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Jeffrey D. Saut, Chief Investment Strategist (727) 567-2644
“Hey Jeff, you mentioned this morning that the equity market’s rise currently may be more about an absence of supply rather than a pickup in demand. Is it also fair to say December low was the opposite? Just want to make sure I am interpreting things correctly. Thanks.”
. . . A financial advisor
I received a number of emails yesterday about this statement in yesterday’s Morning Tack. Most of them read like this:
“Hey Jeff, you mentioned this morning that the equity market’s rise currently may be more about an absence of supply rather than a pickup in demand. Is it also fair to say December was the opposite? Just want to make sure I am interpreting things correctly. Thanks.”
I guess I need to further explain that comment. The selling climax low that ended on December 24, 2018 was one of the worst I have ever seen. It left the equity markets about as deeply oversold as they have ever been. I have explained the reasons for said selling (hedge fund liquidation, mutual fund redemptions, ETFs being sold, tax loss selling, etc.). The selling squall exhausted the sellers (read: no more “supply”). Consequently, even with little in “demand” (read: buyers) the slightest pick-up in potential “buyers” overwhelmed the reduced “sellers (read: supply of stocks). The subsequent rebound rally has been intense, with January being the best January performance in about 30 years. The rally has lifted the S&P 500 (SPX/2737.70) back above its 50-day moving average (DMA) of 2611.66 and is now challenging its 200-DMA of 2741.77. Clearly, the SPX has overshot my near-term trading target of 2600- 2650. However, as we have written earlier this week:
Despite the overbought condition, our work suggests the equity markets can trade higher into mid-February’s energy peak often referenced in these reports. Despite that outlook, we do not trust the overbought condition the equity markets have currently worked themselves into and continue to advise caution on a short-term trading basis. That said, there is now plenty of internal energy in the equity markets to continue the move.
In yesterday’s missive I expanded on that comment by noting:
The equity markets are consolidating to the upside, which is pretty consistent with what my indicators have been telegraphing even though I remain concerned with the overbought conditions of the equity markets. That upside consolidation should be followed by yet another breakout to the upside with a secondary trading target of 2800 – 2820, which should stall into the mid-February energy peak timing zone.
Ladies and gentlemen, if we are going to get a pullback it should come from that energy peak. However, to reiterate my comments since the second 90% upside day of January 3, 2019, we continue to think the December lows will not be retested. As the acute John Murphy, famed technical analyst and author, writes as a headline for a recent blog entry:
WHAT TO MAKE OF THE 2019 REBOUND -- BEAR MARKET RALLY OR START OF A NEW UPLEG? -- S&P 500 NEARS TEST OF 200-DAY AVERAGE AND MAYBE ITS DECEMBER HIGH -- WEEKLY CHARTS ALSO SHOW IMPROVEMENT -- MONTHLY CHARTS, HOWEVER, SUGGEST MORE CAUTION AS BULL MARKET NEARS ITS TENTH ANNIVERSARY.
Obviously, I continue to embrace the secular bull market theme. As my pal Leon Tuey writes:
Many continue to hold the view that a bear market had commenced or that a "cyclical bear market" is in progress. Clearly, they have no understanding of the market’s logic and they confuse the various market indices with "the market." As mentioned, what investors saw was nothing more than a normal reaction to an overbought condition registered in the August/September period. The plunge in the averages was caused by the drop in the heavyweights; the various Advance-Decline Lines, however, just went through a garden variety correction, one of the mildest in this great bull market. Since the seers (and most investors) only pay attention to the market averages and not to “the market," the plunge in the market averages caused widespread fear.
Since Powell backtracked and the People's Bank of China stepped up liquidity injections, global money supply has round-tripped to March 18 levels. Forget earnings or macro. This is why markets have rallied. History shows that buying stocks at or near all-time highs, with stretched valuations, because the Fed is easy while the economy begins an ebbing cycle is a path to ruin (See 1999-2000, 2007-2008). U.S. stocks are extremely overbought on a trading basis and short-term basis. A spirited retreat can appear at any time. However, for the foreseeable future, most traders will continue to buy any and all dips because the Fed Put has been reinstated.
This should end with the mid-February energy peak, but I do not believe the December low will be retested. This morning futures are flat . . .
February 6, 2019
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