the bull case for a V-shaped recovery. Two of the five components of my Bottom Spotting Model triggered on Friday. Historically, two or more simultaneous buy signals have marked durable bottoms in the past.
In addition, the Zweig Breadth Thrust Indicator fell into oversold territory on Friday. In the past, such episodes have also marked short-term bottoms, or positive risk/reward points of entry into stocks. The market has 10 trading days for the ZBT Indicator to reach an overbought condition for a ZBT buy signal. These signals are extremely rare, and I am not holding my breath waiting for one.
Reasons for Skepticism
On the other hand, it’s difficult to believe that a market can suffer a sudden large drop from an all-time high and continue to roar upward while ignoring the technical damage that was been done. Seth Golden pointed out that the percentage of stocks falling below the 30 level on the 14-day RSI reached a critical level on Friday. Such instances have shown that “the threshold has not proven a floor for oversold conditions, but signals more downside”.
SentimenTrader issued a similar warning.
The Verdict
Here is my verdict. It’s difficult to reconcile the bull and bear cases. The VVIX, or the volatility of the VIX Index, has risen above 100. Historically, market anxiety doesn’t subside and it would be premature to sound the all-clear before VVIX calms down again.
The thing I am suspecting about melt ups, is similar to black holes…normal rules do not apply. So we might get that ZBT which Cam you will have a hard time believing (I don’t blame you). The last ZBT you also were cautious about. Caution is good. Nobody went broke missing out on FOMO.
But a monthly chart of $COMPQ, shows what happened in the Dotcom bust. We had LTCM in Sept 98, is the April Tariff Man storm analogous? About 6 months later things really took off and the QQQ literally doubled in about 1 year.
Tariff spats abound, but the last thing China wants is to see its grip on rare earths loosen. Push hard enough and somebody else gets their own rare earths. Has anyone learned that using the USD as a weapon can backfire? That using rare earths as a weapon can do the same?
Maybe this is all a poker match or game of chicken. Trump wants to make a deal that he can claim is a good deal, I doubt he wants to say “I couldn’t make a deal” just doesn’t fit.
So what happens if we get some kind of deal…we could get that ZBT and the melt up continues in all of it’s insanity.
So I did a June 26 spread on the SPY 840/845…cost me 11 cents for a max 5 bucks, and a 835/845 for 23 cents , max 10 bucks….so it’s like nickel slots. If we get that insane melt up could be nice, if nothing happens I lose 34 bucks.
What is gold telling us? Can they tokenize holdings and use the tokens for non USD trade? Or is it just looking at massive printing when the inevitable undeniable recession hits and buying in advance? Sentiment matters too. Gold has fulfilled the target from the massive cup and handle that started in 2011…could still go higher of course.