The first of the month tends to be positive, attributed to new investments that come into the market (retirement accounts and other monthly distributions from paychecks), and at least for the blue chips, that held true today. The tech indexes and RUT did not do as well as the blue chips today and there are some stronger hints of possible trouble for the bulls.
Today's Market Stats
The first of the month for SPX has been bullish 10 out of 11 times this year and that's been attributed to the new-month money that comes in from paycheck deductions for investments, especially retirement accounts. It's become somewhat of a self-fulfilling prophecy as well since traders are now expecting the first day or two to be bullish.
Another statistic the bulls have on their side is the fact that the first of November has been bullish 2/3 of the time since 1976 (hat tip to Tom McClellan). The blue chips kept the streak going with their positive close today, although the selloff following the morning gap up is not a bullish sign.
The tech indexes and RUT suffered a stronger selloff following this morning's gap up for the market, which could be a warning sign. There might be some rotation out of the riskier stocks into the relatively safety of the blue chips (easier to sell in a downturn, lower beta if riding the market down) and this could be hinting there's trouble ahead for the rally. But the bears have some work to do before they've proven the bulls are done.
This morning's economic reports were largely ignored (very little price action in the pre-market futures) since there were essentially no surprises. The ADP employment picture improved with the +235K vs. the +110K in September (which was revised lower from the originally reported +135K). The number was a little better than the +215K that the market expected.
The ISM Index came in a little lower at 58.7, vs. 60.8 in September, but near what the market expected (59). Construction spending for September was +0.3%, which was an improvement over the +0.1% in August and much better than the -0.2% that had been expected. Unfortunately the year-over-year% continues to decline since peaking in the spring of 2016.
Crude inventories declined -2.4M last week but that didn't help oil prices today since they declined after an overnight rally. As I'll show in oil's chart, the overnight high has the potential to be the top of its rally from June.
The FOMC rate decision this afternoon was a no-surprise hold on rates. The Fed's announcement left the door wide open to an expected December rate hike since the economy is "solid." There was no further discussion of the "QER" (QE Reversal), which remains on track to slowly reduce the amount of bonds that are rolled over, thereby removing some of the liquidity the Fed has been providing over the years.
One of the things that's not registering with the market yet is the fact that major central banks are now talking about and implementing plans to reverse some of the stimulus they've been providing with uber-low interest rates and lots of free money. The stock markets of the world (along with many other assets) have benefitted greatly from the extreme levels of stimulus from the central banks and most recognize this to be true. So why is QER not striking fear into market participants? Because right now the market is not paying attention to any bad news. As my granddaughter (3 years old at the time) used to say, when she didn't want to be told something she didn't want to hear, "Don't say any something." That's what the market is telling us right now.
Cora sent me an email with the following observation about all of this:
"This market does not sell off or take profits for any reason whatsoever.
- Manhattan terrorist attack during market hours - same old, same old...it didn't take out any of the 1% that makes our market
- President threatened with impeachment - whatever, it's just another day of politics
- Fed unwinding Quantitative Easing - eh, they will take care of us in some other way
- Korea threatening with [a nuclear] bomb - he has funny hair
- Catalonia declaring independence, Venezuela on the brink of falling apart - who, what, where, why should we care?
The disconnect is getting scary."
The market is obviously bullish when it ignores bad news and just keeps rallying. The time for the bulls to worry is when good news is sold. These both are sentiment indicators -- you want to be bullish when bad news is bought and you want to be a seller when good news is sold.
While some bullish sentiment indicators have backed off, such as VIX and the Fear & Greed index, the Investors Intelligence report shows a 30-year record high level of bulls (63.5%) vs. bears (14.4%). The spread (49.1) is above a level that has been associated with major market highs in the past. This in combination with a slowly rising VIX (higher lows) and declining Fear & Greed index while the stock market indexes continue higher is a dangerous sign for the late-comers to the market. The retail crowd is shedding its fear of the market and jumping in with both feet, which typically means the market is nearing a top (when they're all in).
The Investors Intelligence reports the results of a survey of 100 investment advisors and newsletter writers. Their answers are categorized as either bullish, bearish or "correction" and when the majority swing to one side of the boat it's a good time to high side the other side of the boat before it tips over.
It reminds me of sailing our Hobie Cat -- we'd love getting one pontoon out of the water and up high, hanging out over the side and enjoying the ride up high as we flew along the surface of the water. We'd then wait for the bow of the low side to dig into the water, which immediately stopped the boat. It would then flip over and cartwheel, throwing us all into the water. If you knew it was coming you could prepare for it but for those we gave rides to, who were simply enjoying the ride, well, let's just say they weren't happy campers when they were suddenly ejected without warning.
My sense is that the market is up high on one pontoon and the bow of the low side is starting to dip under the surface. The hapless bulls, especially those who don't suspect the danger, will not be happy with what's coming next. The 30-year high reading for bullish sentiment in the Investors Intelligence survey is clearly a warning sign that the "most hated bull market" is not hated so much anymore. When everyone gets in the pool it's usually a good time to get out.
And with that let's see if the charts are providing any warning signs that our boat is about to dig in and suddenly stop.
S&P 500, SPX, Weekly chart
Last week SPX finished with a dragonfly doji (more bearish version of a hanging man doji) at a trend line along the highs since April 2016 and at the midline of an up-channel for the rally from 2010-2011. So far this week's candle is a small doji cross that's down 2 points from last Friday's close. Obviously a lot can change before this week completes but with the weekly oscillators threatening to roll over from overbought with price up against trendline resistance it's a good time to be cautious about the upside. There's no evidence this is going to be a top but the wave count also supports the idea that we could be putting in a final high here.
S&P 500, SPX, Daily chart
SPX has been struggling near the price projection at 2579.14, which is where the rally from April achieved two equal legs up. This is an important price projection for a final 3-wave move up in the rising wedge pattern for the rally from February 2016. Last Friday SPX closed at 2581, which was exceeded slightly with this morning's high at 2588, but it closed back down near the 2579.14 projection.
We have bearish divergence since the October 5th high, which is another warning sign but again, no proof yet that a high has been made, just a warning. The first sign of trouble for the bulls would be a drop below the 20-dma, currently near 2563, which would also be a break below its uptrend line from August. Until SPX drops out of its up-channel it's obviously still in an uptrend.
Key Levels for SPX:
- bullish above 2590
- bearish below 2544
S&P 500, SPX, 60-min chart
This morning's high for SPX also tagged 2587.62, shown on the 60-min chart below, which is the 127% extension of its previous pullback October 23-25. This is a common reversal Fib level to watch and this morning's strong reversal off the gap-up start to the day is not a bullish sign. We could see SPX chop its way higher in a small ending pattern, in which case I see upside potential to 2590-2595 and maybe just above 2600. A drop below Monday's low at 2568 would be the first indication that a top is likely in place.
Dow Industrials, INDU, Daily chart
Other than the fact that the Dow has been unable to get through the trend line along the highs from April 2016 - March 2017, currently near 23550, I see more upside potential to about 24K. The daily chart below is using the arithmetic price scale since that shows the referenced trend line acting as resistance. When the chart is viewed with the log price scale the trend line is higher and now nearing 24K. But like the short-term pattern for SPX (60-min chart), I see the possibility for just one more minor new high to complete a small ending pattern, which could result in one more test of the trend line.
Key Levels for DOW:
- bullish above 23,500
- bearish below 23,100
Nasdaq-100, NDX, Daily chart
NDX gapped up this morning and tagged the price projection at 6270.35 (with a high at 6276.66), which is where the 5th wave of its rally from August equals the 1st wave. That 5th wave, which is the leg up from October 25th, is also a 5-wave move and its 5th wave has also achieved equality with the 1st wave. There's at least a little more upside potential to the top of its up-channel from July, currently near 6312, but the pieces are now in place to be able to call a top. Whether or not it will be a top awaits confirmation. An impulsive decline (vs. the choppy pullbacks we've seen since Jesus was a little boy) would be our first clue that the bulls are done. Confirmation of a high doesn't come until NDX drops below 6010.
Key Levels for NDX:
- bullish above 6270
- bearish below 6010
A big driver behind the tech rally has of course been the FAANG stocks. Other big-cap stocks benefit greatly from the buying of the QQQ and other tech ETFs. The SOX has also been strong and INTC has been particularly strong. But going through many of the tech charts is further evidence (to me) that a high for the techs might have been this morning's. AAPL gapped up and ran into trendline and Fib resistance and then reversed strongly back down. Today's created a bearish engulfing candlestick, which is a reversal candlestick.
Updating my weekly chart of MSFT that I showed over the weekend, I had noted that Friday's high reached an upside target zone at 84.65-87.20 with its high at 86.20.The target zone is based on a throw-over above its up-channel that equals how much it was below the channel at the start of its rally from June 2016. Friday's high was the positive reaction to its earnings and that created the gap up and throw-over finish to its rally (potentially). There's been no follow through since that high and while it's a little early to call a high for MSFT that's the current setup -- short against Friday's high.
Microsoft Corp., MSFT, Weekly chart
Russell-2000, RUT, Daily chart
The RUT has continued its entrapment inside its expanding triangle off the October 5th high. The choppy consolidation inside this pattern should be bullish and a rally out of this pattern could see the RUT run up to a price projection near 1548 (for the 5th wave of the rally from August), which is where it would also hit the intersection of the broken uptrend line from August and a trend line along the highs from July-October (the trend lines cross on November 10th).
It's possible the RUT will break down from this pattern, in which case it would be a failed bullish pattern and that would mean a strong decline to follow. The first sign of trouble for the bulls would be a drop below the bottom of the expanding triangle near 1477. Stronger confirmation of a high would be a drop below its 50-dma, which is rising towards the trend line along the highs from 2007-2015, currently near 1465.
Key Levels for RUT:
- bullish above 1515
- bearish below 1477
10-year Yield, TNX, Weekly chart
Last week TNX made it up to its downtrend line from 1988-2007 and stopped a little shy of a price projection at 2.508, which is where the c-wave of an expanded flat a-b-c bounce off the June low would be 162% of the a-wave. The October 25th high was 2.475 and the turn back down from there is a small 5-wave decline into today's low. That's our first clue that TNX has reversed back down and once a bounce correction to the decline from October 25th completes we should see a continuation lower.
There is of course further upside potential, especially if a pullback holds above the 200-week MA and its uptrend line from July 2016 - September 2017, both of which will cross near 2.20 in a few weeks. A climb above 2.51 would also be bullish. The big question is what will happen if and when the stock market starts back down, especially if it becomes a scary pullback. If fund managers scurry into the relative safety of Treasuries it would spike yields down.
KBW Bank index, BKX, Daily chart
BKX looks toppy with its new high above its October 6th high and bearish divergence. It's also struggling to get through the trend line along the highs from July-October. There's Fib correlation at 103.03-103.24 so if BKX presses a little higher keep an eye on this area for a possible high. The Fibs come from a 127% extension of the March-April 2017 pullback (103.03) and the 162% extension of the July-September pullback (103.24). The first sign of trouble for the banks would be when BKX drops below its 20-dma, currently at 100.60.
Transportation Index, TRAN, Weekly chart
With its October 13th high the TRAN tagged the trend line along the highs from December 2016 - March 2017 and has since rolled back over, leaving a bearish divergence at the new high. For an ending pattern for the rally from January 2016, a 3-wave move up from May 2017 fits well as the completion of the rally. Therefore we have a good setup for an important high for the TRAN but a new high can't be ruled out until it drops below the August low at 9010.
Dow Jones US Home Construction index, DJUSHB, Monthly chart
One sector that's been particularly hot this past year is the home builders. But as with the broader market, the home builders could be reaching a peak, as shown with the monthly chart below. There is an up-channel for the rally from the November 2008 low, based on the uptrend line from October 2011 - February 2016 and the parallel line attached to the first highs off the 2008 low. DJUSHB has now reached the top of the channel and there are hints of topping in the oscillators. If the index turns back down from here it would be a signal that the housing market is slowing, which would be a negative for our economy. It's too early to tell what will follow here but it'll be worth watching over the coming weeks.
U.S. Dollar contract, DX, Daily chart
At the moment the US$ has a bullish breakout in progress. On October 26th it broke out of its down-channel from January and above 94, which fits as a neckline for an inverse H&S bottoming pattern. A pullback to 94 and then higher would be bullish as would a pullback to the top of its down-channel, near 92.90 next week. Either would be a bullish back-test and a continuation higher would confirm the bullish breakout. The new up-channel from September could also contain the rally up to the H&S price objective, near price-level resistance at 97.50.
Gold continuous contract, GC, Daily chart
With last Friday's low gold again tested its broken downtrend line from 2011-2016 and its 200-dma. It's showing bullish divergence against its October 6th low and now all it has to do is get back above its broken 20-dma and its broken uptrend line from July-October, both crossing near 1283. The next hurdle for the bulls would be price-level resistance at 1300 and its broken 50-dma, also near 1300 (it was unable to hold above both after its rally into the October 16th high). Gold bulls would in trouble if gold drops below the intersection of the broken downtrend line from 2011-2016 and the uptrend line from December 2016 - July 2017, near 1257.
Oil continuous contract, CL, Daily chart
Oil's overnight rally had it tagging the top of a parallel up-channel for the rally from June and it then proceeded to sell off sharply today. The corrective bounce pattern off the June low is one thing that keeps me bearish longer-term for oil but short term I see at least a little more upside potential. Two equal legs up from the pullback into the August 31st low points to 56.38 so that remains a possibility. But the minimum projection that I had expected to see, at 53.96 (for two equal 3-wave moves up from June), has been met and now with the rally up to the top of the up-channel there is the potential for a turn back down from here.
There is the possibility that the downtrend line from March 2015 - January 2017 is the neckline of an inverse H&S bottoming pattern (the June low is the right shoulder). The upside price objective out that bullish pattern is near 84. So it would be bullish to see a pullback that holds support at or above the neckline, currently near 51.50.
Thursday will be a quiet day for economic reports but Friday will be important with the employment data. This morning's ADP report showed an improvement in the employment gains for October so the market will want to see confirmation of that with Friday's NFP report.
We have more than a few signals that a market top could be here with this morning's gap up and selloff. Between trend lines, Fib projections, the wave count, bearish divergence and a slew of other technical indicators there's enough evidence to suggest the bulls could soon be in trouble. But the bulls have been in trouble many times before and the market just keeps rallying. The quote from Cora says it all -- this market continues to rally on all kinds of bad news and that's bullish. When we see the market sell off on good news we'll know market sentiment has shifted.
Bullish sentiment, as described with the Investors Intelligence survey, tells us it's risky to be thinking bullish (you want to be very careful when you're with the crowd since you can get trampled when everyone is trying to get out at the same time). The bottom line is we have a good setup for an important market high but without the confirmation.
The challenge for those in long positions and those wanting to get short is that a coming correction could start very quickly and violently, catching both sides flat footed or back on their heels. Getting out could be a challenge, especially if the market becomes no-bid as the computers turn into selling machines and can't find buyers.
Those who want to get short could find themselves faced with having to short in the hole, which is always challenging since there's always the fear that the market will come roaring back at any time, even if it's just going to be a quick short-covering rally. It's a big reason why I think it's prudent to trim long positions and/or hedge your positions with some short positions. Bears can use longer-dated OTM put options and hope to get in cheap and out with inflated premiums.
Bottom line is that it's a good time for both sides to play it safe and be cautious. I think upside potential is dwarfed by downside risk and I'd trade accordingly.
Good luck and I'll be back with you next Wednesday.
Keene H. Little, CMT
In the end everything works out and if it doesn't work out, it is not the end. Old Indian Saying