Charts and Thoughts

There’s a lot going on right now. Tons of cross-currents. Lots of risk, but lots of good risk/reward set ups as well. Here are the charts and thoughts that to me matter most.

First, and most importantly, we are very, very oversold by historical standards.

The above is the McCellan advance-decline summation index. If you line up all the other times since the GFC that the indicator has been at this level with the SPX, you will see that either contemporaneous to or within a few days of the local low, stocks started a meaningful bounce. The three times this did not hold true were in the July 2008-March 2009 window. There is also a pronounced divergence in the NYSE cumulative AD line and its RSI.

(NB: For an aggressive trading style, there is a big difference in sizing a position in anticipation of an immediate bounce, and sizing it for a bounce that you think is likely to happen after the next couple/few days.)

Second, shorter-term, many of the major and sector indices are running into natural resistance spots–either popular moving averages or overhead supply points. Most investors right now are some combination of skittish, wounded, and underperforming; Can’t afford to lose more, can afford even less to be left out of a year-end rally. This creates the exaggerated buy the rip, sell the dip dynamic that is often referred to as a ‘short gamma mindset’.

Here are the SPX, IWM, and QQQ:

You can also see overhead/natural resistance in the SMH and the XLF, among others. However, on a more constructive note, if you look closely at the above charts you will see that when they made lower lows in price, their RSIs (relative strength indices) made higher lows; in other words, positive divergences.

Third,  EMFX, metals, and some EM names bottomed in early September, and platinum, gold, and some gold miners have really promising patterns. It is true whatever safe-haven bid that may have crept into gold and gold minors would unwind in a meaningful equity bounce, but the fact that EMFX bottomed at the same time, and platinum is leading gold, is encouraging.

Here are: FXJPEMCS (JPM’s EMFX spot index), AU, ABX, GLD and BFR (one of the Argentine banks)

Fourth, and at odds with the last point, real and nominal yield patterns have shown no sign of stopping their rise.

Below are the 5-year real yield and the 10-year futures contract:

The bottom line on rates is that despite whispers of global slowdown, the data–in the US at least–are still running on the hot side and yield patterns still look higher. This could turn quickly, on even the smallest of comments from the Fed, but it is important to underscore that until it shows signs of doing so, it’s little more than wishful thinking.

Fifth, there are a lot of names that have asymmetric entry points. Stop outs are fairly close by, and if global markets do rebound, there would be a lot of room to run. Some, like Deutsche Bank, Argentine banks (BFR, BMA, GGAL), homebuilders (PHM, MTH, NVR, , are knife-catches–and in the cases of European banks and US homebuilders, they are bets that the US and global cycles haven’t ended. Others are strong secular growers–thinking about names like AMZN, Tencent, BIDU, SQ–that only give us entry points when we are least inclined to want to buy them.

It should also be pointed out that many of the charts that have bumped up into resistance of one type or another could easily pull back for a day or three and turn into a ‘W’ or an inverted Head-and-Shoulders–two common bottoming patterns–so the timing over the next couple few days could be tricky even if a meaningful bounce is upon us. But the signs, on balance, are quite constructive.

How you risk-manage (how to size, where to set stops, how much correlation across positions/risk concentration) is a function of your ‘mandate’, your personal style, your current level of ‘mental capital’, etc. But it is worth underscoring the importance of managing your risk in a way where you aren’t likely to get ‘chopped out’ because positions are too large, or the portfolio is too concentrated.

Good luck.