Two weeks ago I was resolutely bearish with what I felt a number of substantive data points supporting my stance. One of my stronger clues was the relatively dependable pattern of Option Expiration Week. Well OpEx week ended up pretty much how it behaved for the entire two weeks…kinda wimpy. It did follow its the pattern – down the week before (S&P 500 down 1%) and up the week of (less than 1/2%). A key takeaway emerges from this shallow/early bottom result, with all the negative data points lined up for a decent correction…that was all the Bears could muster?
The bigger picture battle will probably be with us for several years – the Bears anemic economic growth vs. the Bulls fire hose of Central Bank liquidity. Taking advantage of cyclical moves in a secular trading range becomes the challenge. The S&P is essentially flat since late 2014, but up 15+% since the Feb. lows. That is the type of period to take advantage of.
I believe this benign OpEx outcome sets us up for a pretty good rally in the coming months as hope for change takes place within the fiscal arena. The conversation of a Quantitative Easing (QE) on a fiscal, not monetary, basis could lift the economic outlook and the leading indicator stock market may rise in anticipation of that. That is the big picture driver for the coming rally I see.
Here are ancillary reasons I believe we may have put in an intermediate term bottom this week. Supporting charts at end of letter.
1. Seasonals – This used to be below the radar, now everyone knows Nov-Apr are buoyant for stocks vs Sell in May and go away.
2. Technical Backdrop – Several markets have bullishly broken out of bases of late, Brazil, Argentina, Canada, and Japan. Domestically the XIV (Inverse Volatility ETF) which often leads the market broke out this past week too. Many other bourses are hovering near post Brexit highs and appear ready to break out as well. If they do collectively that is very bullish.
3. Muted Option Expiration/Sell in May – As I mentioned the inability of the Bears to make a statement last week with the tailwind in place is a tell. The fact wee have had Sell in May, Brexit, nauseating Prez campaign, and abundant negative divergences to deal with – equities persevere. Bullish in my work.
4. EOY Heinz Rally – Most money managers are lagging their bogies dramatically. Chasing and then pushing the market higher over the last couple of months is not uncommon in Central Bank fueled markets. I call them Heinz rallies, everybody playing ketchup.
5. Bonds Vulnerable/Interest Rally – During OpEx week I had a bullish set up for US Treasuries (more evidence for an equity correction) and it failed miserably. T-Bonds are very close to breaking key support and if they do a strong rally in rates could unfold. Have you done your refi yet?
6. Summation Index Signal – This indicator has made a double bottom which is often a prelude to a rally.
This week could be very telling if stocks begin their ascent with 2150 on the S&P 500 first line of resistance. There are others above and I will address them if we take out the near ones. As you are aware my #1 rule is everything I said could be wrong as the market always has the last say. So here is where I would consider being wrong – If we take out last week’s lows of 2115 I will have to re-evaluate the short term. I still think if that does occur the intermediate term is optimistic for stocks.
It feels good being bullish again,
The NYSE McClellan Summation Index Weekly Stochastics made a double bottom this week which often leads to a rally.