SPY: Falling through support

Let's look at the longer view on the weekly. Last week was a big red pepperoni and this looks like a subtle warning ala Mamis. Strength in the US dollar was required for such a move lower in the stock market, so we continue to watch the DXY to stay above $76.00 and preferably $76.30.

The chart is necessarily busy and shows Elliot wave 5 resolving the motive with last week's high. Also, both Fibonacci price retracements and time extensions are depicted. Eighteen weeks passed from the March low to the July low. The July low resolved upward after the fake out a-b-c reversal. November 13 will be exactly 18 weeks from the July lows, so following the Fib time extension, this should be a significant date.

In July, the pullback was less than 38% and this pullback should be in that neighborhood if we follow Fibonacci rules. That would give us a target of about $95 on November 13th, which sounds like an aggressive pullback. We'll see.

The dotted red trend line is from the March lows as is the solid red trend line.

TLT: preparing for deflation

TLT has followed pretty classic Mamis bottom formation.

Talk of Green Shoots = Higher DJIA. Always?

Megan McArdle references headlines from the summer after the last deflationary crash in 1929. From July 23rd 1930:

[Hoover] Administration members reported telling Wall Street that business has turned corner, and should curve slowly upward until winter, becoming clearest in October. No forecast beyond that ventured. However, administration strenuously denies rumors of using "its influence to bring about organized support for the stock market."

Irving Trust July review says we may be entering "ultimate pit of the depression;" sees mostly bad news in June, including declines in most lines of business, lower commodity prices, stock market declines, and possible tariff reprisals. Nevertheless, advises remembering that "It is always darkest before dawn."

Sentiment improved by market support yesterday. Conservative observers still advise buying on dips and selling rallies, but if market can get above previous resistance, would be considered confirmation of uptrend and convert many observers to the bull side.

Banks reported deposit increase by $257M in past week, to $21.317B; most of money not employed; increase of $37M in loans and $82M investments.

[snip]

Technical analysis: Next week is crucial to determining whether the current rally was due to fundamental factors or just technical. As of last Friday market had recovered about 50% of the June break. Bear test on Saturday and Monday then wiped out about a third of the rally gains. New support yesterday was encouraging; if market continues up, this indicates rally is due to fundamental reasons (increased business confidence).

Current month is the anniversary of the business slowdown; October will be anniversary of the stock decline. "Every succeeding day means we are just that much nearer a definite turn for the better." Meanwhile a Canadian broker points out: In the 1907 panic March 14 was the low, and the nearest low afterwords was 224 days later. Likewise in the 1929 panic, Nov. 13 was the low and the nearest low afterwords was 224 days later (on June 25)!

There's more, and you can go to her website for more newspaper quotes from July 23, 1930: Business improving, cash on the sidelines, technical improvement, fundamental improvement... yada, yada. We can relate the summer of 1930 to today, using Mamis' view of market bottom's. Traders and investors had all the same lingo we hear today and I'm sure were all "cautiously optimistic" and nobody wanted to miss the "recovery" which was just around the corner. I'll add the charts annotated with the Mamis points:

So, let's look to see what the intervening couple years had in store for all those investors' "green shoots". Ouch.

Of course this is a new century and the political and monetary minds may have learned something in the intervening 80 years; the Hoover administration was all about balanced budgets, fiscal restraint, and tight monetary policy and ignored the huge deflationary influence of increased capacity and rising unemployment. Thus we saw bank failures and a massive abrupt deleveraging of our indutrial and financial industries. Today, arguably we have a looser monetary policy and are flooding the market with liquidity. Will it have a material effect?

Investors and traders likely learned something as well and may be less giddy this time around. But all this is doubtful.

IYR and XLF Mamis targets

Mamis bottom chart showing the sentiment readings and targets. Now let's look at some sectors that appear ot be rolling over to see where the targets are. Time series analysis is not my forte, but I'll give rough estimates.

XLF Weekly hit the high week of May 8th and now appears to be rolling over with renewed belief in negative news. Point E Aversion target is 9.50 or below around July 24th.

IYR Weekly. Recent high Point D was reached June 6 and if this is deteriorating we have a target of 25-ish near July 24th.

Has the dollar bottomed?

UUP has made a higher high and may be forming a higher low now. This is not a "crowded trade" since nobody is convinced the dollar is in bull mode... reference Tim Seymour on Fast Money (see Eric's post for the video.)

The dollar is still oversold and unpopular and yet is exhibiting some bottoming characteristics as per the Mamis model (below.)

Mamis Model Review

The Justin Mamis model is intact. The range for the near-term high is 95 to 102, so even another leg up from here would not be too odd.

Moving averages are intact, but no question, this rally is due for a pull back. Cobra has a chart that shows multiple bearish divergences: Chart is Here.

How lucky do you feel?

SPY hits subtle warning phase

SPY is telling us that it's tired.  Head and shoulders, bear flag, subtle warning...

On the 65-minute.

I was reviewing Mamis' bottom formation and drinking a few beers....

and this is the weird stuff.  The SPY 65-minute chart looks like the inverse of the Mamis bottom,

so I'll call it the "Simam Top".  Look at the next chart for the inverse of the SPY...

Inverted SPY chart from above on the 65-minute scale.  This shows that recent top as the Mamis Point C "bottom."

Mamis' Point D is the denial of positives, so the inverse is the denial of negatives, correlates with the positive action despite the crappy employment numbers and continue excess capacity, not to mention the undercapitalized banks.

Inverse Point DD is the "renewal in belief in positives", and I think that is pretty close to where we are at now, or maybe Point E (Glee).  When it breaks thru the blue trend support, that would be the inverse Point F, and instead of "positive action met with suspicion", I'd guess it would be "negative action met with disbelief."

The question is whether we are at Point E now which would correspond to Mamis' Averson (call it "Glee"?) or is this a Point DD on the way to Glee?

I'll have to think about the inverse emotions and sentiment that would go along with the other points on this graph.

Okay, I'll stop drinking beer now when I look at charts... but if I'm right on this, I may have to get a Kegerator installed in my kitchen.

The Mamis Bottom Formation

In his book The Nature of Risk, market thinker Justin Mamis looked at what bottoms look like and tied it to the sentiment cycle.

At bottoms, fundamental analysis fails and trader sentiment becomes more important. Humans are hard-wired to become fearful at an existential threat. Mamis sees Panic (Point A) as the ultimate manifestation of fear of impending doom, which gives way during a bear market to Discouragement (Point C).

The climb from Point C to Point D is called the Wall of Worry and is marked by a lack of fundamental backing to the rise in stock prices. All the news is bad and the global economic picture is dire, but the market rises dramatically regardless. Sound familiar? Nouriel Roubini recognizes this phenomenon has occurred and seems surprised that the market has rallied. This shows how clueless an economist in regards to the sentiment involved in trading.

Bear market rallies occur as day follows night. From 1929 to 1933, the last deflationary downturn, we had many double digit market rallies as the market dropped 84% of its value in 40 months.

In every bear market the bad news wears investors out and there is new belief in negatives. I think is coming soon.












In the current SPY, we can see similar patterns of Panic, Discouragement and now the Wall of Worry. Eventually there will be a renewed belief in negatives and my guess is that will come soon as the bank stress tests come out and the market rally tires. Aversion phase (Point E) will need to come and that will make a higher low than the March 9th mark.

After that only good news will instill the necessary belief in the market to move stock prices up. This is only one scenario, but it may be time to take some profit off the table and even look at some short opportunities. Also, we can look at sectors that perform in various stages of the recovery.