The Calm Before the Storm

It looks as if the inventory market is now not topic to gravity. The upper it goes, the upper it goes, and it has been a traditionally very long time since we’ve seen any important pullback out there.

However, like all issues, finally what goes up should come down. We’ve questions as merchants. When will the market retreat? What might presumably crack the unstoppable, debt-fueled bubble market in entrance of us?

Whereas I don’t have the reply for you immediately, I’ve an thought of what may need to occur for a drop. At this level it looks as if it’ll have to be an exterior catalyst, a black swan of types, that might put a pin to the bubble.

Nonetheless, as merchants, we can not anticipate this stuff. What we will do is see and weigh the proof in entrance of us.

In the mean time, I’m seeing a trifecta of issues for the markets as they sit at new all-time highs.

This isn’t to say that the markets have topped, and as of scripting this I’ve zero quick publicity; nevertheless, I feel it’s essential to share what I see.

The primary drawback I’m seeing is a serious momentum divergence into the current highs. Momentum divergences occur when costs go increased whereas the momentum indicator goes decrease.

This doesn’t imply a reversal is imminent, however it does present an unstable market situation that usually resolves with reversion to the imply.

The instance above reveals the divergence on the QQQ know-how sector. Nonetheless, this divergence is discovered in every single place out there on all indices and sectors, which is why it’s essential to attend till it resolves… both with a recent momentum excessive to justify the brand new value highs or a pullback to the imply.

For now, construction stays intact and the bias is increased… Nonetheless, the divergence creates a little bit of a darkish cloud over the motion till it’s resolved.

The subsequent sign is predicated alone indicator, the Pattern Oscillator. This indicator has a behavior of displaying coiled up momentum/development strikes properly earlier than they happen, and when it does it appears to be like precisely like this (picture under).

The instance above is an hourly chart of the VIX (Volatility Index) for the previous month. Observing value, we will see the VIX hasn’t actually gone anyplace. It has traded in a sideways vary at some point of the month.

Nonetheless, the Pattern Oscillator is clearly displaying a optimistic bias, the place the inexperienced line is above the pink line and each are climbing and now each are above zero (50).

That is an imbalanced place. The indicator is displaying extra momentum than the worth is displaying. This resolves considered one of two methods, both a pointy break decrease… which “fixes” the positioning of the 2 traces… or, extra generally, a break increased because the discreet buildup of momentum fires.

Lastly, we’ve a chart of the internals. There are numerous methods of taking a look at internals, however I’ll concentrate on the proportion of shares within the S&P 500 above their 50-day transferring common.

As merchants we prefer to see issues commerce above the 21-day transferring common. At worst we prefer to see them above a rising 50-day transferring common. What we don’t usually wish to see is many shares buying and selling under that common.

Within the instance above, we will see that solely 60% of the shares within the S&P 500 are buying and selling above their 50-day transferring common.

This isn’t a giant deal, per say, however it does present an inside weak point or divergence relative to the all-time excessive costs on the indices.

Placing all of the items collectively, we see a discreet buildup of momentum within the VIX.

We see a momentum divergence into new value highs on virtually each index and sector.

And we see a divergence out there internals the place much less shares are taking part within the transfer to all-time highs.

On the finish of the day value is king and we should look ahead to a price-based sign to behave on these darkish clouds out there, however I feel figuring out these darkish clouds are there’s essential to plan for as a dealer.