The 1-Minute Market Report - October 26, 2018

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Includes: DDM, DIA, DOG, DXD, EEH, EPS, EQL, FEX, FWDD, HUSV, IVV, IWL, IWM, JHML, JKD, OTPIX, PSQ, QID, QLD, QQEW, QQQ, QQQE, QQXT, RSP, RWM, RYARX, RYRSX, SCHX, SDOW, SDS, SFLA, SH, SMLL, SPDN, SPLX, SPUU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU, SPXV, SPY, SQQQ, SRTY, SSO, SYE, TNA, TQQQ, TWM, TZA, UDOW, UDPIX, UPRO, URTY, UWM, VFINX, VOO, VTWO, VV
by: Erik Conley

What happened last week. What we're watching for next week.

What comes next?

The market is oversold on a short-term basis, but there may be more pain to come. Expect a rally next week, but don't get your hopes up just yet.

Chart 1. S&P periodic returns

Notable changes in the periodic return charts. The 1-month return went even more negative than it was 3 weeks ago when this volatility began. The 3-month return was even worse, and it is now negative as well.

The Year-to-Date gain was 7.9% just 3 weeks ago, but is now negative. Last year it got as high as 20.2%. What's happening to the vaunted Trump Rally? See the chart of the week below.

And the 1-yr return has dropped from 13.1% just three weeks ago, all the way down to 3.8%. This is a concern to me, and I'm increasing my cash position accordingly. If you want details, you'll have to subscribe to my newsletter, The Monthly Intelligence Report (How's that for a shameless plug?).

This Week

sp500 periodic returns

3 Weeks Ago

sp500 periodic returns

Key Markers

The most salient point from this comparison is the fact that the market has now taken out three support levels, or Key Markers as I like to call them. But again, let's put this in context. It usually takes at least 5 violations of support to confirm a new bear market. Don't get ahead of the indicators.

As you can see from this week's chart, the market is slicing through one marker to the next with little resistance from the once-intrepid dip-buyers.

The reason for the Support number jumping up to 3% is that I'm now using a new support level, since the old one is now history.

Chart 2. Distance from Key Markers

This Week

sp500 key markers

3 Weeks Ago

sp500 distance from key markers Chart 3 - chart of the week

What happened to the Trump Rally? (This is not a political judgment, it's a stock market comment). The Trump Rally is taking a pounding, and that may explain why Trump has been so vocal about the mishandling of interest rates by Fed Chairman Powell.

But Trump doesn't control Mr. Powell, and the stock market doesn't like rising rates. It's killing the Trump Rally, and there isn't much that Trump can do about it.

trump rally Chart 4. The Market Dashboard

I changed the scale of the chart in the upper-right corner of the dashboard. This is the count of the number of up days out of the last 21 trading days, which equates to a calendar month. I did this because I think it gives a better picture of what's going on from a momentum perspective.

Bollinger Bands continue to spike higher, indicating increased volatility. Drawdowns are approaching the January-February lows of 10%, which would usher in the formality of calling this downturn a "correction."

I only care about one thing: what is the probability that a bear market will arrive sometime in the next 12 months. I have a model for that, and subscribers to my monthly newsletter can track it along with other relevant indicators.

Final Thoughts

Last week I said that I was going to watch earnings announcements. Part of the turmoil we're seeing in the market is due to some high profile earnings misses. As you know, corporate earnings have been on a tear recently and I'm watching for signs of a slowing of this supercharged growth rate. It may not come this quarter, but it's coming soon.

This week I'll be watching what the dip-buyers can do to stop the decline. There will be a rally, for sure, but can they sustain it? The market has now taken a hit of 250 points on the S&P 500. It's going to be a tough slog for the dip-buyers to take back that much ground.

But they've done it before, and they can do it again. I wouldn't bet the ranch on it, however.