• Comments for February 5, 2018

    I would say "finally the market is providing some sort of pullback." Of course, the selling of Friday was swift with a Money Flow that was about five times the average of the past 10 days, which points to panic selling. We also know that Friday-strong-selling is usually followed by Monday-continuation-selling due to margin calls.

    But then, what do we have in store?



    I posted early in the trading day on Friday the negative 20DMF divergence, which usually appears when buyers are pulling out. That pattern continued for most of the morning, while we could see some dip buying later in the day.





    Interesting to compare the current selling pattern to the most recent selling patterns for QQQ and SPY. We can see below that the QQQ TEV pattern looks similar to what we saw in November: a swift move down followed by more selling before the market bounce on the Tax deal.



    For the SPY, there was some selling in December, but the price hardly moved down. The present price weakness looks supported by sellers.



    You will also note below SDS strong selling. This is probably due to funds who bought SDS has a hedge and are now selling both their long SPY position and their SDS hedge. This tells me that index investors are worried for now and hence might fuel a continuation of market weakness.



    Also note below that all fixed income instruments were down.



    Note the selling in PCY. There is surely contagion fear for any type of bond holders HYG/JNK follow similar patterns - Not shown here.



    Also interesting to see TIP being bought at the announcement of the Jobs report which flared up inflation fears, but then crashed back down as TIP might not protect you so much against higher rates.



    The question regarding the 10Y/20Y rates is really how sustainable this parabolic uptrend really is.



    This is especially valid for the US/Japanese rates differentials. This sort of differentials is really compelling for Japanese pension funds to invest into US assets, especially with a weakening Yen.





    Conclusions:

    The 20DMF issued a short signal by the close of Friday and everything is negative. Usually, we should be expecting a negative Monday. There are two issues that might soften the downward pattern:
    1. In the most recent past, pullbacks have been buying opportunities. The whole market algos have been trained that way.
    2. The US/Japan interest rate differential is a very strong sucking mechanism for Japanese liquidity.

    We need to closely follow the Ratio of sectors on a Buy signal wait mode, which needs to bounce back above 35%-40% in order to get a good buy signal. Any weak bounce before then will probably attract more selling.