SPX, COMPQ, OIL: Bull and Bear Arguments

Last update, I wrote about how there had been no "big surprises" from the market in a while, but I'll readily admit that yesterday's move surprised me.  I thought that, even if the rally were ultimately destined to head higher, SPX would at least pause near the 4430-55 zone.  Instead, it gapped over it (which is one way that the market sometimes conveniently avoids addressing a resistance zone -- due to leverage, it's much easier to drive a rally in futures than it is to drive one in the cash market).

So, it seems I was indeed "due" for a screw up, and I got that one wrong.  

That said, I do want to note that I never backtracked from my piece on November 8, when I wrote:

In conclusion, there's no quick and easy roadmap in the current position, so we'll just have to watch for potential impulsive declines in real-time and take it from there. Waiting for impulsive turns can sometimes help bears stay out of trouble in the event the "straightforward bull count" shows up, since that approach prevents one from shorting the entire ride up to new highs. It also gives one a clear stop (against the high where the (pending) first impulse down began), as opposed to the current situation, where the only crystal-clear level is way up at 4607.

Any bears who followed that "not trading advice" haven't lost a dime on this rally yet, so I hope it helped someone.  I'm at least glad I published that when I did -- and even last update concluded by reminding bears that while I was leaning their way from an analytical standpoint, I wouldn't bet the farm on that, because, quote: "we don't even have an impulse down yet!"

Anyway, now we get to try to figure out what the market is actually trying to do here.

The simple answer, if you're a bull, is "run to the moon."  If you're a bear, then it's the opposite.  And while either of those stances is easy to say for the "perma" crowd, supporting them is the rub.  

Let's start with the bull argument, which is tied to the news that became the excuse for the rally:  The CPI report was released yesterday, and core inflation rose a bit less than analysts expected (they expected .3% over September, but it rose .2% instead).  This, in turn, leads to the hope that inflation will continue moderating (it's a bit confusing/misleading when analysts say inflation is "falling" -- inflation is still increasing month-over-month, just not as quickly as it was before), which in turn leads to the hope that the Fed will stop raising rates, which in turn would take some pressure off the market and the economy, and maybe forestall a recession.

Core Inflation came in at 4% (in September, it was 4.1%); the Fed's target for Core Inflation is 2%.  Thus, the bull argument is partially predicated on the belief that Core Inflation will continue moderating until it reaches the Fed target of 2%, prompting the Fed to declare victory and go home.

Overall inflation, which is the rate at which your overalls expand during the holidays, was 3.7% in September, but came in at 3.2% for October, largely because people ate less due to an increase in the price of food, thanks to inflation.  Wait.   [consults notes...] That's only partially correct (I trust my readers are smart enough to figure out which part!).

Now, the hope for bulls here is that the Fed will see all this and decide that all the numbers are headed in the right direction and thus that they no longer need to raise rates.  

But here's the thing:  Given the speed of this rally, bulls also seem to be hoping that the Fed will then relaunch QE while consumer debt simultaneously vanishes overnight (thus giving people a whole new clean slate of spending power) and the market will head right back into a significant bubble.  Because... 

(and this leads us into the bear argument)

...as we've discussed here previously, P/E ratios are not "low" by any means.  To the contrary, the current P/E of SPX is now hovering near 25, which is already into "overvalued" territory.  

For comparison, in October, 2007, at the peak just before the biggest bear market in recent history, the P/E ratio was 23.41.

Can an overvalued market get even more overvalued?  Absolutely.  We've seen it happen many, many times in the modern era of centrally-managed currency and interest rates.  But that doesn't change the fact that the current market is not exactly a fundamentally good value.  

No one is buying here because prices are low.  Prices aren't low, so they're not scooping up great values in solid, beaten-down stocks.  

They're buying because they're afraid that other people are going to buy before they do.  

And, whether they know it consciously or not, one could argue that buyers are not only banking on the Fed ceasing their campaign of raising rates, but on the Fed cutting rates fairly quickly and probably stimulating the market again.  Because P/Es rarely get much above current levels without either a bubble or a crash (in the case of trailing P/Es, where prices drop rapidly to make past earnings seem massive by comparison).

And hey, maybe that bubble will happen.  Wouldn't be the first time.  But that's at least part of the bear argument.

Let's take a look at oil.  So far, oil is bouncing off its downside inflection zone (usually my identified inflection zones work, unlike SPX yesterday!).  Equities bulls probably need to also be oil bears (since bullish oil drives inflation higher), and oil bears probably need to see a sustained breakdown at the rising blue line, for starters -- though I haven't updated the annotation since the prior warning, since I literally can't fit anything else on this chart without deleting something, and that seems unnecessary right now.

Next, let's look at COMPQ, which outlines the most obvious bull option.  The most obvious bull option is a simple straightforward fifth wave to new highs currently underway.  This would jive (for a reasonable bull case, that is) with what we're seeing from a fundamental standpoint, suggesting that even if COMPQ makes a new all-time high, it's not the start of a big new bull market, it's the end of one.  Of course, that's the most bearish interpretation of the bull count, but also the one that requires the least speculation.

COMPQ seems to be heading toward the "or (2)," which I placed on the chart on October 26, but now regret not discussing in more detail at the time.  While I make every effort to remain as objective as possible, I'm human too and am not magically immune from getting swept in by the prevailing sentiment, though I suppose I should see if it even reaches that before browbeating myself too much.

For SPX, we're just going to look at a simple chart for now.  For the past week-plus, I felt confident enough that the market was headed higher to publish the chart with blue ii/4 overhead (above then-current prices), but now that we've passed that zone, we're into a sort of no-man's land as far as I'm concerned.  So I'm not going to publish a chart that suggests we're headed to X zone next, because I just don't have that read to offer right now.

In conclusion, there are still bear options here, but obviously, bears will need to show they have even a little firepower to stop this thing for more than 10 minutes, and thus bears should still continue to await an impulsive decline before stepping in front of this steam train (not trading advice).  On the bull side, nothing has changed from November 8, when I wrote that their count was straightforward, that is: "ALL OF C completed at 4103 SPX and it's on to new highs (north of 4607)."

Trade safe.

SPX and NYA: You Are Here

On Friday, SPX made a new high for the move, putting it smack at the blue ii/4 label.  We have an interesting situation now.  By all rights, this should be an inflection zone (the zone stretches a little higher), so this is going to be the first real test of this rally.  

I say that because, while many folks look primarily at indicators (which are often derivatives of price) -- and I agree those can be useful at times -- my philosophy has always been that price trumps everything.  And since the current SPX price is not unexpected (as indicated by the label being there before the market was!  In fact, one could say this price was largely "expected"), now we have to see if and how the market reacts to this zone.  That will give us further information.  

So, while I'm open to larger bull options here, the market is still operating within the tolerances of "bear" price territory.

Next, it's interesting that NYA (representative of the broader market) is still below its high from roughly a week ago, so the broad market is not participating to the same extent so far.

In conclusion, there have thus far been no big surprises for a while -- the market declined to where it was supposed to, then rallied after capturing its target.  That was all expected (though the rally did exceed the expectations I had back before we even started rallying, I immediately adjusted those expectations when they were met) -- actually, before we close this, let's take a quick stroll down memory lane:

While we (myself and my readers) were looking lower (big picture -- near term, we had some upside target captures) for a while before September 22, I had mainly been painting that in broad strokes, and I think that was the first day I published the "official" exact target of 4090-4115 SPX.  Which was 300 points lower than SPX:

SPX had just about reached that target by late October, so I began warning both verbally and visually.  At that point, the visual warning "only" indicated a bounce to ~4340 (~240 points up from the downside target zone -- ~540 points total in both directions now).

Then, as SPX reached that upside target, it became apparent it was heading higher, and I changed the label to "ii?" (added the "/4?" two updates later) and raised it to its current zone:

And that's where we find ourselves today.  So maybe I'm "due" to be wrong (because I am still leaning toward bears, though not in a "bet the farm" sort of way at this point -- we don't even have an impulse down yet!) and this rally will smash records and we'll all live happily ever after.  But I do want to see how it behaves here first.  Trade safe.

SPX, NYA, OIL: What Did Powell Say? We May Never Know

Yesterday, Chairmanpersonguy (apologies to those who are offended by "gendered" language; the proper gender-neutral term is "chairmanpersonguypeople" but it's too long to type all the time) Powell spoke and, while I have no idea what he said (I didn't listen and don't feel like looking it up right now), the market clearly didn't like it.  I like to imagine that he harshly scolded the market for being out of touch with reality, but it's probably more likely that he simply mumbled "tools" a whole bunch of times before belching loudly and without apology, and then spun on his heel and left without taking questions.

No change from the past few updates, but a few interesting charts worth looking at, starting with the very long term SPX chart:

Next is the near-term SPX chart.  SPX is into the lower edge of the first inflection zone for these counts, so a reversal is possible (not guaranteed) anytime in here.

IT, my broad-strokes view is unchanged for now:

Next, NYA rallied straight up to the price zone where I'd originally drawn red 2, though decidedly faster than drawn.  If it were to become a two-legged rally, that would stretch it sideways/up and add more time to the pattern (but again, this is "easy as cake" territory, so that's not for certain either and an immediate end isn't impossible):

Finally, oil is getting into the general ballpark of three waves down after being rejected at the ~8 month-old red b-wave label, which proved to be both a strong magnet and strong resistance.  It's uncertain if the drop in oil wants to become five down or not, but if not, this is the upper edge of the general zone where a bounce could begin:

In conclusion, no change from recent updates, but the market is now flirting with the first bear inflection zone, so it will be interesting to see what happens from here.  Trade safe.

p.s.- okay, I finally looked it up so you don't have to and Powell was hawkish in his speech yesterday.  So, I wasn't far off in one of my guesses about his speech, though I'm still not sure which one.

SPX Update: "Easy as Cake"

SPX rallied a bit more since last update, which is no surprise, but it occurred to me that it might be helpful to spell out the options with a bit more clarity.  I've been doing this so long that I sometimes forget to convey information that I take for granted.  So let's focus on that today.

The two main options from here are:

1.  For bulls:  ALL OF C completed at 4103 SPX and it's on to new highs (north of 4607).

2.  For bears:  The recent decline was a nested first wave and the current bounce is a nested second wave.  In full disclosure, the argument against this version of events is that the prior wave extended 1.618 times the A/1 wave, which is common behavior for C waves, not as common for nested first waves.  The arguments in favor are more fundamental than technical.

The bull option is straightforward, so there's no need to discuss it further.  

The bear option breaks down into a couple of suboptions, which I've attempted to roughly sketch (don't hold me to these, because where we are is not this predictable) on the following two charts. 

Bear suboption 1 is simply "run it up as fast as we can, then run out of gas like an unsuccessful test rocket":

Bear suboption 2 is to drag things out for a while by forming a two-legged bounce:

So bears should keep in mind that even if everything goes their way, the market can always grind along for a while, and could even give bulls something akin to a false Santa Rally.

I also wanted to quickly update the TLT chart.  My warning from October 23 proved quite timely:

In conclusion, there's no quick and easy roadmap in the current position, so we'll just have to watch for potential impulsive declines in real-time and take it from there.  Waiting for impulsive turns can sometimes help bears stay out of trouble in the event the "straightfoward bull count" shows up, since that approach prevents one from shorting the entire ride up to new highs.  It also gives one a clear stop (against the high where the (pending) first impulse down began), as opposed to the current situation, where the only crystal-clear level is way up at 4607.  None of that is trading advice.  Trade safe.  

SPX Update: A Zweig Breadth Thrust Indicator?

On Friday, the market continued rallying.  Several members of the forum pointed out that this triggered a Zweig Breadth Thrust Indicator, which is a rare signal that's triggered when the market thrusts its breath so forcefully that it wheezes, which makes a noise that sounds like "Zweeeeeig!" That wheeze is a buy signal.  (Or something like that.)

Investopedia defines it slightly differently, stating:

"The Zweig Breadth Thrust Indicator is a calculation that measures the swiftness of market sentiment shifts. It was developed by American stock investor and financial analyst Martin Zweig. The calculation is based on the ratio of advancing stocks to the total number of stocks. It is calculated by dividing the 10-day moving average of the number of advancing stocks by the total number of stocks. The indicator is used to identify major shifts in the primary trend."

Of note, that piece wasn't written over the weekend, but was published April 12, the last time the market triggered this exact same buy signal.  Which was of course in the wake of the "Banking Crisis Averted! (for now)" action from the Fed, which suggests the signal can be triggered by short-covering rallies that shift sentiment.

As I noted on the forum, one thing worth noting is that the forward P/E ratio of the SPX is currently 18.62, which isn't exactly low, and which suggests that if the market were to turn into a new bull from here, that would not be based on fundamentals, but would instead be a new bubble.  Which isn't unheard of, obviously, we've had plenty of bubbles in the past -- but which may be a stumbling block for the Zweig Breadth Thrust Indicator, as the only other time it triggered with the forward P/E ratio this high was -- you guessed it -- back in April of this year.

So, maybe it's a good signal and we'll be marveling at it a few months from now -- but unlike many of the previous successful signals throughout history, this one seems to lack fundamental support.

Anyway, just one chart today, where I updated the labeling to match the annotation from the prior update.  Note that SPX hit the blue resistance line on Friday, so that's its next hurdle.

Not much to add beyond that.  Trade safe.

SPX Update: Finally Bouncing from Target/Inflection Zone

Apparently it was "that simple" as SPX finally committed to bouncing solidly after capturing its downside target and inflection zone.  In fact, the bounce is now close to wave 1/4 overlap territory, which would suggest the bounce is either another 2nd wave or the ALL OF C bull option discussed on 10/26:

Next resistance is fast approaching (blue rising line), so we'll see if that zone can slow the bounce or not:

Not much to add beyond that.  Trade safe.

SPX and NYA Updates: Five Nights of Fed-days, Starring Jerome "the Gnome" Powell

Not much to add to the past few updates.  SPX and NYA have both continued to bounce from their target/inflection zones.  A day late for Halloween, but today is still a Fed day nevertheless, and how the market reacts will probably determine whether a higher-degree bounce plays out now or not.

SPX:

NYA has rallied to the lower end of the blue circle:

In conclusion, nothing really to add.  Trade safe.