One Year Ago Today… A Review Of The Market Technicals

It was just one year ago today that we flattened our equity book and went 200% long bonds… Good times…

Anywho… We’ve been seeing some chatter from the Perma bears (you know the type) who are saying things like “there are a number of parallels between now and then, except this time it’s going to be inflation that kills…” I’m quoting one of the repeat offenders whom I won’t give the honor of calling out by name.

Instead, I’ll use today’s piece to explain what’s really going with the recent vol and where the market is likely headed. So let’s begin.

This week’s air pocket market action is a common symptom of “Trend Fragility”. It’s a manifestation of the positioning and sentiment environment we’re in and which I’ve been pointing out for the past few weeks (here’s an excerpt below).

  • record net 19% FMS investors assuming higher than normal risk
  • FMS cash level of 3.9% have triggered a ‘sell signal’
  • Global Risk-Love indicator is in the 97th percentile of history going back to 1987
  • EU Risk Appetite indicator is in overbought territory
  • Asia ex-Japan and Emerging Market Risk-Love Indicators are signaling euphoria for the first time since 2015
  • The Sell-Side Indicator is at its closest level to a ‘sell signal’ since the GFC

(Click on image to enlarge)

But stretched positioning and sentiment are only a condition, not a catalyst. Both can persist for a long time.

Increasing intraday volatility is what makes a Bull Volatile Regime — the major indices are currently switching back and forth from Bull Quiet to Bull Volatile. This is typical action that defines the latter part of an intermediate trend. But… it doesn’t by itself mean we’re forming a market top.

The market can easily go on to run to new highs over the coming weeks and even months. Furthermore, volatility like that which we’ve seen over the last couple of days actually helps prolong the trend by shaking out weak hands and resetting sentiment some.

What we need to watch how the TL Score develops. It’s currently giving a reading of -2, which is bearish but not horribly so. Remember, it’s readings of -3 or worse that precede larger selloffs. The breakdown of the TL components is as follows.

  • Breadth: +3
  • Sentiment/positioning: -2
  • Liquidity: -3

Breadth matters the most over the short-term. And right now it’s holding up very well. This tells me that we should see a continuation in the bounce over the coming days.

Liquidity is the thing to watch to see if this will end up being a bit of a sideways range before the next leg up or if it’ll evolve into a larger selloff.

I’ll explain what’s happening on the liquidity front by starting from the 30,000ft macro view before zooming in for a closer look.

The major market moves right now are being driven by a complete repricing of the macro outlook.

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Disclaimer: All statements are solely opinions and are for educational purposes only.

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