Bigger Picture

Here”s the transcript for yesterday morning”s Saturday Review, and its recording is linked here: https://roddavid10.mitel-nhwc.com/join/ypykkym

Good morning and welcome. It’s Saturday and time for the Saturday review. A fairly productive week on our part. I don’t know about the market if it can claim the same. It wasn’t unsuccessful. Began the week with a gap down. That is, the market wasn’t successful. Beginning the week with a gap down. The gap down really at this stage or that stage actually of the pattern of the trend wasn’t likely to extend down. There is unfinished business below at various levels but that was not the way to kick it off. There was a new Globex trend extreme upstanding from the prior week. That was the reaction remember way back when. Wasn’t that the China rate cut?

This is not the way to start a decline even from a failed descending triangle. Had that failure been from a little bit higher, had this ascending triangle probed at least a 61.8% extension outside of the range instead of just slightly higher, yeah we could have seen something much more substantial get underway, but to stop the rally short, not that it had any specific upside necessary at any given time, but then to stop short from a Friday following Thanksgiving, a half day, and then to gap it down aggressively. Just was not going anywhere. We have lower prior highs back here. In fact, lower prior highs, a singular representation of that range being 2051 held its support.

One other influence, too. Greeting the new week with extreme sentiment is often a sentiment extreme. Gapping not just out of this particular construct or out of the weekend. Very often that is an extreme reaction to some sort of news that did not have acquitity. All that pent up, in this case, selling pressure, resolves down and finds the bottom but this did not resolve up too quickly. It took the day. In fact, the day did not resolve up. Test after test after test, look at it after 1 minute. Repeatedly testing 2051. There was a lower low in the morning. Positive divergence on our side. Because Monday did not recover by Monday’s close, really through Monday afternoon, because the balance of the session was spent testing and retesting and I lost track. Quadruple quintuple retesting 2051. At some point, there is an obligatory lower low required. At some point, some lower lows under 2051 under Monday’s lows is required. This pattern began, this recovery that is, began without that. Gapping up we caught the move and caught it all and it was obvious after the open. When the open was not going to give anything back, there was one opportunity during the noon hour to reverse the trend down.

So, this whole recovery this week, as productive as it was to absorb Monday’s opening drop to fulfill the objective, the reward for having absorbed Monday’s drop was no less than to probe prior week highs to have produced that reward. Still this is not a strong rally. It recovered pretty quickly, not just by gapping up Tuesday and extending higher throughout Tuesday and already testing the high Wednesday, new highs Wednesday. Because of that speed with which Monday’s gap down was even though delayed that day, then made up the lost time by recovering to produce that fresh high. It already is indicative of the weak handed sponsorship. The weak handed sponsorship that was too impatient here gapping up Tuesday to allow test of Monday’s low first. Now into the end of the week, that has not mattered. Into the end of the week, tests of support have also held. Knee jerk reaction down that is. Mario Draghi’s comments is CLE unchanged and change did not do anything. No change in rate. No change in easing or, that is, open market buying. Same thing with the ECD, but then Mario Draghi starts talking and as promised, stirs things up. In fact, that is actually two legs down, but that did not get anywhere ultimately. The knee jerk reaction down yesterday to the employments choice report, as expected, recovered immediately. Finally produced new highs. So, we are getting some pessimism in here, but the sponsorship that got us here is recanted, so, as strong handed as sponsorship is at this stage, it is not going to get very much farther than to the upside and really should not unless it does show vary steeply and then if it takes that route by rallying steeply, it can be pretty productive in absolute terms, price-wise, but not for very long. There is one or the other. Either this pattern produces some deeper pull back before mounting a more durable rally effort. Some deeper pull back that corrects the premature, impatient buying printer that recovered from Monday’s gap down, preferably a probe under Monday’s low, or this rally simply extends higher. Pretty much without any further delay, but only for 2 or 3 days before finding a peak and then reversing back down more substantially.

Bigger picture.This is FEX, cash. Notice something about the closes. We have a new high close on a Friday. We got a new high close back here on Wednesday. Problems with those new high closes, they are not above prior intraday highs, and not just the prior days high, but the prior swing high. So, new high close also Thursday and Friday’s high closes with a product of last minute bounces. It’s not the lack of trying. It’s not that the market was just barely making it back to the prior highs, those sessions have probed prior highs and still could not maintain. So, normally, when we have a new high close on Friday, the observation is even if there were an immediate reaction down on Monday, it could last days, weeks, we would still know since trends don’t end with new high closes on Friday’s or new low closes for that matter, we would know the context of that reaction down, that it is temporary, no matter how long a temporary may be, that it would be recovered. That’s not the case here, because this Friday new high close is just not significantly different. In fact, it’s significantly un-different. Not just from the previous day’s closes, not just from the previous days intraday highs, but from the previous swings high. Still does not take off the table the upward momentum and the potential to probe intraday highs, it takes off the table that confidence if there is an immediate downturn, then it has to be recovered.

So, just comparing SPX as we have been doing, probing fresh highs this week, but not maintaining probes above the prior highs through the close. Comparing that to Dow, Dow doing better relatively speaking. This is what a strong trend in S&Ps would look like. These are each day’s. There’s the Dow spending pretty much the entirety of yesterday above prior highs. That new high close is above all prior intraday highs. The Dow is not leadership so the Dow does not get to call this shot. What the S&Ps look like would be confident that an immediate pullback for whatever reason it would be temporary. Instead, the Dow, which is 30 docks among the highest probed file, most liquid, most widely followed. If you are a money manager, not just on the cutting edge, not a hedge fund, trying to outperform, but your number one goal, despite being in stocks, is preservation of capital and whatever you do, don’t let the market outperform you too much. In other words, institutional safe money. You still have to be in stocks or even for those times if you have the latitude or decision not to be in stocks, you still want to have some exposure in stocks for whatever reason, but you are not willing to take the risk of the S&P 500 broader based exposure as well on NDX or Russell, more speculative indexes. You’re going to focus on the Dow and the Dow, therefore, is going to start outperforming the S&P 500 when the preponderance or we pass that point of equilibrium among those safer institutional managers shifts their focus. The question is whether that has happened for two consecutive days because one day does not make a difference. One day is one day. There are too many times that one day does not lead to second consecutive days where one day just cannot be influential.

What we find is, yeah this is just one day. This one day would have been very important to the S&P 500 had it performed like this, but it also is not as consequential for the Dow unless it follows up on Monday with another higher close. Then we can start to consider the Dow as outperforming instead of that being just a one on. Compare that to the NDX, the NDX more speculative. Now it is not as great an indicator but still indicative of what bigger institutional money is doing. What is their risk tolerance is, but in this period of historical low, negligible interest rates, where you are paid to be exposed to the risk of NDX components that is still widely followed by not as predictable of a stream of earnings and not as liquid as the Dow stocks. This kind of underperformance does reflect less risk tolerance when the Dow is at least performing in lost step with our control group, the S&Ps, if starting to outperform. NDX is definitely underperforming. To some degree, this is Apple. To some degree, that has caused that immediate underperformance by Apple. That is an overly of Apple. As you can see, Apple was already underperforming even in the NDX. That is the NDX having so much exposure to Apple, it is underperforming, but that has gone on for more than a couple of sessions, and so even Apple’s poor influence. You can see Apple outperforming. That is not really having the same effect in the NDX.

We cannot dismiss it to Apple altogether and, in fact, what we do is consider that Apple itself may be a canary in a coal mine. Just real quickly, looking at the Russell, which is not as influenced by interest rates fully underperforming and that has been the case for a while. Those stocks will be chanced regardless or not chased regardless of the interest rate environment. I have started adding the NYA, the NYSE Composite, and that is also just representative of every stock on the New York Exchange, but you can still see the divergences.

So, to get a picture, I’m not ready for a thought, but ask me Monday. If we get follow through on Monday, every single day in this pattern at this stage of the pattern, every single day that does probe a fresh high, every day that probes a fresh high is vulnerable to reacting down, reacting down roughly.