Long EAFE, But Maybe Not Yet

The relative turn from S&P 500 (Nasdaq) leadership to MSCI EAFE (MSCI Emerging Markets) leadership has probably started, but the first stage might still be bearish for stocks. At least it was in the 2000 and 2008 turns...

SPY-EFA Ratio Threatening Breakdown

If this rolls over and drops, it's a major signal for the markets. U.S. stock market leadership is over and it is either the start or end of the bear market.

What do you think? A new bull market is starting along with a new U.S. dollar bear market, led by non-US developed markets or a major top in the U.S. markets is about to pick up downside steam? SPY has way more tech exposure than developed markets, so if bearish, it hints at a resumption of Nasdaq leading the markets lower. If you notice the stochastics below as well, SPX-EAFE ratio bottomed in February 2000 and peaked again in October 2000. This time it peaked in December 2021 and bottomed in February 2023.

Here is EFA versus EEM for comparison. Looks like a massive base in favor of developed markets.

Dominoes Lined Up and Falling

ES traded down to a support level this morning. THe Dow Jones Industrial Average lost the 1929-2000 trendline. Palladium is threatening a top completion and breakdown.

Binance is in trouble and it is the market:

Platinum:

3900 Is Open

Below 3930, room to drop. Above and 3950 and 3980 are resistance areas.

I posted a bunch of trades over on the Substack.. It is a shooting gallery out there because a reversal will hit everything. I don't have positions on these ETFs, but funds such as XLV and XLI (healthare and industrials) are ripe for reversals. Energy should get crunched, tech, etc. If it looks like a good short, it probably will be.

The Inflation Trade is Over

This morning's spike in the CPI was the last torching of the inflation bears. Inflation peaked in June 2022 and a lot of bears didn't get the memo. They continued pushing a bearish outlook based on fading inflation, with a resulting series of squeezes. It appears that like the dodo, these animals are now extinct.

All is not well in the markets though, at least this morning isn't yet a clear victory for the bulls. The DJIA reversed all of its CPI gains by 11 AM and Tesla broke to a new 52-week low.

Zooming out, this is supposedly a bear market, but even the technology sector failed to crack its 50-month moving average.

Does this mean it isn't a bear market? Not necessarily. The 2000 bear market was a similarly slow starting affair that was frontloaded with massive losses in speculutive growth stocks. This cycle has crypto, that one had Beanie Babies. It could be a giant correction though, a huge rotation from growth to value, with energy becoming the still-extant bull market's leader. I still lean bearish because the charts strike me as bearish, particularly where many Dow components are situated, yet there is some fog at the current price levels. If the bear resumes, it won't be because of inflation fears. It will be driven by a new fear, most likely recession.

QQQ/SPY Ratio

Unemployment and Stocks

Very simple formula for 2023 in my opinion. If unemployment rises, stocks are going to new lows.

The first chart below shows claims and stocks positively correlated because myopic, QE-addicted bulls think higher unemployment is good for them, because the Fed will ease off hikes.

If unemployment starts rising sharply, then we'll know what form the Black Rabbit will take.

Coppock Curve and Dovish Feds

The Felder Report discussed the Coppock Curve. I can see both a bullish and bearish interpretation. It confirms the 50-month moving average hold being a correction with the Coppock down a little more than in most corrections and similar to the 1987 crash move. It bottomed well after stocks began their rally.

The other chart shows how the bulls interpreted the Fed's pivot in August 2007. A very bullish reaction in September 2007 when another rate cut followed and then the top shortly thereafter.

Apple Ratios

A trip to the lower support on AAPL/QQQ corrolates to a $130 price at the current level of QQQ> A conservative target is a touch of that support. Adjust for move in QQQ.

Hello Deflation

The October PPI report was bullish for stocks. The market should love than news and run higher this week, but there are signs of weakness. I was caught wrongfooted opening short positions yesterday, but I might have been early instead of wrong about the rally completing.

The exhaustion I saw in the market yesterday was wiped out by the morning’s response to the PPI. Most people are not looking at China and other data sets showing the clear tilt into deflation underway and more oncoming in 2023 once housing data trickles through. At least through the PPI release, the market is still viewing falling inflation as bullish.

The core PPI services segment went negative in October.

There’s one potential paradox: speculators have been bidding up commodity prices in response to lower inflation readings. Will that continue? Today’s initial response was a jump in commodity prices that quickly reversed. It will be telling how this plays out today. If copper and oil continue sliding, it may indicate the market has started realizing the downturn in prices and slowing pace of Federal Reserve rate hikes might not be bullish.

Stocks reacted far more positively because there’s no sign of recession yet. Falling commodities without a recession would be positive for GDP growth, consumer spending and limit Federal Reserve rate hikes. It would be a move back towards the “Goldilocks” economy that stocks love.

If instead stocks and commodities start sliding, it will be evidence the market has moved beyond inflation worries and started on deflation worries.

Yesterday I opened a bunch of short positions having seen exhaustion on the tape. I’m going to be underwater at the open, but notice the line on the NQ chart. I have two resistance lines on the NQ at 12100 and 12200. Right here, my thinking is to add more shorts at 12200 if it can get there, but cut loose all the short positions above.

Copper Reversal

Copper reversed at an important resistance level. The gold/copper ratio has pulled back since July's highs, mainly a copper-driven move, and coming up on a base of support. A turn higher led by gold will signal stagflation and a turn higher driven by losses in copper will signal deflation. A continued drop in the ratio signals economic growth may remain strong despite the inflation.

As for the S&P 500 Index, the next level up is clearly 4100. Nothing particularly bearish will happen until 3930 falls on the downside.

ES Tags Resistance

Inflation Cool, Stocks Hot

3875 is the key level today. Above and the bulls are in control. Probably going higher. Below and then 3850 and more important, 3830.

zooming out , 3930 is a resistance area should the bulls press it today or into tomorrow.

As for inflation, the number beat the most optimistic investment banks, while the Cleveland Fed missed by 100 percent.

Chart Thoughts Heading into the FOMC Meeting

A few ideas I've been mulling. Some of these aren't new, but are timely again in the context of a rally. I'll start from big to small.

1. Bear markets are not merely 20 percent declines. A bear market is big in time and in price. The Nasdaq fell 30 percent over a couple of months in 1998 and you don't hear anyone refer to that as a bear market. You did hear people refer to the stealth bear market in value stocks from 1998 and beyond. There has been a bear market in ARKK, crypto and similar investments. There has been a bear market in gold miners and emerging markets. There has been a bear market in treasuries. There has not been a bear market in the major stock indexes if the bottom is in. Moving averages such as the 200-week moving average aka 50-month break in bear markets and once they're through, they go way lower. They do not break in bull market corrections or do peek-a-boo fakeout.

2. Bear market rallies of 25 percent are normal. There are much larger rallies in the most beaten down indexes or in very long-term bear market, such as Nasdaq in 2000, the 1929-1932 DJIA, 1970s DJIA, the 1989-??? Nikkei. A 25 percent rally from 3500 goes to 4375.

3. The DJIA is only down about 10 percent from its all-time high. The long-term chart looks like this:

4. Everyone is watching areas between 3900 and 4100. My sense is there is higher upside possibility to the degree bears are too aggressive or too skittish, but the Federal Reserve has to cooperate for a continued push. My sense is the market is moving into a binary event where the rally either has two or three days left, or it has many weeks left and people will be talking about new all-time highs come January (at least on the Dow).

Almost Time to Close All Shorts...Or Is It?

Am I closing my shorts yet? No, and I still have cash looking to open.

My view is diesel is up 40 percent in a month, oil still high, markets are showing they are still filled with crack-addled speculators who will throw their inflated cash into stocks at the first whiff of a Fed pause, let alone a pivot. Gold is moving like it wants to crash too:

Days like today hurt, but it also makes me even more pessimistic about this bear market and its impact on the United States. The bubble in stocks wasn't as extreme as the dotcom bubble, but in my opinion, the economic situation is far worse. The 2000 market top was a big one, but it was concentrated in the technology sector. The Federal Reserve was overly aggressive and helped create conditions for a housing bubble that ultimately led to a lower stock market low in 2009. They've been insanely aggressive since 2009 and went nuts in 2020. This produced a profound sentiment shift among investors. Sentiment surveys ymay say bearish, but I don't think there are any real bears out there. Investors are valuing stocks on peak earnings, assumption of resuming earning growth, assumption of a return to low interest rates and so on. If I'm wrong, point out some examples not named Hussman or Druckenmiller. I keep coming back to charts such as corporate profit margins, which hit 16.5 percent

Long story short, I shorted more. I'm out of firepower unless I close other positions now.

It's All Apple Now

There's some squeezing in the Nasdaq now, but when the NQ was up about 1 percent this morning, the entire amount was from Apple alone. Apple was 13.67 percent of QQQ coming into today. It was up about 6.5 percent when the QQQ was up less than 1 percent. A 6.5 percent gain in Apple was enough to lift QQQ about 0.89 percent (lots of moving parts so this isn't precise). They reported not good earnings. Not terrible earnings though, and the stock was probably heavily shorted by bears looking for carnage. Hence a big squeeze this morning that propped up the markets. I expect it will run out of steam around 11 am, not far from here, although it might get all the way back to 3900 before reversing.

Bulls Want to Go Back, But We Only Go Forward

My expectation coming into today was that I either short again on a bounce or have to wait to short as the market drops. There's the PCE bounce on the release. I thought the numbers could come in lower, but they are in line with the market consensus. That is negative overall because according to the Cleveland Fed, inflation accelerated in October (confirmed by the rebound in commodities). Also, Cleveland Fed was looking for a lower number and was wrong. Their models have been biased on the underside lately, and they're already seeing faster price increases in October.

The peak conditions for peak stock prices are in the past. Not only is the bull market dead, but the future bull market will be a totally different animal. Bulls are still clinging to hopes of pivots, blaming the Fed for hiking rates and so on. They are going to keep being sucked into dip buying until they realize it's over. Then we can see a capitulation wave down, probably not the final one either. I suspect that wave is already underway with BigTech earnings coming in weak.

Keep It Simple

New high on ES, step aside or go long. No new high on ES, accumulate short positions.

I'm guessing the market will end up pinned going into the Amazon + Apple + PCE news. Three massive pieces of information that in hindsight probably don't matter. There won't be good enough news to stop a bear market and there probably also won't be the kind of shockingly bad news that will derail a rally amid bullish sentiment. The marekt is going to do what is it going to do, but there could be major distractions in the next 24 hours that carries forward for days.

Nuclear Silos Opening

Bombs away. It's time to short away. I will get out if new highs are taken out. I'm buying December puts.

SPX Where It's At

Bounced off the 200-week, which every Wall Street bank is hyping to suck in more bull suckers. It is at the underside of the trendline formed by the 2009 and 2018 lows.

I'm guessing earnings season will be overall bullish because bulls are excited to pay a premium for companies that raise prices by 10 percent, but only see sales go up 5 percent, heading into a recession. The market is a casino filled with gamblers though, and any news can spark a price surge or collapse. Economic destruction is coming to the United States because the economy is based on legal gambling at this point. People looking for inflation have it totally wrong. Whatever happens with the nominal price of things, the value is going to be eradicated. People will make $50,000 starting salary at McDonald's, average homes will be $300,000, the S&P 500 Index will be 5000 and gold $10,000 under inflation. Or shrink all the numbers for deflation. Evaporation of phantom wealth is the story. Whether it comes by inflation or deflation won't matter much in the end, and in either case, stocks are not the place to be. Commodities will lead under inflation and cash/hard money will lead in deflation.

All the headlines you're reading today on Wall Street, gamma this and squeeze that, will read like the menu on the Titanic in a few years.