The sideways churn in the major U.S. Stock indexes since late March continues. We have a lot of new members that have

Transcription

1 May 17, 2016

2 Dear Members, The sideways churn in the major U.S. Stock indexes since late March continues. We have a lot of new members that have recently joined us in the past couple of months. For you new comers, we turned very bullish towards stocks, especially global equities, in late January. By mid-february, the U.S. stock market finally bottomed along with other lagging developed markets like Europe and Japan and confirmed what we were already seeing in emerging markets, particularly in Latin America and South Africa. Over 90% of our upside targets had been achieved by late March and we have since then wanted to approach the equities market much more neutral to bearish. Cash is a position too. Remember, shorting stocks as aggressively as I want to be is not for everyone. Neutral and cash heavy is a position too. In fact, I can make a very strong case for a large cash position. In recent letters and conference calls I ve preferred to err on the short side and personally I still feel that way. The weight of the evidence continues to suggest that the path of least resistance in stocks, both in the U.S. and globally, is lower. So shorting stocks or raising cash is our favorite approach moving forward. The one thing we do NOT want to be doing is buying stocks that have positive correlations to the S&P500 and other major global indexes. Most U.S. and Global Indexes are either at or below their late March highs where we wanted to be taking profits across the board. Our neutral to bearish approach has been working terrifically and I think it continues to work. But here is why I d rather err on the short side: The Japanese Yen continues to make higher lows and higher highs. This is an uptrend in an asset that rallies when money is flowing out of risk assets, particularly stocks Sentiment has shifted positive again. When calculating the amount of Wall Street Sell Side Upgrades minus Downgrades, we are getting extreme bullish readings not seen since January Meanwhile, we saw the exact opposite activity from the sell side in early February as the downgrades and downside revisions very much outweighed upgrades and upside revisions. The sell side as a consensus is an excellent contrarian indicator and they re bullish! Volatility is low compared to recent years. We are at levels in the S&P500 volatility Index $VIX from where rallies have been sparked in the recent past. Meanwhile, the Commitment of Traders Report show Speculators pressing their already bearish bets on Volatility. This extreme pessimism in volatility from a great contrarian indicator is further evidence that we should see higher volatility. This activity normally coincides with lower prices for stocks. International Stock Markets are rolling over. In fact, of the 38 countries that we track, 21 of them put in a bearish momentum divergence at their recent high in April or May. Another 11 countries did not even hit

3 overbought conditions on the recent rally, which is even worse. So essentially 32 of 38 countries, or 84%, suggest not being long and most of them have triggered short positions. Also 31 of those 38 countries have broken their uptrends from their respective first quarter lows. Breadth in the U.S. stock market continues to deteriorate. We are seeing fewer and fewer stocks on the NYSE making new 52-week highs while we see the list of stocks on the NYSE making new 52week lows starting to spike. Also, as previously warned, the Common Stocks Only NYSE Advance/Decline line has been crashing since getting up to that former resistance from 2014 highs. The bearish momentum divergence as it hit resistance was enough evidence to suggest it would fall, and sure enough, that is exactly what we ve seen. In the Nasdaq, new lows are out-pacing new highs by 2 to 1. In other words, in the Nasdaq, we are seeing twice as many new 52-week lows as new 52week highs. That is the sheer definition of bad breadth. The yield curve is flattening faster than even I expected. The one things I ve been consistent on in the bond market is the fact that the yield curve is flattening and on its way to inversion. The U.S. 10-year yield minus 2-year yield closed today at the flattest it has been since Meanwhile, 30s minus 1s are on their way to 8+ year lows as well coming within a percent of a fresh low today. The Dow 30 components look terrible, even the best ones. One of the things I do that I ve found many people don t, is a deep dive multi-timeframe analysis of all 30 stocks in the Dow Jones Industrial Average. Of the 30, 18 of them have triggered short positions, while several others are right on the brink of breaking support levels we are watching. This makes it difficult for me to make a bullish case for the Dow Jones Industrial Average and therefore any indexes, U.S. or globally, that are positively correlated to the Dow (there is a very long list of these ). I can keep going, but I think you get my point. We do not want to be buying stocks. We want to be selling them, whether to raise cash or initiate shorts. We want to be short the S&P500, Dow Jones Industrial Average, Dow Jones Transportation Average, Dow Jones Utilities Average, Nasdaq100, Russell2000, Mid-cap400 and Russell Micro-cap Index. I think they are all heading much lower. The lines in the sand are outlined in the Chartbook, but these have all been shorts for us this month and continue to be. I do not want to cover short positions until we see new 52-week lows. If anything changes, I will update members via the weekly letters, monthly conference call and/or bonus post. But with what we are seeing right now, these are all shorts or neutral. Definitely not buys.

4 Here are some tips to help understand the research and our process. These charts will be updated weekly with annotations and commentary detailing any and all changes in the data that may or may not change our perspective on a given market. The weekly charts and commentary are geared to get a much more structural perspective on the market and relative strength. The daily charts are for more tactical trading opportunities. Both time frames can be used together and don t always agree with one another. For example, a bullish weekly chart can easily be accompanied by a bearish shortterm setup and vice versa. You won t always agree and that s okay. The idea behind membership is to consistently have an unbiased opinion to supplement any prior thesis. There are other details on the charts that can be mentioned but for the purposes of these reports we will focus on only the most relevant and actionable information. Since the markets are fractal, we use the same period for our moving averages and momentum on both daily and weekly time frames Smoothing Mechanisms = 200 period Simple Moving Averages Momentum = 14 Period Relative Strength Index (RSI)

5 SPX - S&P 500 Weekly Structurally the S&P500 was in a strong uptrend until it broke the uptrend line from the 2009 lows last summer and remained below it without recovering. We've said consistently that the longer it stayed under this broken uptrend the higher the likelihood that a more severe correction was coming. It is clear that the 161.8% Fibonacci extension from the decline has proven to be a problem. There has been no reason to be long from a structural perspective and after further deterioration, it appeared late last summer as though a test of 1900 was coming soon. This was resistance early in 2014 that turned into key support during the October 2014 decline and our downside target was hit in late August. If Momentum hits oversold conditions, that would be another negative as it continues to confirm the bearish divergence that it was putting in the past couple of years prior to the correction. I would continue to be a seller of any strength from any kind of structural perspective. A break of this support on a weekly close near 1870 would be another negative which would likely take the S&P500 to , which was support and resistance in I would still focus more on the daily timeframe for a more tactical approach and be short the S&P500 if we're below the downtrend line from last Summer's highs, currently near 2072 I think S&Ps get crushed from here

6 SPX - S&P 500 Daily Short-term, the S&P500 failed to hold above 2120 on any attempts last Summer. We said that was warning #1. We said that a break below the March & July lows from last year near 2040 would be costly as it would mark the first lower low out of this sideways range. This broke in August where the selling really got going hard giving us a target near Our downside target was hit in August. After a brief rally, prices retested those August lows successfully and we then only wanted to be long above the September lows for a tactical trade and taking profits near 2040 as this had been resistance in the past. That target was achieved at the end of October and then wanted to be short S&Ps only if prices were below 2080, which was the December recovery high. This worked out well to start 2016 and our targets, which were back down to the August/Sept lows, were achieved In January. Since then, we've wanted to err on the long side and only be long if prices are above the September lows and taking profits near , which was former support and resistance in the 2nd half of last year. We hit our upside target in March. Since then, neutral has been our best approach. We only want to be short the S&P500 if prices are below the March 22 highs of If we are above that then there is no reason to be short. We want to be covering shorts near the August and September lows under 1900

7 DJIA - Dow Jones Industrial Average Weekly Structurally the Dow Industrials were in an uptrend until last Summer when they broke the uptrend line since early We said that if prices broke and held below it, I would be much more cautious. Sure enough, once that level broke the selling really began to accelerate. Prices found support near 15,300 which was resistance in early 2013 and support in early From there, we wanted to be a seller of any and all strength, particularly near that broken uptrend line that was the lower of the two parallel lines defining this uptrend channel since There is no reason to own this structurally and we had downside targets near 15,300, which was resistance in 2013 and support in August where we wanted to be covering shorts. This downside target was hit in January. Ultimately I think that 15,300 breaks and we head towards 13,400 which represents the 61.8% Fibonacci retracement of the rally. In the meantime we have wanted focus more on the daily chart for a more tactical bullish approach and remain neutral bigger picture but as we approach the downtrend line from last year's alltime highs I would be short the Dow Jones Industrial Average only if we are below the downtrend line from last year's highs and neutral if we're above. See daily chart for a more tactical approach

8 DJIA - Dow Jones Industrial Average Daily Short-term prices had been trading in a sideways range above and below a flat 200 day moving average throughout the 4th quarter and broke down to start the year as we had previously warned. This put prices below the uptrend line from the August lows which was another problem. We only wanted to be short if prices were below 17,000 and said that a retest of the September lows was likely coming soon where we want to be covering tactical shorts under 16,000. That target was hit in January. Moving forward we wanted to be selling into 17,000 and taking profits on all long positions. This target was hit last month. Now we are running into the downtrend line from the early November highs, and also from the all-time highs last May. We've wanted to remain neutral here tactically since last month, but at this point we are breaking the uptrend line from the February lows. If we are below 17,850, we want to be short the Dow Jones Industrial Average as that would confirm a failed breakout, and neutral if we are above. Prices below that confirms a bearish divergence in momentum. We want to be covering shorts under 16,000 which were the September lows last year

9 DJTA - Dow Transports Weekly Structurally the Transports had been in a huge uptrend since 2009 but in late November 2014 ran into the upper trendline of this giant rising wedge which had been our target. The bearish momentum divergence in 2014 led to a massive sell-off over the past year. We said that a bearish development would be if prices broke the uptrend line from the 2009 lows and this occurred last May. This has looked bad and we've been arguing for much lower prices. Going forward, we said that if prices broke support since June 2014 should lead to further selling that would take prices below 7300 which is the 38.2% Fibonacci retracement of the rally. This target was hit in January where we said we wanted to be covering all tactical shorts and taking profits. Neutral has been our best bet as prices have been in between these two converging downtrend lines since late At this point we want to be short Transports if prices are below the upper of these two converging downtrend lines. See daily chart for a more tactical approach

10 DJTA - Dow Transports Daily Short-term prices continue to make lower lows and lower highs and are in a very well-defined downtrend. Momentum hitting oversold conditions in August and once again in January are confirming just that. The 8300 level had been key resistance for months and has been where we wanted to sell into. To start the year, with prices below a broken uptrend line from the August lows, we have wanted to be a seller of strength towards 7450 and covering shorts under 6900 which is the 161.8% Fibonacci extension of the August-November rally. This target was hit in January. Since then there has been no reason to be short tactically. Prices have now reached the downtrend line from the March highs last year and are now attempting to break the uptrend line from the January lows. I would be short Transports here only if we are below the downtrend line from the March highs last year and would be adding to short positions only if we are below the August lows. We want to be covering shorts down near 7050 which represents former resistance in early February and the 61.8% Fibonacci retracement of the January-March rally.

11 DJU - Dow Utilities Weekly Structurally we've said since November 2014 that the Dow Utilities had finally arrived at our target based on this giant rising wedge since Structurally Utilities were fine as long as they were trading above the 2009 uptrend line. Momentum in a bullish range also suggests the bulls are still in control. As we continue to point to, we've only wanted to be long if we are above the uptrend line from the 2009 lows. Our upside target for a long time had been just under 660 based on the 2014 highs. This target was hit last month. At this point, based on former overhead supply from January 2015, we want to be short the Dow Jones Utility Average only if we are below 660 and neutral if we are above that. We want to be covering short positions near 540 which has been support and resistance going back to early See daily chart for a more tactical perspective. Also See $XLU

12 DJU - Dow Utilities Daily Short-term we wanted to be buyers in December down under 550 which had been support since the Summer. This worked out well and wanted to approach this more as a rangebound trend. We only wanted to be long if we were above 549, but taking tactical profits near 610. This target was hit in February and we have been focused on the weekly timeframe since. At this point, with prices making new highs while momentum put in a bearish divergence, we want to be short the Dow Jones Utility Average only if we are below 665 and add to shorts only if we are below the lower of the 2 parallel uptrend lines from the 4th quarter lows. We want to be covering shorts near 610, which was resistance all throughout last year. Also See $XLU

13 NDX - Nasdaq 100 Weekly Structurally the Nasdaq100 was in a long-term uptrend until prices hit resistance from the March 2000 top and then broke below the uptrend line from the 2009 lows. At this point we still want to focus on the Nasdaq 100 more tactically (see daily chart). There's been no reason to be in this structurally if prices are below the uptrend line from Going forward I would still be a seller of any and all strength, particularly towards that broken uptrend line from the 2009 lows and resistance from the 2000 top: 4700ish. See daily chart for a more bearish short-term tactical approach

14 NDX - Nasdaq 100 Daily Short-term prices once again in December sold off at resistance near 4700 as it did last Summer. This became the catalyst to break the uptrend line from the August lows which then made things worse. Momentum had been giving us mixed signals hitting both overbought and oversold conditions although recently confirmed a bullish divergence at the February lows. Since the beginning of January we had been wanting to short Nasdaq and covering those shorts near 4050 which were the September lows. This downside target was hit in January. We had not wanted to be short if prices were above 4080 and we continued to hold above that. Our upside target since then has been where we wanted to be taking profits on all longs. Our target was hit last week. We had wanted to be neutral near a flat 200 day moving average but at this point if prices are below 4500, we want to be short the Nasdaq 100 and cover down near 4100 which has been support since December If we are above 4500 then neutral is best.

15 RUT - Russell 2000 Weekly Structurally, the Russell2000 in the first half of last year had been stuck between the broken uptrend line from the 2009 lows and above former resistance since early This uptrend line had served as support for 5 1/2 years and we've expected it to turn into some resistance like it has since last March. From a structural perspective, there has been no reason to be long if prices were below 1210 and wanted to be a seller of any strength into that level, which was hit nicely in November, and covering short positions near 1080 which was support since early This downside target was hit in late September and once again in January where we wanted to be covering all shorts. Since then we have wanted to be neutral and I would continue to approach it this way from any kind of longer term outlook. If we start to break back below 1080 I would start to get bearish and look to initiate shorts. In the meantime, see daily chart for a more tactical approach

16 RUT - Russell 2000 Daily Short-term we had only wanted to be short since last Summer if prices were below 1205 and covering shorts near our initial target of which was support in the first quarter last year. This target was hit in August, and we then only wanted to be long above those lows and taking profits near This upside target was hit in December and wanted to sell aggressively into that area around which was support throughout the 1st and 2nd quarter this year before breaking in August. We said that a break below the uptrend line from the September lows would be a negative and wanted to get short, covering near 1040 which were the October 2014 lows. This downside target was hit in January where we wanted to be covering all shorts. In February we put in new lows and momentum diverged positively. This gave us the buy signal and we wanted to be long only if we are above the January lows and taking profits near 1100 which was support in August. This upside target was hit in late March and we wanted to be taking profits on all long positions. At this point, prices are trying to hold above the downtrend lines from last June's all-time highs. With momentum putting in a bearish divergence we want to be short the Russell2000 only if we are below I would be covering shorts and taking profits down near the January lows around 960

17 MDY - Midcaps Weekly The midcaps had been in a strong Structural bull market until this break of the uptrend line off the 2009 lows. Since then we have seen a series of lower highs and lower lows. I would continue to sell into any strength towards 264, if we get up there. We have wanted to be short structurally and cover short positions under 240 which has held as support the past couple of years. This target was hit in January. With momentum near the middle not hitting oversold or overbought conditions, a neutral approach was best again. Last month, however, with prices getting back above key support going back the past couple of years, we wanted to get long only if prices are above 236. We wanted to be taking profits near 264. This target was hit 2 weeks ago. At this point, it looks like we are failing to hold above this downtrend line from last year's alltime highs and want to be short MDY only if we are below that downtrend line and covering shorts down under 240. In the meantime, neutral is best. See daily chart for a more tactical approach

18 MDY - Midcaps Daily Short-term prices are near a downtrend line from the Summer highs and a downward sloping 200 day moving average. We had a nice buying opportunity with low risk back in September on the retest of the August lows that came with a bullish divergence. We said that a break of the September lows on a closing basis would signal another leg lower towards 230 which has been support since 2014 and where we want to cover short positions. This target was hit in January. At this point, prices are failing to hold above the downtrend line from last year's all-time highs. With a bearish momentum divergence at recent highs we want to be short MDY only if we are below the downtrend line from last year's highs and taking profits down near 245 which were the August and September lows. Neutral is still best if we're above the downtrend line from last summer's highs

19 IWC - Microcaps Weekly Structurally, the micro-caps have been one of the worst performing groups over the past couple of years failing to make new highs last Summer like their larger-cap counterparts. We said that this failed breakout last June would lead to further selling and needed a quick recovery to invalidate any of these bearish developments. We never got it and down we went. Our initial target where we wanted to be covering shorts was near 69 which was support most of last year and that was hit in late September. After that, we only wanted to be long if we were above those lows near and selling into 77. That upside target was hit in November and I wanted to continue to sell any strength into that level. At that point with prices holding below 69, we wanted to be aggressive sellers on any rallies towards 69 and covering shorts near 59 which is the 161.8% Fibonacci extension of the rally. This target was hit in February where we wanted to cover all shorts. At those new lows, momentum put in a bullish divergence (see daily chart) and since then we have only wanted to be long if we're above the Feb lows and taking profits near 69 which has been support for 2 years. We have now hit all of our upside targets and I would be short $IWC only if we are below 69 and covering shorts near 59 which were the February lows. See daily chart for a more tactical approach

20 IWC - Microcaps Daily Short-term the key level that we were watching was this overhead supply from the July 2014 highs near which also served as support during the first half of last year. There had been no reason to be long this market below those highs. After breaking the uptrend line from the September lows we said that a test of 66 was coming soon. That target was hit in January where we wanted to be covering all short positions. Once we broke below that we wanted to only be short if below 66 and cover under 60, which is the 161.8% Fibonacci extension of the rally. The next area to cover shorts was under 60 and this target was hit in February. With momentum putting in a bullish divergence, we have only wanted to be long if we were above the January lows. We've wanted to take profits between and that was hit over the past week. At this point we want to be short $IWC only if we are below the downtrend line from last year's all-time highs. We want to be covering shorts under 60 near the February lows.

21 TLT Year Treasury Bond Weekly Structurally Treasury bonds looked great after breaking the downtrend line from the early 2012 highs in the Summer of In January last year we hit our upside target near the 2012 highs where we wanted to be taking profits. Momentum hitting overbought conditions is a good thing bigger picture, but a flat 200 week moving averages isn't great. We wanted to get long last June near the 61.*% Fibonacci retracement of the rally and taking profits near 124 which was resistance in 2013 and served as support in March. This was hit in September. Since then, we've wanted to see prices hold above 124. We said that if they can do that, it would be another positive and we can get long again. Moving forward we've only wanted to be long if prices were above that downtrend line from last year's highs and look to be selling above 132. This target was hit in February. Going forward we only want to be long if prices are above the 2012 highs near Neutral is best if we are below that. See daily chart for a more tactical approach

22 TLT Year Treasury Bond Daily Short-term prices in January broke out above a downtrend line from the January highs of last year. Momentum is in a bullish range hitting overbought conditions during the 2016 rally. Moving forward we only wanted to be long TLT if prices were above that broken downtrend line from last year's highs and taking profits near , which was former support in Q1 last year and the 61.8% Fibonacci retracement of the sell-off last year. Our upside target was near and that was hit in February where we wanted to be taking all profits. I would maintain a neutral stance here and would be long only if prices are above Neutral if we're below that is best.

23 TNX - Interest Rate 10 Year Weekly Interest rates broke hard in October of 2014 below the key support which was resistance in Oct 2011 and March 2012 and also support back in October of This level also represented the 38.2% Fibonacci retracement from the rally in rates. We said that a break of those lows should lead to a strong leg lower towards 2%, which is exactly what we got. We also had a bearish momentum divergence at those 2013 highs and extremes in sentiment as we came into These sentiment unwinds combined with momentum divergences can lead to trends that last longer than most can imagine. In this case, this meant lower rates. I would still fade any strength in rates (buy weakness in bonds) as long as we are below 2.4%. Above that and a more neutral stance is appropriate. It has looked for some time that we were heading down towards 1.6% and got down there last January. Momentum hitting oversold conditions on that decline is definitely a negative bigger picture. I see no reason to think structurally rates are going substantially higher anytime soon and would focus entirely on the daily timeframe. We said that the resolution out above or below these two converging trendlines since last year was going to be telling and it looked like this is breaking lower. Sure enough it did and we said the next stop was 1.65%. This target was hit in February. I would look to fade (buy dips in bonds) on any moves towards 2.0 in rates. If rates fall below the January 2015 lows, that could be disastrous (bullish for bonds). See daily chart

24 TNX - Interest Rate 10 Year Daily Short-term rates are below a downward 200 day moving average and in January broke down from its previous range that was between % since November. We said if this resolved to the downside, it would be a bull flag resolving negatively which suggests much lower rates are coming quickly. We said the longer rates stayed below 2.1 the worse this becomes and the higher the likelihood we are heading under 1.9%. We hit that last month and said the ultimate target was down near 1.65% (see weekly chart). This target was also hit last month. Since then we've expected yields to get back above 2% so buying US Treasury bonds is still a bad idea for now. I've argued the past few weeks that the longer that yields hold below 1.87%, the worse this becomes. We said if 10s are below the 1.87% levels which had been support and resistance since 2014, then I can see a bullish case for bonds. In that scenario we want to be buying bonds on dips as 10s appear to be headed back under 1.65%. See $TLT

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