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May the Fourth Be With You

If bear markets are the Empire, this week the Empire may strike back. Based on weekend futures markets stocks are poised to drop Monday, with a strong indication of follow-through for the week.

Last week we hit a significant technical level as the S&P 500 pushed above 2950 intra-day last Wednesday. This, by most measures, fulfilled the 61.8% Fibonacci retracement many technicians were looking for.

While this is no guarantee, you may begin to see the tune change for some analysts as more people jump on the band wagon that this price move from the March 23 lows is a bear market rally. This may also be a shift in discussion from “V-shaped” recovery to some other alphabet (L, W, U… zig-zag, whatever).

The reality is that the economic impact of this thing is starting to set in. Some companies will survive but others will hurt. And when enough companies hurt, economic activity slows. That hurts the winners too in most cases. So even a big company like Amazon — a company that seemingly has the perfect business model and opportunity during this crisis — can still get punished by increased costs and fickle investors.

Looking ahead the crystal ball is murky. The technical outlook is not encouraging if the typical trend emerges. If we really are in a bear market, a resumption of the downtrend should resume, and we’ll decline for a season. The real question is whether or not we re-test the March 23 lows.

No one really knows the answer yet. If the virus turns out to be less deadly than hoped, we start to re-open the economy and things start spinning again. If it’s more deadly than hoped, we sit on our hands longer. The states that have opted to re-open will be case studies closely watched for a bit. Spike in cases and hospitalizations? Market probably gets nervous. No spike, market drifts sideways for a bit and finds its footing.

For this week, the primary support level looks to be 2683/2650. Given the pattern of fairly aggressive volatility, it would not be out of line to see a pull-back to this level. That’s about a 5-to-6.5% decline. Historically that seems like a big move for a week (and perhaps it will take a couple weeks to unfold), but that’s not out-of-line for the way this market has been moving recently.

Up-side resistance would be at the 2950/3000 levels again. That’s basically both the 100 and 200 day moving averages.

Other noteworthy stats we’re watching: all three of the BigFoot Macros are negative… so that’s a pretty ugly thing. The database climbed from about 21% long to 23% long — so, green shoot — but still, not enough to move the needle much. It’s still a very bearish percent-long at this point.

The other side-show we should keep watching is Washington. Are they going to come out with some sort of direct-to-consumer money dump? Some form of universal basic income (though they won’t call it that)? If so, that could be lighter fluid for this market. So… we’ll have to wait and see.

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by BigFoot), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from BigFoot. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. BigFoot is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the BigFoot’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

What a Mess

Pricing is basically guessing at this point. A stimulus package may completely alter economic modeling as we currently know it. From loan payment deferrals to utility bill deferrals, it’s all up in the air. And that means uncertainty…

Markets hate uncertainty. And now we get to add politics to the mix, as Congress can’t seem to get a bipartisan stimulus package pulled together… yet.

Meanwhile, each state is managing their viral response independently.

In short, everything in is flux. This is not a recipe for happy markets.

Despite the fact markets are already way down it does not appear the blood-letting is subsiding yet. As of the writing of this blog the futures had hit their 5% limits. This does not bode well for Monday’s market open.

It appears the self-fulfilling prophecy have declared 2000 to be the ‘target’ for this pull-back. At this point, the technical trend for the week shows an SPX lose of about 2085.

The problem is, there are some technical indications that is not the bottom. It could be 2000… it could also be 1810… or even worse, 1713. Shall I continue? (Probably not, honestly… about 40-50% appears to be the likely downside to this thing, but we need to see how the news cycle evolves going into April. Do we see massive spikes in death rates, or does this end up being over-blown?)

Whatever the case, the set-up for this week looks pretty negative. If a strong stimulus package emerges perhaps things will shift. Otherwise, momentum remains strongly to the downside.

Downside Target appears to be 2085 for the week
Here you can see some of the more extreme downside projections

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by BigFoot), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from BigFoot. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. BigFoot is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the BigFoot’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

Slowing the Bleeding

Unless you’re hiding under a rock you know last week was a mess for the markets. Coronavirus grabbed headlines and panic set in for investors.

At this point, markets are pricing for recession. Trying to make sense of what’s happening is essentially a guessing game. Whether it is or is not likely to happen, the price tells us all we need to know for now.

What we do know is we just saw the worst week in the markets since 2008.

Let’s get to the stuff folks are asking about:

  • Is it over?
  • How bad can it get?
  • What should I do?

First, is it over? There is no way to tell. Anyone that says they know has something to sell.

How bad can it get? Well, as the saying goes, markets can remain irrational longer than you can remain solvent. So it could get worse. But the better question, how much worse? The numbers are moving so fast it’s difficult to get a handle on this. But read on, we’ll try to unpack some critical pricing levels.

What should I do? While none of us can predict the future, we can all take a deep breath, get a hold on our emotions, and make sure we’re using logic and data rather than emotion to drive our decisions. If you’re part of the BigFoot club, that means sticking to a process.

Now, the numbers… just what the heck is happening?

Last week we blew through most every support level on paper. So technical analysis is pretty shaky right now. Stock prices fell… hard. Looking for where things may bounce is pretty much a guessing game. Looking for support… well, we have to look pretty far back in time. So the numbers are less reliable than we’d hope.

Interestingly enough, not a single macro has turned negative for BigFoot. We did see the S&P500 index get an algo-sell. But both the DJIA and NASDAQ only shifted to wait.

If we end March below 3160 the Market Macro should flip negative. But there’s a long time before the end of March. A lot can happen in a situation like this where we’re trading more on conjecture than data.

Here’s what we can look for… note on this week’s charts, no red/yellow/green. Nope, those imply a generally decent probability of likelihood to occur. This week, we’re into the ‘maybe’ zone.

Support appears to be at 2910/2771… and yes, you read that right. There’s virtually no support in between (not to say markets won’t find support in this range, it’s to say there’s nothing material showing up in the charts).

Finding support numbers this week is tough

Longer-term, you can see how far back we have to look to find support.

To find solid support we have to look back close to 2018. That’s pretty shaky.

This week’s price behavior will be important. It’s possible there is a bounce given how over-sold things are. However, it will take some time to shake off the ‘stank’ that this market has taken on over the last week. People are scared, and the behavioral shifts will likely hit the economy. The effects of this behavior are yet to be determined. Suffice it to say, we’ll be talking about this event for some time, even after it passes, as either an excuse or a reason for odd market behaviors.

Hang in there. Keep a cool head. And remember, equity markets are very efficient at transferring money from the impatient to the patient…

SPX braces for a gap down

Is Coronavirus a Black Swan?

If there is such a thing as a self-fulfilling prophecy, the Coronavirus may be on its way to becoming the next ‘black swan’ of this market.

We’ve been asking ourselves the question for some time: what is going to bring this bull market down? After all, since last October, valuations just kept climbing.

Initially the markets shrugged off the idea that Coronavirus was that big of a deal… then some companies started specifically crediting the outbreak with an impact on financial numbers.

No big deal, the impact is baked into the price already.

But perhaps expectations of this outbreak missed the mark. Perhaps this as a lot more serious. A Biblical pandemic even?

Before borrowing a bunch of trouble, let’s look at things in context. The coronavirus is awful… but so is influenza. This is not ebola. While it is potentially lethal, the majority of those infected still survive the illness. This is not to trivialize coronavirus but to give us some perspective.

Currently, coronavirus is part of an active news cycle. It’s unknown, it’s scary, and it’s the perfect train wreck to get folks staring at their screen. In short, it’s an advertiser’s dream.

Since the stock markets have largely dismissed the circus that is Washington DC lately (thought if Bernie Sanders continues to gain momentum this could change) , the coronavirus news cycle keeps viewers glued to the screen. And the unknown factors that seep into the stock market are drawing this out more than the typical 1-week narrative.

So what are we to make of this?

First, a quick breakdown:

Fundamental data, as measured by BigFoot’s economic and credit macros, remains solid. Technical data, as measured by BigFoot’s market macro, is always solidly above any sell threshold.

All three major indexes (DJIA, SPX, NASDAQ) have ‘wait’ indicators… this is neither a sell nor a buy. It is simply an acknowledgment that downside volatility has increased (so buy at your own risk).

When looking at the technical price movement of the SPX, this week is setting up for a big gap down at the open. Futures are indicating somewhere close to 90 points of downside. That’s over 2.5%.

This is definitely a knock on the market’s momentum. But the truth is, the SPX upward pricing channel will not be broken unless the index closes below 2514 this week.

A close below this support level potentially throws everything out of whack. It would mean a close both below the 50-day moving average, and the prior support/capitulation point where buyers showed up to support the markets.

It also means there is very little pricing support all the way down to 3036 or so… so basically a drop back to the 3000 level for the SPX.

For the non-math-whiz reading this, that’s a full-blown correction.

But keep in mind, this market is gapping lower after a big up-trend. And it’s doing so on speculation and fear.

Perhaps the markets are getting it right. Maybe this is a pandemic-level event and global economies are going to completely grind to a halt. Or perhaps this is a classic over-reaction to fear.

The reality is, this market has been moving higher and higher with virtually no resistance since last October. It has spend most of its time at the top of its pricing range. This projected drop simply flips from the top of the 1-month trading range (1.5 standard deviations above the 1-month pricing average) to the bottom of the range (1.5 SD the below).

The jarring and scary nature of a pull-back like this can be enough to shake anyone’s confidence in this market. But keep in mind a handful of other odd details:

Oil is dropping but gold is climbing in price.

The US dollar is climbing, treasury prices have been dropping… and gold is climbing.

The gold thing is likely fear, where the rest of the data says this underpinnings of this market are fundamentally unchanged.

If anything, the spread of Coronavirus may further strengthen the US dollar, as other global economies are weaker that the US already. This could lead to further weakness, exacerbating the dollar’s strength… not great for trade, but great for keeping treasury yields low.

Bottom line: one day does not a trend make.

Monday is likely to be painful. The real interesting thing will be not how we open but how we close. If markets manage to open to big losses but pair more than 50% of those losses by close, that’s probably a pretty good sign that equities are still an attractive asset.

Don’t let the man behind the curtain (the media) fool you. Stick to the data and a process. This bull will eventually die. But let’s let the numbers do the killing rather than the rumors.

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by BigFoot), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from BigFoot. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. BigFoot is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the BigFoot’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

Hard to Fight a Trend

This market has a lot of momentum.

Yes, it’s an underwhelming statement; but it’s nonetheless true. The stock market has the wind at its back these days. Even in the face of scary headlines about Coronavirus epidemics.

The reality is that Coronavirus is having an effect on systemic profitability. It has altered behaviors and shuttered factories for many multinational players. The result is, not surprisingly, profit headwinds.

And yet this market goes higher.

Did we mention this market has a lot of momentum?

This is becoming a more concerning sign as retail investors shrug off concerns, rally behind the cry of a ‘good economy,’ and continue to push stocks to new all-time highs.

Currently, it’s tough to peg just how high this market can go. But the down-side has given us a few technical hints.

The January pull-back for the SPX set up a consolidation wave with support around 3285. This is a little less than three percent below current market levels – not exactly a massive pull-back if those numbers get tested – but enough to give traders a new entry point. And frankly, that seems to be the pattern of this market: buy the dips.

We’ve seen this before, and markets went significantly higher during 2019 when this happened. Will history repeat itself? Who knows? But did we mention this market has a lot of momentum?

Until evidence suggests otherwise, it may be wise not to fight the tape too much on this one. This bull will end, but the eminent demise is not evident at this time.

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by BigFoot), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from BigFoot. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. BigFoot is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the BigFoot’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

Circuit Breakers Tripped

Well, we’re in for it now. The Kansas City Chiefs won the Super Bowl. And certainly congratulations are in order. But what does this mean for the markets?

If the Super Bowl Indicator is to be believed, we’re in for a bear market.

Of course, the accuracy of this indicator is highly questionable (having been wrong the last four years in a row now). Still, on a purely random basis… maybe?

When considering other factors in this market, it looks like last week’s negative move was ‘good’ in the sense that it moved us out of over-bought territory.

The concern (if there is one) is that we tripped some minor circuit breakers in the BigFoot system. Our confirming indicators shifted from buy to hold on the major stock indexes.

This is not in and of itself a big deal. The confirming indicators have historically been more accurate as entry signals than exit signals (at least anecdotally). Nevertheless, they flipped. So, for the time being, the system is warning against deploying new capital (at least into the indexes – the signals are actually intended to be used on a position-by-position basis).

What this circuit breaker does imply is that markets have pulled back enough we may be moving into a consolidation phase rather than an expansion phase.

The technical picture appears to confirm this. Last week’s move down was not a surprise. Still, the move was enough that it caught people’s attention. And sentiment may shift.

We forget that many market participants have not adjusted their expectations with inflation. To some, a 600-point drop in the Dow still ‘feels’ like a massive day. In reality, it’s less than a two percent decline. So, while a real move, it’s nothing like a 5-to-10 percent move that some associate such a number with.

Regardless of the fact such a data anchor is flawed, the move can damage sentiment. (This sounds worse than it may be.) The good news about a shift in sentiment is that it leaves room for markets to potentially keep climbing a wall of worry.

In reality, little has changed for this market. Despite fears of coronavirus and election uncertainty, the underpinnings of the economy continue to remain relatively intact. And the conditions that drove us to this point are relatively unchanged. Which means the fundamental elements moving this market – low rates and an accomodative Fed – continue to drive this market.

So, absent new evidence, you keep doing what the market tells you to do… until it tells you to do something else.

Right now, on a technical/quantitative basis, the market still says the bull is intact. Last week’s move was corrective in nature, but the 50-day moving average for the SPX held as support.

For the week, keep an eye on 3200 for the SPX. If this support holds the odds look good for a recovery and re-challenge of the highs of the year. If it’s breached, next week’s blog should be more interesting.

Happy February – and fingers crossed the Ground Hog was right yesterday.

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by BigFoot), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from BigFoot. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. BigFoot is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the BigFoot’s current written disclosure statement discussing our advisory services and fees is available for review upon request.

Breather

If the futures are any indicator, this equity markets are in for a breather Monday. Signs point to a drop of over 1.5% for major indexes.

Before you go panicking about this pull back, be warned, this was not unexpected. Stocks have been on a major tear, trading about 1.5 standard deviations above their monthly trading average for the past several weeks. This kind of run is bound to tempt some short-term traders into profit taking.

Now that earnings season is fully underway and the Q2 projections are rolling out, it makes sense for markets to give back a little as traders trim gains.

The bigger question folks are probably asking is, ‘is this the start of something more serious?’

Too early to tell, but probably not ‘serious serious.’ Most of these pull-backs have been met with folks piling back into the markets. We need to see a sign that this is not going to be the case. However, given the low rates around the globe, one has to ask two big questions: 1) where else would I put my money? and 2) Has the Fed made any material changes in monetary policy that would lead me to change tactics right now?

The short answer to both of those questions leads to the short-term conclusion that the stock market is still the most likely option for folks seeking anything more than preservation of capital.

When looking at the support/resistance areas, the down-side target for this move is approximately 3217/3196. The lower of these figures is the 50-day moving average. The higher is about 1.5 standard deviations below the average 1-month trading range (a reversal of the last month’s trend). For context, that’s about a 2.3%-to-3% pull-back; not too ‘serious’ if that’s the extent of it.

Of course, should those support areas fail, a more ‘serious’ correction phase will need to be examined. For now, a pull-back and recovery towards or above prior highs looks likely to play out over the coming week or so.

As a side note, the coronavirus, while garnering headlines, is not yet to a point the markets are panicked about it. However, this is worth tracking.

The fact that the US Embassy has evacuated all US personnel is somewhat disconcerting. While the spread of the virus is relatively small at this time, one has to wonder what is NOT being said when we figure it’s safer to clear out an embassy than it is to just wash your hands more often. If this becomes a true pandemic, all bets are off.

We’ll keep an eye on this not-yet-situation-that-could-become-a-situation, but for now, let’s let the main thing stay the main thing.

Now, for the picture you’ve all been waiting for… markets go down, but probably back up later this week… assuming this coronavirus thing stays mainly in China… we’ll see…

SPX projections for the week of January 27th… take with the usual grain of salt
Note the 50-day moving average and support arrow – this is the area to watch. Pierce this and more down-side could be in the works

IMPORTANT DISCLOSURE INFORMATION

Please remember that past performance may not be indicative of future results. Different types of investments involve varying degrees of risk, and there can be no assurance that the future performance of any specific investment, investment strategy, or product (including the investments and/or investment strategies recommended or undertaken by BigFoot), or any non-investment related content, made reference to directly or indirectly in this blog will be profitable, equal any corresponding indicated historical performance level(s), be suitable for your portfolio or individual situation, or prove successful. Due to various factors, including changing market conditions and/or applicable laws, the content may no longer be reflective of current opinions or positions. Moreover, you should not assume that any discussion or information contained in this blog serves as the receipt of, or as a substitute for, personalized investment advice from BigFoot. To the extent that a reader has any questions regarding the applicability of any specific issue discussed above to his/her individual situation, he/she is encouraged to consult with the professional advisor of his/her choosing. BigFoot is neither a law firm nor a certified public accounting firm and no portion of the blog content should be construed as legal or accounting advice. A copy of the BigFoot’s current written disclosure statement discussing our advisory services and fees is available for review upon request.