The True Message of the Market (and Thinking for Yourself)

This report is a major update on what’s happening in global Equities, including what I’ve shared over the past several weeks and extending it even further.

Before we begin, I want to address what I think is the biggest problem facing investors and traders today: the constant daily barrage of permabears and nitpickers fighting the market.

The first group needs no introduction. The permabears are a known breed with notoriously short lifespans. Virtually all of them blow up and become bloggers (except those that never traded real money to begin with). Sadly that’s just the start of their mission to destroy themselves and others, as they begin to prey on unfortunate folks by luring them with n=2 “this (completely useless) indicator also happened in 2000/2007 so the world is ending” charts. You can spot them a mile away, because they tell you how bearish they are, every single day.

But there is another toxic breed of pundits that provide even LESS value: the nitpickers. They’re just as easy to spot, because they exhibit several common behaviors: snarky tweets, clever soundbites, short sentences heavy on sarcasm and zero data. Sometimes, claiming a data point is “the highest since [not very long ago]” with no analysis included (for a reason). They’re successful at presenting themselves as analysts/strategists, but ultimately they’re just as toxic. Why? Because they don’t have a system, don’t have a process, are not real market practitioners, have no real understanding of how to actually trade or invest in markets, and their sole job is to feed you noise and distract you from what’s really happening.

Let me show you what’s really happening, and how important this is.

On October 28, I shared the following charts on Twitter and wrote: “Japan and Europe showing massive strength – previously observed at the start of every Major Cyclical Bull Market in the last 20 years. In the context of historic outflows, LT Momentum confirming up and Cyclicals already leading – truly a sight to behold.”

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What does it mean to say “Long-Term momentum is turning up”?

From my last report published here on Sep 19: “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.”

The Japanese market itself had already been suggesting this Bullish potential for almost two years, while it based at the old multi-decade horizontal tops line. Most important of all, price and breadth are now confirming each other in a historic way. The market is telling us to focus on the big picture.

It’s happening everywhere, as I also mentioned in that September report when markets began to exhibit historic thrust behavior.

Further, on October 29 I shared this chart: “I consider this the most important chart in the world right now. The Stock/Bond Ratio is breaking out of a massive 2-year compression, confirming the SPX breakout. Trend momentum is just beginning to expand – a potential major & historic rally getting started.”

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Here’s what the Stock/Bond Ratio looks like now again the market is telling us to focus on the big picture.

Here is a version of the Stock/Bond Ratio using the Nasdaq index look at the clear strength as it’s almost at a new multi-year high:

Related to this, on October 30 I shared this chart: “Here’s why the Stock/Bond Ratio is so critical: One version using NDX is the strongest of all. Most people said they “disagree with the chart”/”take the opposite side” – in the long run, this is the fastest way to the poor house. Never argue with the market.”

Here is what fighting the market looks like, at similar points in the past when Stocks were exhibiting similar strength:

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On Nov 4, I shared the following: “Here’s the problem for those still trying to fade every uptick in this rally: Remember the massive Weekly compressions – NDX bandwidth was at bottom 5% of its history. The bands are now expanding with rising prices. Further, LT momentum has also turned up. Pure energy.”

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Finally, a chart I shared on Nov 1: “I consider the Stock/Bond Ratio the most important chart in the world – here’s another reason why: Relentless selling & pessimism identical to the end of the last 3 global crises. This is how Stocks began major rallies, breaking out with few believers. “Wall St never changes”.”

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Here’s what the chart looks like now, breaking out with flows just starting to turn up from a historic capitulation:

Again it’s important to emphasize: what’s actually happening, what are the implications, and what is the time frame?

Instead of reflecting on these meaningful questions, here’s what Twitter’s nitpickers decided to say:

(1) “The market went up but not enough Stocks are making new highs”. I wrote this before and it’s worth repeating: the nitpickers don’t tell you that new Lows are zero (globally), and the MSCI World Index is doing just fine up 20% YTD with 52Wk Highs in the single digits most of the year. Also, if the market keeps pushing any higher, New Highs will go into full expansion mode. And that’s exactly what’s happening, as 52Wk Highs are expanding into double-digits just like in 2016 when markets last broke out of a 2-year consolidation. Any more upside and the expansion could go into full gear.

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(2) “The Put/Call Ratio is really low and the last time was January 2018.” This isn’t even worth showing a chart, it’s just more ridiculous noise. There were hundreds of times throughout history that the P/C Ratio was very low. Many of them occurred just as Stocks were launching into some of the biggest rallies ever, such as March 2009, August 2010, November 2012 (breakout rally), December 2016 (breakout rally). Again, what carries more weight? A single day of options buying activity or the trillions of dollars that need to chase Stocks and cut Bonds as the Stock/Bond Ratio breaks out of a historic consolidation?

To illustrate, here’s the 50-day moving average of the Put/Call Ratio (inverted) that’s supposedly euphoric. A week ago I said that maybe the true contrarian & objective view is to focus on the big picture – and ignore those fading every daily tick. Turn off the noise.

(3) “But Sentiment survey X is high and it’s impossible for Stocks to keep going.” Wrong. High initial sentiment was also a feature of the launch phase of every major rally in history (see chart below from NDR, with my annotations included). Other features include positive long-term momentum, breadth thrusts, extreme pessimism & outflows, all of which are present today thanks to the permas and nitpickers.

(4) Another one making the rounds: “AAII bullish sentiment 4W change was the highest in 2 years!” This fits the classic nitpicker style, ‘the highest since X’ with no analysis included (for a reason).

Below, the majority of historical sentiment spikes were associated with Stocks either launching a major Bull market rally, or an epic Bear market rally within a bigger downtrend. Even in 2000 and 2008.

Finally, it’s important to remember: there will be endless noise in the next weeks and months, claiming the next intraday data point is really bearish. There’s always something. But as I noted in every chart here, and in hundreds of tweets over the last months, the medium and long-term signals are still in a deep, historic panic. For instance, here is a chart from Oct 18, showing the 6-month average of AAII Bulls. The chart is from three weeks ago. Today, that moving average is at 29.61 (still falling). And yet people are going around parading the “4-week change”.

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Finishing this report with a positive message:

BE YOURSELF

Even though I believe there’s significant evidence suggesting we’re in a Major and potentially Historic global rally, Stocks don’t move in a straight line and usually pull back/consolidate regularly. Also from experience, I think Stocks probably won’t drop a whole lot if millions of people are nitpicking the latest intraday datapoint and completely ignoring the big picture.

More than ever, markets are littered with people looking to distract you with answers to questions that don’t matter.

Do you want to see what all those people look like? Here they are, millions of little pixels piling themselves up into towers (just like in that zombie movie) every time the market pulls back. Millions of hours of human potential, now just a line on a chart.

Each pixel is a permabear or nitpicker sending a tweet claiming victory for a 2% pullback or the inevitable correction, along what has been one of the most epic secular Bull markets of all time.

Free yourself from them (if you haven’t already). Erase them from your market research process. Build a system that listens to the market, and the market will quietly show you the answers. Be yourself, think for yourself, and the world will be yours.

Thanks for reading.

If you liked this post, please share it with colleagues, subscribe to the Blog to receive future updates, and follow me on Twitter for daily charts: @MacroCharts.

Emerging Markets in a Historic Panic

There’s no other way to describe what’s currently happening in Emerging Markets.

To get everyone up to speed, I will start this post with some charts I shared on Twitter over the last week, and then share some new charts (never seen before), tying everything together at the end and making the case for a major potential opportunity in EM.

In chronological order:

On August 6, 61% of Stocks in the South Korea KOSPI Index hit oversold RSIs. Only two other times in history were more oversold: (1) The four trading days from October 24-29 2008 which included the KOSPI’s exact final bottom of the Bear market (October 27). (2) The only other day, October 29 2018, was the exact day the KOSPI bottomed last year. So far, August 6 was the exact day of the bottom in KOSPI for this year.

Also on August 6, 47.23% of Stocks in the South Korea KOSPI Index made new 52-Week Lows. I shared the below chart on Twitter with the following comments: in nearly 20 years, just ten days had more than 45% of Korean stocks at 52-Week Lows. August 6 was the 9th most oversold day in data history. The most recent spike (2018) led to an +18% rally. The other spikes (2003, 2008, 2011) led to career-making rallies.

On August 13 and 14, a historic 76% of Stocks in the Hong Kong HSI Index (H-Shares) hit oversold RSIs. This was one of the most negative extremes ever. Incredibly, H-Shares were nearly as oversold as their 2008 lows. Including last week, in the last 18 years just seven total days had more than 75% of H-Shares with Oversold RSIsLast Tuesday and Wednesday were the #5 and #6 most oversold days in history. After those spikes, a common pattern was for the market to spend some weeks forming a base, eventually transitioning to a multi-month rally. So far, August 14 was the closing low in the H-Shares index.

Now let’s look at some NEW charts that I researched and saved specifically for this report today:

My Emerging Markets Intermediate Breadth Oscillator is extremely compressed. Similar to the prior charts, this indicator shows the net amount of EM Stocks declining has reached nearly historic oversold levels. In most prior cases, this created a “ball held underwater” situation where EM Stocks ultimately responded with an extremely sharp rally. In some cases, a historic rally.

EEM ETF. Here too, we are witnessing history being made. This is the most liquid, most popular EM ETF in the world. And its NAV discount has reached one of biggest extremes of all time, indicating EM traders want to “sell at any price”This panic condition has produced some of the biggest bottoms in history, including the exact 2008 low, which was just barely more extreme than today.

My EM Core Trend Model is at major oversold Buy levels, already below the region where all EM bottoms formed since 2009. It’s important to mention that risk remains elevated while the model is still declining. Still, I’m looking for a turn up in the model to provide a clue that an important bottom has been made. The oversold conditions are so broad and historic, it’s possible that EM (particularly H-Shares and KOSPI) are bottoming before U.S. Markets. Hold that thought for now and I’ll talk more about this later.

As would be expected from a panic of this magnitude, the outflows have also been proportionally historic:

EEM Net Flows. Widespread selling should lay the groundwork for a bigger recovery later this year, as funds are forced to chase the recovery. Any residual price declines from here would likely make the capitulation even more extreme.

EWH Net Flows. Massive & historic outflows, second largest on record. Since this ETF’s inception 23+ years ago, the record outflow was back in 2013 during the Chinese bank liquidity crisis, when overnight SHIBOR spiked. Social mood and panic may be approaching similar proportions.

MCHI Net Flows. Biggest panic on record.

IEMG Net Flows. First outflows ever.

Next is a chart overlay of the H-Shares Index with USDHKD Risk Reversals. This shows that a wave of China Bear tourists are betting heavily against the Hong Kong Dollar in the currency options market, highlighted by the extreme and historic spike in Risk Reversal pricing. Historically, similar panics led to major bottoms in H-Shares and huge recovery rallies. I originally shared this chart on Twitter on August 14, with the following added comments: “Hong Kong’s leadership warned last week the city risked sliding into an “abyss”. With social mood and markets in mass capitulation, the bar for a recovery is very low.”

Finally, let’s take a look at two critical price charts I am watching.

HSI weekly chart held the nine-year horizontal shelf and the 200wma, closing last week with a potential Bullish hammer.

Last but not least, note how the EEM chart is potentially tracking for a bottoming scenario. I’ve been updating this scenario in real-time on Twitter over the last few weeks. Note the potential wedge structure in play – which could be missing a final mini-flush lower followed by Bullish reversal. It doesn’t have to play out exactly like this, but overall I think the message is that EM and particularly Asia Equities are close to a turn (and may have already bottomed for the most part).

IN SUMMARY,

Emerging Markets are in a historic panic — particularly Asian Equities which represent the bulk of Global EM market cap.

A major cluster of signals is coming together at this critical time, with the potential to form a historic bottom.

Additionally, since EM has been completely wiped out, it could be bottoming before U.S. Stocks. This happened many times throughout history. (*most famously, in 2001-2002 and 2008-2009). It also happened most recently in December 2018, when EEM made higher lows and continued to form a base while the S&P plunged another -16% in three weeks. I think any residual lows in U.S. markets over the next few weeks would help draw well-developed sideways/basing structures in EEM, EWH, EWY and FXI — setting up a Major Global Equity rally later this year. I believe this theme is so critical to monitor, I will dedicate the next several weeks to track and share everything I’m seeing here and on Twitter — so stay tuned.

Thanks for reading.

If you liked this post, please share it with colleagues, subscribe to the Blog to receive future updates, and follow me on Twitter for daily charts: @MacroCharts.

Consensus Lawnmower (2019 edition)

Almost everything investors believed just a few months ago has been cut down:

  • EM & China were among the best places to invest.
  • The Fed was “friendly” and the Dollar would continue to weaken.
  • Equity & Rates Volatility would stay low because the Fed removed tail risks.
  • Commodities were going to make a comeback.

Feels like a long time ago, but these views were widely accepted until very recently.

In Mr. Market’s twisted Yogi Berra irony, 2019 has already been a tale of two halves, except we’re not even halfway yet.

Rolling waves of pain:

  • U.S. Financials & Banks fell sharply in March, and bottomed.
  • U.S. Healthcare & Biotech fell sharply in April, and bottomed.
  • The Dollar has rallied sharply, cutting through every consensus EMFX trade.
  • Like last year, the Dollar is moving in waves. First against the weak current account countries (ended a month ago), then Asia (largely over I believe, and wrote about last week), now migrating to a few select final pockets. Wherever the carry books are still holed up, that’s where the Dollar has unfinished business.
  • Asian Stock markets fell sharply in May, in some of the heaviest selling waves in history. Some markets broke selling records, far greater than even the panic in 2008. I’ve documented this extensively on Twitter and prior blog posts. Yet this week, momentum has been quietly stabilizing.
  • As EM tries to stabilize, U.S. markets continue to decline and look for a bottom. Yesterday, the main EM ETFs were up while U.S. indexes were down almost 1%. U.S. Tech in particular is starting to fall faster than most other areas.
  • U.S. Semiconductors, which rallied 50% from the December lows and triggered historic extremes in late April, have given up more than half their gains and become “ground-zero for trade war risk”. Quietly, they closed up yesterday even as the rest of U.S. Tech was down nearly 1%.
  • Even the U.S. defensive sectors are dropping sharply. Over the last two days, they lost nearly 3% (roughly 2-3x what broad markets fell). When Bears take out the defensives, they are running out of targets (everything else has been eradicated). This happened in December too.

True bottoms are made when the Bears successfully take down all the last pockets of strength. Sellers have relentlessly and systematically purged the haves for nearly two months. Everywhere we look, the haves have turned to have nots: there’s no one left overweight EM, China, Semis, EMFX, or any cyclicals of any kind. Defensives are heavily favored. Bonds are in a panic spike.

Meanwhile, Chinese stocks are quietly stabilizing directly above the support targets I’ve been tracking for several weeks.

Is it possible that China is forming a base ahead of the U.S.? It’s an extremely contrarian scenario. It also happened three years ago in 2016:

History doesn’t have to repeat exactly, but it wouldn’t be the first time EM & China were sold to the bone, only to bottom ahead of the U.S. and lead the recovery.

The destruction of consensus trades came in waves of selling. It works the other way around too. If sentiment is approaching rock bottom, the recovery will also come in waves:

Here is a candidate for the first wave: a key Asian market, stuck in the middle of the trade war, with heavy exposure to the Tech & Semiconductor industry — representing a massive 50% of its stock market capitalization. Essentially this market is uninvestable in the current environment. All of this psychological damage, for a simple gap fill and base on the 200dma.

We’ve already documented the historic outflows from China and everywhere else in EM. So for posterity, here is the wave of selling that just went through the same market from the prior chart (Taiwan):

No one can say with 100% certainty if the bear case is now fully priced in. What we do know is, many highly-exposed markets — most now deemed uninvestable by the same folks who were pounding the bull case just a month ago — have been deleted from investor menus, have stopped falling on bad news, and are now rising even as U.S. markets continue to search for a bottom.

Over the last month, the market wrote a story gradually, as prices came down. Now another story is quietly being told, for those that are listening. A story that will likely carry bullish implications far into the future.

Thanks for reading!

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Some notes on Stock sentiment

Last week produced a list of “Bullish” news so extensive, I don’t recall seeing anything quite like it in many years. I’m writing a list to organize my thoughts with the goal of revisiting everything later on. Perhaps there is something to be learned here. Only time will tell.

To me, it looks like sentiment is completely euphoric and speculation is rampant. While this kind of excess can sometimes keep going and get even more extreme, one thing is clear: we’ve come a long way from the dark days of December.

  • Major Wall Street banks are “telling clients to be ready for a sudden rip higher in the market.” The banks “highlighted the possibility of a rapid, surprise jump in the stock market known as a ‘melt-up,’ driven by investors looking to get in on a positive momentum shift.” (CNBC, May 1). The banks recommend playing the melt-up with call options, “the best risk-adjusted way to add beta”.
  • Several Wall Street strategists increased their S&P target prices simultaneously this week. The most stunning move was a strategist who had the second lowest target, jumped overnight to having the second highest target.
  • Tech “Unicorns” are flooding the market with a huge number of IPOs. The unicorns have incinerated billions of Dollars of private equity money over the last decade, operating in low barrier-to-entry markets with little chance of ever making money. Many unicorns even say this in their prospectus, telling investors they may never turn a profit.
  • Beyond Meat, a company that makes plant-based meat substitutes started trading this week, its stock rose +163% on the first day of trading, making it the best-performing IPO since the financial crisis.
  • The SoftBank Vision Fund, perhaps the biggest private equity fee-generating bagholder scheme of all time, is “considering audacious fundraising plans, including a public offering of its $100 billion investment fund and the launch of a second fund of at least that size, as it looks to seize on an exploding startup scene”. Audacious may not be the best word to describe this plot.
  • Louis Dreyfus, a family-controlled company that has been private for 168 years, is suddenly holding talks with potential investors to sell equity stakes.
  • Almost every major financial media source/website published a “DON’T Sell in May” article this week.
  • Berkshire Hathaway revealed it has finally bought stock in Amazon. Warren Buffett himself regretted publicly years ago that he “missed” the opportunity to buy shares early in the company’s history. All of a sudden the most traditional, disciplined value investor in history has capitulated and bought into the most consensus growth story of this investment era. The decision was likely influenced by his lieutenants, who have been moving towards tech investing in recent years.
  • On May 6 (today) the CME will launch Micro E-Mini futures for the S&P, Nasdaq, Dow and Russell indexes, offering a product for small retail traders to access index futures. Historically, the launch of new futures products have coincided with some major turning points in markets. The most recent case was Bitcoin futures, which started trading December 2017 just five days before the cryptocurrency topped and fell -84%. Other examples include Uranium futures in May 2007, almost the exact day of the top, after which prices fell -88%. Gold futures debuted December 1974 less than 0.80% from the final top, after which Gold fell -44% over the next 2 years.
  • Businessweek magazine just put Microsoft’s CEO on the cover, displayed as a heavenly figure surrounded by clouds, captioned “The Miracle of Microsoft” and proclaiming “The greatest tech company of the 1990s is back!”. Previously, the last stock featured on the cover of BW was Boeing on February 19 2018 (“Up. Way Up. How Boeing seized the sky”), after which the stock spent ten months plunging five different times.