Global Equities signalling Major Bullish Thrusts

In this report, I will discuss the following three topics:

(1) Exactly one month ago, I noted Emerging Markets were in a historic panic. Since then, they have slowly stabilized and rallied ahead of U.S., Europe and Japan. As I’ll present today, the rally in EM looks similar to the start of prior Major Bull markets.

(2) In a stunning new development, last week produced significant and compelling evidence that a Major Global Equity extension rally has ALSO started in the U.S., Europe and Japan. Today’s charts will show a powerful combination of Price & Breadth Thrusts has triggered simultaneously in every Major Global developed market.

(3) Throughout the report I’ll discuss potential implications of these signals, while also presenting various scenarios and areas of research going forward.

PART 1: EMERGING MARKETS TURNING UP FROM A HISTORIC BOTTOM

In chronological order:

On August 19, my EM Core Trend Model turned up from a historic oversold level. This was a critical signal I was tracking in my August report. I shared this chart on August 20 on Twitter, as critical initial evidence for a potential Major bottom in EM unfolding.

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Also on August 19, my Mexico MEXBOL Core Trend Model turned up from a historic oversold level. Similar turns identified most major bottoms since 2008 with only one failure (sideways from 4Q17-4Q18).

On August 21, 67% of South Korea KOSPI stocks triggered a MACD Buy Signal. I tweeted this chart the following day: “Starting to show signs of life… Similar to some historic bottoms. Look for a base to form, setting up potential Major rally.”

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On August 23, 72% of Hong Kong HSI stocks triggered a MACD Buy Signal. I wrote: “One of the biggest spikes of all time. ALL TEN priors led to massive 6-12M gains. Only one made new lows first (2015). Look for a base to form, setting up potential Major rally.”

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On August 29, 60% of Mexico MEXBOL stocks triggered a MACD Buy Signal. This confirmed the Core Trend Model Buy signal that had triggered ten days prior. I wrote: “One of the biggest spikes of all time. Seen at some historic bottoms, including both final bottoms in 2008. Look for a base to form, setting up potential Major rally.”

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Taken together, the massive number of signals in EM were indicating strong signs of a historic turn, similar to the start of prior Major Bull markets.

But EM alone wouldn’t be enough to carry Global Stocks higher…

PART 2: MAJOR BULL MARKET THRUSTS IN U.S., EUROPE AND JAPAN

A BRIEF DESCRIPTION OF THRUSTS AND THEIR IMPLICATIONS

Several legendary market technicians such as Wayne Whaley, Marty Zweig and Walter Deemer have studied the behavior of Price, Breadth and Volume Thrusts. While there are many important variations and calculations, Thrusts ultimately all measure the same thing — a rare but extremely important moment in time when Stock Buyers (demand) are overwhelming Stock Sellers (supply) for a sustained period, usually a few weeks. This extreme Buying is typically seen after Major Stock Market bottoms but can ALSO occur as Stocks are breaking out from extended consolidation periods.

Which brings us to what’s happening today…

UNITED STATES

Last week, U.S. Stocks triggered their SECOND Major Breadth Thrust of the year. This is one of several Major Breadth Thrust signals I track for the S&P 500 index (this specific one is based on Wayne Whaley’s PTA work). The first Thrust came right after the December 2018 bottom, a Major rally initiation signal.

I shared this chart on Twitter on September 16, noting “similar strength was seen in 2013 and 2016 as Stocks broke out of identical 2-year ranges. A new Bull Market extension rally may have begun, marking the end of the 20-month volatile trading range which began January 2018.”

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Later that day I added that “the entire market is showing massive strength. NYSE Composite triggered only the 5th Major Thrust in over a decade. Note the base at the highs. Russell 2000 triggered only the 6th Major Thrust in over a decade.” [*Note my NYSE Composite data is for Common Stocks only, sourced from my own proprietary database going back to the 1940s.]

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Now let’s add some charts I’ve never shown before:

Last week nearly half of Russell 2000 Stocks spiked above their Upper Band – a potential rally initiation signal identical to the ones last seen in 2011-2013 and 2016. This is a textbook type of Thrust within the category of Price Thrusts.

Also last week, nearly a third of Nasdaq Composite Stocks spiked above their Upper Band – another textbook rally initiation signal similar to the ones last seen in 2011-2013 and 2016.

So many Thrusts triggered across the major U.S. Indexes & Sectors that it may be impossible to cover them efficiently in a single report. The key message is — that the weight of the signal evidence suggests the U.S. market is in broad directional alignment and starting a potential historic Bull Market extension run.

JAPAN

Last week, nearly 70% of Nikkei Stocks spiked above their Upper Bands – an extremely powerful Price Thrust (rally initiation) signal last seen 2009, 2013 and 2014 – the start of historic runs in Japanese Stocks. Many thanks to @Reflexivity27 on Twitter for giving me the chart idea here, originally using the TOPIX index.

Further on Japan, last week nearly 80% of Nikkei Stocks made a new 4-Week high – another extremely powerful Thrust (rally initiation) signal last seen 2009, 2013 and 2014 – the start of historic runs in Japanese Stocks.

These Thrusts are coming right after a historic capitulation in Japanese Stocks:

Japan has been completely abandoned by Foreign Investors. This mass capitulation is how the last two major Bull markets started. Last week’s Thrusts should mark the beginning of a historic revival in appetite for Japan Stocks, adding massive fuel to the Bull run. The Nikkei quietly gained almost +4% last week, the TOPIX almost +5%, and the TOPIX Banks almost +9%. Very few people were talking about this.

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Further, Nikkei Volume is now starting to wake up from its slumber (original chart here). Note the initial Volume spike turning the moving average back up. This is a potential Major rally initiation pattern similar to 2013, 2014 and 2016. The buying stampede may have begun, likely aided by Foreign Investors rushing back into the market.

Critically, note these Thrusts are triggering right as the Nikkei appears to be completing a Major base at the prior highs from 1994-2015. In other words what was previously resistance for three decades may now be support. Meanwhile note the Monthly MACD curling up, in preparation for what could eventually turn into a Bullish cross identical to 2016. This cross would likely confirm a massive Bull market extension rally.

The Nikkei’s massive three-decade base is even more interesting on a Weekly scale, adding the 200-week moving average as a trend gauge. Note how the Nikkei just formed a double bottom on its rising 200wma, an almost identical repeat of the 2016 bottoming pattern. If this historic base is complete, could we soon enter the STEEPEST part of the price advance? This would be compatible with a market that has been totally abandoned by investors and beginning to show historic Thrust behavior.

EUROPE

The DAX just triggered one of the biggest Breadth Thrusts of the decade.

To save space I won’t show the full Europe signal list here. Rather, let’s look at some new ideas — for instance, the unique trend potential that’s ALREADY in place in Europe:

Below, the DAX has already completed a Monthly Bull cross at the zero line. This is a potential historic opportunity in the making, not just in the DAX but also across the entire European continent, as every other Major index has also completed a similar pattern (SX5E, FTSEMIB, CAC, to name a few).

Looking at the DAX’s weekly chart, note the completed Base at the 200wma and now in full 1-2 launch sequence. This is the identical pattern noted in the Nikkei earlier. Also note the Weekly MACD crossing up from the zero line. All time frames (M/W/D) are aligned to the Bull side, with Major Thrusts in place, and almost no one has any European Equity exposure (see chart on EU Equity exposure here).

Taking a last look at Europe, note the SX5E weekly chart with a box consolidation at the 200wma. Similar to the DAX, the weekly and monthly gauges have also turned up. Europe could finally have the energy to break its multi-year resistance line and trigger a Major Bull Market extension rally.

IN SUMMARY,

The weight of the evidence suggests Global Markets are in broad alignment and starting a potential historic Bull Market extension rally. Short-term moves notwithstanding, markets are sending a powerful message of strength which should be respected.

Historically, prior Bull Markets typically ended with epic rallies, usually lasting several months and with every region in the world participating. While it’s impossible to know if this Bull Market will follow the same script, one thing seems absolutely clear – almost no one is ready for such an outcome.

I believe this theme is of such critical importance, I’ll continue to focus on these major signals and share what I’m seeing here and on Twitter — so stay tuned.

Thanks for reading.

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Stocks and the Current Environment

Starting with some thoughts I tweeted on June 17:

Here’s a chart showing how extreme the selling/capitulation has been:

This is absolutely historic selling. Remember DotBust? Lehman? This is even more selling than seen at the depths of those recessions.

If a global recession is coming, it will be the most widely anticipated in history.

Everyone finally sold out perfectly at the top.

I’ve lost count of how many charts look like this, most at historic extremes. Every time I send one out, 90% of the responses are “this is 2008, crash coming”.

Take this next chart as an example:

Pretty self-explanatory. I shared it on Twitter with the following commentary:

The Russell 2000 has seen a historic wipeout in positioning (like everything else). Traders have completely abandoned this index, perhaps using it as a “hedge” against other holdings. Look at the bottom panel, showing Small Speculators in a historic selling capitulation, matched only by 2008. Extremely contrarian Bullish.

Then I added:

Now look at all the bottoms in the last 11 years. Small Traders were capitulating/selling in all of them. Forget Stocks for a moment. When Small Traders do this in any market, emotions are the primary factor. Avoid emotions, they are the enemy.

Here are some of the responses I received after posting these two charts:

“It says we are in 2008 all over again”

“Small Specs are smart money, this is right before a giant crash”

“Doesn’t matter, liquidity is falling and nothing can stop it”

“There is nothing but talk about how bearish everybody else is. Kind of funny”

“Translation: smart money leaving, dumb money overpaying”

Only one person responded to the first chart with the following:

“Looks like all were great entry points”

Every day since Stocks bottomed in early June, I continue to be surprised by how extreme the mood has become. And it’s not just the data. Even just talking to people it’s clear that a deep fear/anger has taken over. Emotions are at historic extremes.

I’ve kept a trading journal for over two decades. This is a shortened version of what I’ve observed these last few weeks:

  • Since Stocks bottomed in early June, it’s been a relentless rally only surpassed by the extreme reluctance to embrace it. Every single day it’s the same story, veiled in some fresh argument:
  • First I was told the rally was fake because it was all short-covering and not real buying. Then it was supposed to fail at resistance, as traders bought massive Puts and investors sold their longs (what little they had left) down to the bone, pushing my models to extreme oversold. As June FOMC approached, Stocks had supposedly gotten ahead of themselves and would peak on the Fed announcement. Then I was told Stocks barely rose after the announcement, which indicated buyer fatigue. The next day when Stocks exploded higher again, I was told the Fed was manipulating rates on behalf of the White House. Now with the S&P grinding highs “it’s too late to be bullish” (this is from an actual headline that came out last week). To top it off, on the day of the breakout last week, traders pulled billions out of SPY because they felt like being even more in cash.
  • Mass insanity is the only way to describe the last few weeks. The Bearish narrative is so entrenched that it still hasn’t adjusted to the fact that Stocks ran to new highs in almost a straight line. Bears were promised a recession, a deflationary bust, a trade crisis to last “the rest of our careers”, an “uninvestable anti-Tech mood”, “Tech’s glory days are over”, and “don’t take any risk in 2019” (these quotes are from various media articles published during this rally). And now, with Stocks at the highs the same people who missed the whole move say “it’s too late to be bullish”.
  • Paul Tudor Jones once said there is no training for the last third of a Bull market. There are very few people left in the business today who saw both the 2006-2007 Housing/Commodity/EM Bubble and the 1999-2000 Tech Bubble in real-time. The current environment is the complete opposite of those periods.
  • If the Bull market HASN’T ended, then it’s missing a classic “final third”.

Back to the same chart from earlier, adding some red lines:

This is the third time in this Bull market that Stocks recovered from a large correction but investor selling continued relentlessly. In 2012 and 2016, the selling persisted until Stocks had already pushed all the way back to previous highs. The following years were both massive extension rallies.

I can already hear the feedback…

“But it will end in tears just like [insert favorite year here] all over again, Short everything!”

Maybe it will end in tears. But I’m not sure that it has to end right here. One thing we can all agree on, is that history repeats itself. Just don’t forget it can also repeat itself on the upside.

IN SUMMARY…

This is one of the most extreme environments I’ve ever seen. Though I am far from certain, I think the path of maximum pain is higher. Stocks & Commodities are rising, the Dollar & Bonds may be headed lower. Central Bank liquidity is coming back, not just in the U.S. but all over the world.

Meanwhile against this backdrop, Stocks just posted the biggest first-half gain since 1997. You know what else last happened in 1997? Stocks broke to new highs with more individual investors leaning Bearish than Bullish (AAII survey). Who knows, maybe it’s time to dust off the old diary from the 1997-1999 “last third”, just in case.

Thanks for reading!

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Closing my Long USD positions

A quick background on my Dollar view:

I started buying USD-EMFX in March based on (1) my trend models suggesting a major potential move, (2) short-term momentum quietly shifting in favor of the Dollar, and (3) crowded carry positioning and extremely low volatility likely to blow up simultaneously and force deleveraging.

My main fundamental premise was that the economy was doing fine and the market was way too dovish on the Fed. At the time, consensus was looking completely the other way. The narrative was all about the “friendly Fed”. It all went out the window when Powell said low inflation is “transitory” on the May 1 FOMC – which in hindsight was also the day U.S. stocks topped and reversed.

What I’m seeing now that makes me want to rethink my Long USD view:

The Dollar’s rally is getting extremely stretched from a quantitative trend perspective. I thought it would take several months to achieve this, but it took only two. This was one of the most explosive Dollar rallies in such a short period of time, particularly against EM currencies.

The move looks unsustainable at this point – for instance here is the trend strength in USDKRW, which was my biggest Dollar-EMFX position until yesterday:

Here is the same chart for USDCNY. Look what happened to prices historically after similar extremes. A whole lot of nothing. Maybe it’s time to sell some straddles.

The Dollar’s strong momentum could have residual upside, particularly versus Asia on lingering trade war concerns, but I think it would be part of an “M-top” structure, where it chops sideways for a bigger Weekly momentum turn.

For instance, this is a USDKRW chart I tweeted yesterday:

In the chart above, note the M-top patterns in 2014, 2015, 2016 and even 2018 when the MACD got this elevated and rolled over. Incidentally the MACD finally crossed down this morning.

In summary, overall this Dollar move was much more extreme and sharp than I envisioned. Maybe this means it has more to run, particularly if the trade war escalates. Or maybe (I think) it’s close to pricing in a full-blown crisis. Asian FX & Stocks look particularly priced in, having experienced massive outflows in recent weeks. The adjustment looks mostly finished to me, and I prefer to take my hard-earned profits and move on to another opportunity…

I think the next big opportunity is to find the bottom for U.S./China stocks and get aggressive on the Long side. I’ve had this view for a couple of weeks, prices are getting close to my ideal levels and sentiment is almost in the basement. And if the Dollar’s momentum starts to slow, I think it could help underpin Stocks at the perfect time.

Thanks for reading!

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