New Bull Market, Pendulum Swing , or Downside Reversal?
The panic drop from the Japanese Yen Carry Trade Unwind turned the corner pretty quickly. After a 9.71% drop from the July high, the S&P 500 (SPY) retraced 78% of that drop. The SPY appreciated about 8.6% in 9 trading days and some would call the speed of this recovery a “lockout rally”.
Lockout rallies happen when under-positioned institutions buy every dip to boost long equity exposure. Many hedge funds sold quickly when the VIX spiked above 64, but as it dropped below key levels (25, 20, 18), they were forced to increase equity exposure, lifting markets over the past 9 days.
So where do we go from here? Are we beginning a New Bull Market; doing a Pendulum Swing or are we about to have a rug pull Downside Reversal? Let’s review Market Conditions and then look at these three scenarios.
Market Conditions
With the SPY trading above the 9 (pink) & 21 (blue) EMAs we are technically back in an uptrend. RSI is above 50 which is a show of strength and On Balance Volume (OBV) has shows steady buying since the early August panic, supporting the lockout rally re-positioning thesis. We are at a prior high at $544.87 and that may serve as resistance. If SPY is able to break and hold above this level, the next level is the July high at $565.16.
Breadth is strong as evidenced by the NYSE Advance/Decline Line ($NYAD) making a new high. This puts the odds in the favor of more upside momentum in the stock market in the near term. The RSI indicator is not yet overbought, although it may be close and this further supports the idea of more upward movement in the next few days.
Dumb Money bought the dip, as Smart Money held. Since Dumb Money confidence is yet to reach an extreme, this once again supports more upside over the next few days.
Greed is piling back in the market as the Fear & Greed Model spikes to the upside. Since we are not at a Greed extreme yet, this has more room to run, unless another unforeseen event occurs. This is bullish.
The Retail-Only Put/Call Ratio shows that retail loaded up on puts in light of the Japanese Carry Trade panic, which was all over CNBC and every other financial news channel and website. This may have triggered the stock market’s automatic defense mechanism: when a trade get’s crowded the market almost automatically pushes the other direction. This defense mechanism is to maintain the 2-sided market balance and also to not let the masses become rich. Thus with so many puts that need to get washed out (expire worthless) this dynamic is very bullish as the market does the opposite of what most people think.
The market is currently rallying around an economic soft landing narrative. Next week is full of Fed speak as there are Fed Minutes on Wednesday and the Jackson Hole Economic Symposium is on Thursday, Friday and Saturday, where Fed Chair Powell will be speaking. The trend is up but it’s wise to have a downside protection plan.
In the Premium Section we’ll go over the New Bull Market, Pendulum Swing and Downside Reversal scenarios. We’ll also show you how to profit in all three scenarios. You don’t want to miss this.
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