Have a great Sunday Surfers!
In this appointment I decided to talk about both the current state of the markets, which in my opinion, deserves attention, and to continue with the series of articles "Cracking the Stock market".
In this Market Recap we will discuss:
Highs in sight
Can we go short?
Sentiment update
Cracking the Stock Market Part 4 (Intermarket)
Happy reading!
Highs in sight
We have almost reached the most bearish historical period of the year on the S&P 500, which runs from the close of July 17 to September 25.
Do not overreact to this news. It is true that this is the most bearish period, but we rarely see huge declines, especially in a bull market like the one that is developing.
It is clear that during the summer months there is a bit more fighting to be done, that is what the trends say, which are precisely trends and are not GUARANTEES.
While I am trying to identify a short-term top and possibly buy again at cheaper prices in the next few weeks, I am getting more and more nervous in the short-term.
Here are what are the 5 reasons:
Negative divergences in all our major indexes on their daily charts (NASDAQ is especially vulnerable at -7% from all-time highs).
After a glorious ride of several weeks, overbought RSI indicates a probable price stall. Stall, not collapse!
Friday is the technical expiration of options, with tons of premiums in the calls in the money in the stock market, historically of weakness in the short term
The worst time of the year starts next week
the Put/Call ratio indicates that the high is near, as we will see later in the article
In the bearish hypothesis, I expect a behavior similar to that of February/March 2023 where support 1 and 2 are the reference areas.
In the worst case scenario a test of the 13750 area, which corresponds with the 38.2% Fibonacci retracement of the entire bullish leg of the last 7 months, coinciding with the August 2023 highs. This is the most bearish hypothesis that, to come true, an event will have to happen, something that has not yet been discounted in the market.
This is to keep you alert and not rest on the laurels of the bullish market, but it also does not mean that we will see a big crash. It is not a matter of being wrong or right, but only of sound strategy and management.
Indeed, given the bullish signals I see in the market, I believe that by September 25 we will be at higher prices than we are now, but I would not bet on a massive rise.
My suggestion?
Reduce your expectations, but maintain a bullish bias in those areas of the market that are performing.
Can we go short?
If you want to take this risk, the choice is yours. I do not like to go short in a secular bull market, considering that we may not see any major selling but only physiological reversals.
Sentiment - (too much) optimism in the markets?
The 5-day moving average of the Put/Call equity ratio ($CPCE) continues to fall further and further.
When this moving average finds a bottom, it is very likely that the stock market will find a short-term top.
In 2023 we are heading into a much more bullish period, so it is normal for this average to keep pointing southward continuously.
However, I would be VERY surprised to see this moving average fall to the 0.45 level, a level we saw in April 2022.
I think we are approaching a significant low in this sentiment reading.
I mention this only to spread some caution in the short term and not erode the profits accumulated over the past two months. This is not a long-term signal, but an indication of weakness for the next 2-3 weeks.
Cracking the stock market (Pt 4)
We continue the series of articles "Cracking the stock market" by talking about gold, silver and copper.
In the next and final episode we will discuss oil with a look at international markets.
Gold
Many look to inflation and the U.S. dollar when analyzing the outlook for gold.
Although I do not disagree with this approach, as there is ample evidence to suggest doing exactly that, I believe that the most important factor to consider when valuing gold is VOLATILITY ($VIX).
I believe that FEAR is a determining factor in deciding whether or not to own gold.
Here is the positive correlation between the GOLD vs S&P500 ratio and the direction of the VIX:
It is no coincidence that the ratio literally shot upward during the lost decade 2000-2010, although extreme dollar weakness was certainly the trigger during that period.
However, in addition to a weak dollar, we see that it only pays to bet on gold when there is fear in the markets.
Personally, I am not a fan of the yellow metal, especially when I see the S&P 500 continuing to rise through the end of the year and into 2024 and simultaneously the VIX falling further.
History tells me that it is not advisable to own gold in this context, since its relative performance is much lower than that of the S&P 500, even if the dollar continues to weaken, I would continue to bet on the S&P 500 index rather than gold.
Silver
It is considered by many to be a precious metal, but it does not react as well to fear as gold. In fact, if I posted the same graph, you would see that there is no clear-cut correlation.
This is because silver is used in industrial production, so its demand/price will be more related to economic strength than gold.
Let's say it is somewhere between gold that reacts as well as to fear, and copper purely RISK ON metal related to the industrial world
Copper
This is the metal I pay most attention to, because copper is used in many areas of manufacturing/construction and is therefore strongly linked to global economic strength.
If I use the same graph for copper that I used above for gold, and immediately the main difference jumps out at you.
It can be seen that the correlation between the relative strength of copper against the S&P 500 and the direction of the VIX is not so correlated.
There is a mix of two forces here.
If the economy expands, the demand for copper increases, so the price increases
But the same economic strength causes the S&P 500 to rise and the VIX to fall.
So this chart does not lead to any conclusions (which is why intermarket analysis can be complex especially in the beginning).
Instead, let us see the correlation between copper and the S&P 500 index not considering the VIX:
The extreme positive correlation is seen much more often on this chart, which tells us that copper is very much linked to the economy and the performance of the S&P 500 index.
Many times I use the COPPER:GOLD ratio to understand whether we are a RISK ON or RISK OFF phase from an intermarket perspective.
Notice how the price of copper bottomed out in the middle part of 2022, almost at the same time as the S&P 500, just as on other occasions this positive correlation has recurred.
Divergences between these two asset classes are to be viewed with suspicion, such as the 2018/2019 period.
At the moment, I think the decline in the VIX and the renewed advance of the secular bullish market puts many commodities in trouble on a relative basis. They may go up on an absolute basis, but I think the S&P 500 is the best investment option for late 2023 and into 2024 even with a falling dollar.