Mixed Bag of Yuck!

posted Oct 13, 2014, 10:13 AM by Katie Shook

Last week left us licking our wounds!

The total number of long positions within the system has now dropped to 41.13% as fo this morning pre-market.  It’s the lowest I’ve seen the database since since we added the macro indicators to the system.  It’s also the first sell signal on the SPX since 2011.  The extraordinary volatility — the big reversal on Wednesday — the even bigger re-reversal on Thursday — and the negative follow-through on Friday —  all bad signs.

To say last week was a monumental move would be an understatement.  From a short-term technical perspective, resistance is no longer part of the vocabulary;  we’re looking for support or reasons for the market to turn around.  The one interesting thing to note is that the market managed to stop falling once it hit the 200-day moving average.  Then again, this was only the SPX.  Similar small and mid-cap indexes are still behind the woodshed taking a beating.

The internet is now littered with opinion pieces about why this is happening.  The really quantitative gang will talk about the level of put buying on the SPY and concepts like Delta hedging by shorting futures.  The geopolitical economist types will talk about declining global GDP and the end of QE.  There was just an extremely negative tone to most forms of news.  From an analysis perspective, let me boil it down to brass tax.  Geopolitics stink right now, the markets were way high, economic conditions are improving at home but shifting everywhere else, there’s a pandemic scare out there – it all sounded pretty bad.  But no one yelled fire in the theater.  Some people just got up and left — then some more followed — and before we knew it, everyone started heading for the door.  At that point reason stopped being a reason.  It was simply time to go.  Once look at the VIX can confirm this one.

So now what?  The 200-day moving average — the psychological support of the big fat round numbers of 1900 on the SPX and 16,500 for the DJIA — probably not enough yet.  The number to watch this week on the SPX:  1921.79.  Why so specific?  That’s the low value of the 21MALR when it reversed course back in August.  It’s the ‘low wave’ that this market needs to close above in order to signal a possible recovery.  Do I think it will really be that specific?  No.  But within a few points of that range — on the high side — would be significant.  So, for easy math, call it 1925.  And a close above 1936 would indicate a probable reversal.

How will we open?  Probably a little higher than Friday’s close.  The futures dropped down into the low 1880.50 over the weekend but have been trending higher, now at 1900 or so.  It’s relatively close to the closing value on Friday (which continued to tank after the market close right up until the final bell).  After having a big decline like that there could be some short covering that would give a little bump to the markets in early trading.   This would set the tone though.  If the markets at any point in the day go below 1900 we’ll probably see them head down to 1883 to look for support.  If that fails, we’re looking at 1850/1800 levels.  Based on the trend of this market and current sentiment, I’d say we’re 50/50 to see an 1800 print or lower on this market.  I maintain it’s unlikely we’ll see a 2008-style decline here.  But another 5 or 10% is not out of the question.  What we’re looking for is some kind of pivotal data point that can give this market a v-bottom and get this bull back in the ring.

Daily Digits

Daily Digits 10-13-14

Weekly Estimated Range

Weeklies 10-13-14

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