Marketview: Two-way Extremes

• Posted by DynamicHedge
• on February 8th, 2014

About that Sentiment

The crowd sentiment that was “expecting stock turmoil to pass quickly” got slapped hard by Mr. Market on Monday. Focused squarely on soft reports in manufacturing and housing, the ISM Mfg Index report tipped the market over and kicked off major sell programs that pushed the Dow down over -2%. It was ugly.

Tuesday the North American and Asian sessions wobbled out of sync when the Nikkei crashed and the S&P 500 opened up on a gap higher. Big tip off in hindsight – longs were flushed and there were very few willing sellers left. In real-time, it was less than crystal clear, to say the least. Wednesday, the weak ADP traded like a weak report and the market retested the lows early in the session. By the time the meme shifted to “the Bernanke Put is over” the market had run out of sellers. Aftermarket, social stocks $TWTR and $YELP dislocated in their own way. Volatility.

Thursday built off Wednesday’s floor and levitated higher. Friday jobs report saw some incredible pre-market moves as robots murdered one another in the name of ‘market efficiency’. In the end: terrible report = ripping markets. Go figure. Bad is good except when good is good. Sometimes markets are a bit crazy, and you just have to understand the crazy, not the numbers.

We ended up printing a green weekly candle!

Gold

The grind before the storm.

DynamicHedge

Jan. 10 at 2:03 PM

$GC_F should have a decent grind higher (weeks or months) before retesting lows.

Gold is just an instrument and a story at this point – supply and demand. I fully expect Gold to continue higher because the only catalyst left to sell gold is higher prices. I don’t think we’ve seen the lows, but we’re getting closer. Overall, trend is over, and gold is dead money for a long time.

Bounce or Real Strength?

The bounce had the feeling of a boot to the neck of shorts. That’s how it always feels. The bulls are in the process of try to regain momentum and tip the scales back in their favor. There is still very little technical damage at this point, and many sentiment and breadth metrics have been reset in the washout. Is the market likely to breakout and run free and easy continually making new highs? I’m skeptical. The swings will be extreme and serve mostly to deplete the psychological reserves of investors looking for yesterday’s returns. Two-way markets are here for at least a few weeks. It’s gonna get real. Try not to get too bearish until the blue line is below the red line.

We haven’t seen a lower low in a while, and we could be in store for one. In the recent past, every downside move has eventually proven to be a fake out. Pullbacks are still a buying opportunity but trying to be first in line can be dangerous. Violent swings ignite the predator chase instinct. It makes you want to capitalize on every wiggle. If the market wants to test lows, there is a lot of dead wood to clear before the march higher continues. We are still in a bull market, (as ugly as it might get) and bull markets do not end with public sentiment (much different than investor sentiment) at such depressed levels. This time it is not different.

Breadth and Rotation

Breadth, rotation, and leadership are all in a state of flux. Former leadership sectors are seeing massive swings. Healthcare was a solid performers last week and then the worst performer in an up tape. Utilities, Technology, and basic materials all had relative strength. Conglomerates in particular saw money pouring into them. Healthcare, energy, and industrials were weak.

As mentioned before, breadth has been reset. There is quite a bit of room even to get back to neutral. Keep that in mind if you’re thinking about getting short.

Robots

Below is a chart of a mini overnight flash crash in the S&P 500 futures. The entire price action happened over a matter of minutes back in 2008. Is it just me or do you feel like this pattern/behavior is becoming an archetype for our algo-driven markets? Change the scale and tighten range and prints depending on liquidity and this price action can be found in every market on any given day. Run em higher to push them down only to bid them back up.

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