Have a good surfing Sunday!
A lot has happened during this period, both personally and in the world of Market Surfers, but let's go step by step.
In mid-August, I decided to stop writing these columns and take a 10-day break…a rejuvenating vacation!
However, I was aware that there was a website to be completed, so I got to work on the backend of the site and on creating exclusive content that you will only see there.
I wanted to finish it by the end of August and start writing articles for Market Spotlight again, but I was literally embarked against my will for 12 days for a Mediterranean cruise, but it's not the usual cruise you'd expect…
My Engineer degree led me to “scrounge” for an unassigned “vacation” on a Navy military ship and, I don't know how many of you have had this experience, but it is the exact opposite of the concept of comfort, besides the fact that I had zero or little unencrypted connection. I'll post a few pictures, just to give you an idea of where I had gotten myself.
So, crammed into a locum, in cots with mattresses that have seen better days, in the little free time and calm I devoted myself to finishing the site… drum roll… We finished it!
I say “we” because, of course, I didn't do it all by myself; it was a team effort that allowed us to get to this point, albeit with a few stumbles along the way.
Now, there is the flip side of the coin….
I will have to leave again in a few days for a shorter period, so I will not give you any links to the site yet.
I am eager to organize a webinar to introduce the site and bring you up to date on all the new features, and this is likely to happen when I am in an averagely comfortable, dry place with no alarms going off every 5 minutes.
You will have a link by the end of the month, that's for sure, but I don't know the exact day yet.
I have agreed to the connection, so I should be able to post articles on these screens.
But back to the markets now, in this episode, we will discuss:
Where were we?
Current situation of S&P 500
Seasonality of cold weather
What does the VIX tell us?
Where were we?
After 4 weeks of no articles, I picked up the analysis that painted the August/September scenario, and I can say that we hit the nail on the head in the medium term.
Let us now take a look at some charts published in recent weeks and see what they have been up to on Wall Street.
Specifically, in the Dark clouds on the horizon of July 16 among the many charts supporting the thesis of weakness was this chart of the Nasdaq with support levels to monitor.
At the end of September, the list of technologies had this behavior:
Drilled support 1
Sinking to support 2 that held to the penny
Upward break of support 1, which has since become resistance
A slightly dirty test of the same level reverted to support and then upward restart, though somewhat uncertain
Notes in the margin:
A complete reset of PPO, which dropped to negative values and then returned above the zero line, but still hiccups.
The RISK ON XLY: XLP ratio has even broken relative highs (great news for bulls)
Technology, another important sector for capital flow, shows a neutral trend in line with prices. No cues, therefore, from this report, at least for the time being, which will therefore be to be monitored to understand any upside margins in the market.
Let us now turn to the S&P500 index, taking up the chart posted in And finally comes the weakness of August 6.
The behavior is very similar to that of the NASDAQ 100:
Drilled support 1
Support 2 barely touched
Upward break of support 1, which had become resistance
Movement immediately reabsorbed that brought prices to the area between support 1 and 2
Reboot upward.
Throughout September, prices have been stationing above support 1, which proves to be an excellent reference for the short term.
The Growth vs. Value ratios analyzed in the lower panels all show behavior in line with prices and suggest that we are within a consolidation before an upward restart that we may see in the last quarter, with the exception of Small Cap Growths that struggle relative to Values.
Current situation S&P 500
I have spent rivers of words talking about perspective in stock market analysis and have been trying to convey these concepts to myself for several months.
It is usually a bad idea to form an opinion based on only one or two factors. The stock market is a huge jigsaw puzzle, and putting a couple of pieces together does no good, maybe the edges of the puzzle are easier to find.
As part of this process, when analyzing only prices, it is always important to consider all time frames.
A very short-term intraday trader might use a 10-minute chart, but to get the right perspective he or she must also know what is happening on an hourly, daily, and weekly timeframe since market participants are different and all operate on different timeframes.
None of these published graphs, taken individually, is sufficient.
Hourly chart
Analyzing the hourly chart, we see that the 4430 level is the first important support, while further down we have the 4335-4400 area.
Prices are lateralizing in this huge triangle (yes, from the point of view of the hourly chart it is huge), and the break of 4430 is the first warning sign for bullish hopes, but looking only at the 2-month hourly chart, we do not have much downside potential.
Daily graph
Here is another perspective. As we increase the timeframe, we realize that we have more downside potential while remaining in a very significant bullish trend.
From this point of view we realize that we are in a bullish market trend, with excellent price support from 4300 (August 2022 high) to 4340-4335, the recent price lows of the past few months, as seen in the hourly chart above.
Some might say that there is a head and shoulders formation, and perhaps there is, but the right shoulder is significantly higher than the left shoulder, and this has less bearish significance, and prompts me to disregard this pattern, at least for the time being.
Weekly chart
Here is a broader view that allows us to consider recent bearish cyclical markets (2018, 2020, 2022).
It is evident that we have broken the 2022 downtrend (points 1 to 6 show decreasing highs and lows) and a trend line has been drawn on points 1, 3, and 5 to highlight the previous downtrend. Currently, the 4200-4300 area represents our main price support.
Over a 5-year period, we see that the support levels over shorter time intervals identified in the previous two charts are not as “important” when we use perspective.
Seasonality of cold weather
Keep in mind that September is the most bearish month ever.
In the past 73 years, it has recorded positive results only 40 times, and we are approaching the most bearish period ever. In fact, the period from September 20 to 26 has a cumulative return of 41.95 percent.
If you think things are about to get better for the NASDAQ or the Russell 2000, you are sorely mistaken!
The annualized returns of these two indices are -49% and -81%, respectively. This gives us only very short-term seasonal TRENDS, not a guarantee of lower prices, let's be clear.
However, I still believe that we will see strength in the last 3 months of the year, the last quarter of 2023.
VIX
I am very encouraged by the behavior of the volatility index.
I would have expected that this recent period of consolidation/selling would have sent the VIX much higher. Instead, I have noticed that it is not moving too far away from the 2023 low, and as long as it stays that way there is no reason to worry too much.
If there is little nervousness about the stock market crash and market makers see no need to increase premiums on options, then even I, who have been checking the chart off the Croatian coast in my tiny bunk, am not very afraid.
A couple of notes:
Note that the 20-day correlation, which we discussed extensively in the July articles, has risen above zero twice this year. These signals generally suggest the need for a reversal. Although the signals do not provide us with perfect timing, the one in January recommended that an upward reversal was imminent and exploded to the upside in January. The July signal was more ominous and warned us of a possible downward reversal. This was a fairly accurate signal, as we have been in a cold sweat ever since.
The VIX is at the same levels as in the July period, give or take a point, despite the S&P 500 being almost 100 points below the July high. Usually, market weakness results in an increase in the VIX. In this case, market makers do not feel the need to increase premiums on options, which shows that the downturn will be limited and that a rally in the fourth quarter is much more likely than a month ago.
Stock picking
This period really presents a challenge for traders, especially bullish ones. Clearly, it is not that ALL of September is bearish, but there is some statistical bias to the downside, especially in the week of September 20-26. I have no idea if the upcoming FED meeting will cause short-term selling, certainly, the afternoon of September 20 is a candidate for a watershed moment in the short term.
Happy trading!