This report is a follow-up to my February 21 report which can be read here. For those who started following my work recently, I recommend reading that report in order to better understand how we got here.
Also for new readers, please note: email replies containing charts, market history and thoughtful analysis are always welcome. Any other material discussing current events or theories of how the world should work will be spam-filtered and not read. Also a warning: anyone sending inappropriate or disrespectful feedback will also be permanently blocked. Lastly, (1) anyone who fails to understand the time frames being discussed in this report should stop reading (and shouldn’t be trading in the first place) and (2) anyone who trades based on any information contained herein is fully responsible for their own decisions.
- One of the steepest 1-week market plunges of all time could be nearly over – Nasdaq futures even briefly exceeded the worst 1-week loss in October 2008, the core of a historic Bear market.
- Extreme and historic oversold signals are being generated across nearly all core datasets I run & monitor.
- Based on prior historic signals, there is a chance (no guarantee) markets bottom and reverse very soon – need to monitor for price reversals to confirm the turn.
- The subsequent rally could very quickly retrace at least half of the decline within a very short period. Again, no guarantees.
- How the leading Stocks (particularly broad Tech) behave over the next several weeks will be key for the market to repair the damage and re-establish the foundation for a bigger rally into potentially Q2-Q3.
A HISTORIC WEEK FOR STOCKS
My Core Models are all max oversold. Below is one of the most important ones, for reference.
Stock sentiment is in full capitulation. My report last week compared the extreme overbought Weekly RSI signals to January 2018 among other dates. This week’s collapse is tracking almost exactly to the February 2018 decline (and a few others) – suggesting the same dynamics in play. Visible in the chart, NDX daily sentiment DSI hit 10 on February 8 2018 (which was a Thursday) and bottomed the next day (a Friday) with a hammer just above its 200dma (never touched). As of the time of writing, NQ futures touched the 200dma in the overnight session – monitor the cash session behavior – it will be critical.
The Stock/Bond ratio hit an 18 RSI in the overnight session. This is an extremely powerful and historic signal – see the next charts.
Below are the five priors – ALL marked initial bottoms that led to immediate and massive oversold rallies – which then retested the lows as part of a bottoming pattern – sometimes with higher prices, sometimes slightly lower, and in one case there was no retest:
EXTREME NEGATIVE BREADTH
S&P 80% of Stocks are below their Bollinger band. Only three dates ever went lower: August 4 2011, August 8 2011 (bottom), August 24 2015 (bottom).
S&P 0.59% of Stocks are above their 10dma. Other than 2008, this happened only during the 2010 Flash Crash, August/November 2011 collapse, August 2015 collapse, February 2018 collapse, and December 2018 collapse. Some spikes marked the exact bottom (but most notably in 2008, the market kept crashing).
S&P 1.58% of Stocks are above their 20dma. Same dates as the prior chart with a new one added – July 23 2002, the first of two bottoms in a massive 8-month base that ended the Bear market.
S&P 6.94% of Stocks are above their 50dma. Again many of the same prior dates pop up, but some important new dates as well: the initial stages of the 1990 Bear market bottom (market needed more time to bottom), the September 2001 bottom, October 2002 bottom, August 2007 bottom, January 2008 bottom, March 2009 bottom and January 2016 bottom. Even in Bear markets this led to some immediate and extremely sharp rallies.
S&P 62.77% of Stocks have oversold RSIs. Priors: August 23 1990 (market went lower and formed a base over several months), September 20-21 2001 (bottomed on the 21st), July 22-23 2002 (bottomed on the 23rd), October 9-10 2008 (minor bottom on the 10th – then continued to collapse another month), August 4 2011 (bottomed two days later), August 8 2011 (bottom), August 25 2015 (bottom), December 24 2018 (bottom).
S&P 5-Day A/D Breadth is 11.45%, the second-lowest reading since 1990. More oversold than any week in 2008. Only the August 24 2015 shock decline was worse than this (market bottomed the next day).
The VIX curve is historically backwardated (as of yesterday’s close) by more than 30%, in the top 16 days since 2002. Prior dates were: July 22-23 2002 (bottom), October 6-24 2008 (crash), August 24 2015 (bottom), February 5 2018 (bottom). If this is NOT 2008, then there is a chance for an immediate bottom to form per the other dates. Again no guarantees.
As of the time of writing the VIX itself traded at 47.15 in the overnight session, one of the highest levels ever recorded. Prior dates were: October 28 1997 (bottom), September 11 1998 (after the bottom), October 8 1998 (bottom), September 21 2001 (bottom), July 24 2002 (bottom), October 2008-March 2009 (crash), May 21 2010 (initial bottom in bigger base), October 8-9 2011 (bottom), August 24 2015 (bottom), February 6 2018 (bottomed 3 days later).
Also yesterday, VIX closed 6 points above EEM VIX for only the third time since 2011 (data start). The other two dates were February 5 2018 (bottomed 3 days later) and December 24 2018 (bottom). U.S. Stocks, which until last week were seen as the only safe haven, are being used as a source of funds and liquidated.
EXTREME MARKET VOLUME
Records are being approached or completely shattered in ETF Volumes, Futures Volumes and Put Volumes – in most major Indexes, Futures and ETFs. This is a classic sign of a washout capitulation.
One example is the Net Put-Call Volume in the S&P seen below. The only two other dates that matched this extreme bearishness were August 2015 and February 2018, both exact bottoms.
Target Volatility Funds have almost completely delevered into yesterday’s close and dropped Equity exposure to levels close to where the market bottomed in 7 out of 8 cases over the past eight years (the exception was 4Q18 which led to a longer decline, which ultimately was fully recovered in a historic V-shaped rally). [Note this dataset is a model-driven approximation that has been a useful gauge in the past. It is not based on actual reported positioning.]
After comparable historic moves, over a medium-term time horizon most prior cases led to Stocks finishing their decline almost immediately, then rallying sharply (roughly 0.500-0.618) within a larger bottoming pattern that took weeks/months. This is also consistent with the analysis presented in last week’s report, regarding initial declines from extreme momentum highs. The exceptions, primarily in 2008, led to catastrophic losses for traders who bought early.
Because of the extreme risks, it goes without saying that all readers need to evaluate this data individually within their own risk tolerance & long-term objectives, and then decide what makes sense for them. Nothing contained here is an investment recommendation.
But there is ONE suggestion that is appropriate here, and always worth a reminder: turn off the noise.
Here are some of today’s cover stories, screaming for your precious attention – as if we didn’t already have enough problems to deal with:
And here is the noise level on Twitter – at a new all-time record – worst of all, not a single prior spike meant anything for Stocks. Most turned out to be fairly decent opportunities to think differently and take a longer-term view.
Turn it all off.
These were some of the hardest days I’ve ever seen in more than 25 years in markets.
I hope everyone is safe and most importantly, know that life is going to get better.
I wish everyone good luck, a nice weekend, and that this may all become a distant memory – making the world stronger and more prepared than ever before.
Thanks for reading.
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