Sentiment Speaks: Prepare Yourself For A Wild Market

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Includes: BIL, DDM, DFVL, DFVS, DIA, DLBS, DOG, DTUL, DTUS, DTYL, DTYS, DXD, EDV, EEH, EGF, EPS, EQL, FEX, FIBR, FWDD, GBIL, GOVT, GSY, HUSV, HYDD, IEF, IEI, ITE, IVV, IWL, IWM, JHML, JKD, OTPIX, PLW, PSQ, PST, QID, QLD, QQEW, QQQ, QQQE, QQXT, RISE, RSP, RWM, RYARX, RYRSX, SCAP, SCHO, SCHR, SCHX, SDOW, SDS, SFLA, SH, SHV, SHY, SMLL, SPDN, SPLX, SPUU, SPXE, SPXL, SPXN, SPXS, SPXT, SPXU, SPXV, SPY, SQQQ, SRTY, SSO, SYE, TAPR, TBF, TBT, TBX, TLH, TLT, TMF, TMV, TNA, TQQQ, TTT, TUZ, TWM, TYBS, TYD, TYNS, TYO, TZA, UBT, UDOW, UDPIX, UPRO, URTY, UST, UWM, VFINX, VGIT, VGLT, VGSH, VOO, VTWO, VUSTX, VV, ZROZ
by: Avi Gilburt
Summary

Market has turned down from our long term target/resistance.

The superficial analysis is being paraded before investors yet again.

I think we will see much lower levels ahead.

For those that have been following my analysis of the stock market, you would know that I have highlighted the 3011-45SPX region as a major resistance and target for many years. Recently, we have struck that target, and thus far, it has caused us to turn down.

As I wrote in my last Seeking Alpha public article going into the Fed meeting this past week:

So, as we are now at what I think is a major inflection point in the market, with the Fed likely acting as the impending catalyst, I would suggest you watch how market participants “behave” after the Fed announcement – as well as the ensuing day or two thereafter – for our next bigger market directional cue, rather than the substance of the event as analyzed by all the “analysts.”

Yet, to my subscribers at The Market Pinball Wizard, I noted that I still expected we would be topping out within this resistance region, based upon our Fibonacci Pinball method of Elliott Wave analysis:

I still have to abide by what has kept us on the correct side of this market the great majority of the time over the years we have been providing analysis to our members. While there will always be times I am wrong in my primary expectations, the weight of evidence is still not suggesting that this is one of those times.

While most of you are quite certain that the Fed “caused” the turn down, I have a hard time understanding your theory on this position. You see, not only did the Fed do exactly what the market expected with a .25% rate cut, it provided us with an additional unexpected gift by ending Quantitative Tightening early. So, the Fed gave the market even more than it expected. Should we not have rallied instead of dropped? In fact, the very next day the market rallied right back to the point at which it declined after the Fed announcement.

So, was the rate cut good for the market this past week? Was the rate cut in 2007 good for the market too? Based upon the history of stock market reactions to rate cuts, should we even go so far as to assume that rate cuts are bad for the market?

Again, I am quite certain many of you will respond in the comments section below with your after-the-fact reasoning as to why the market turned down when it should have turned up on the better than expected Fed policy. But, I certainly hope that the intellectually honest amongst you are appropriately questioning what really happened.

This brings me to another perspective about the decline we experienced this past week. On Thursday, the market rallied quite strongly, and had everyone assume that we were certainly going back to higher highs as the buy-the-dippers were back in full force. In fact, we completely erased the decline that occurred right after the Fed announcement.

But, I posted an alert to our members of The Market Pinball Wizard noting:

For anyone who remembers trading during the 2008-09 financial crisis, one of the things you may remember is that corrective rallies were ridiculously strong. For now, I have to view this as a corrective rally. In the cash SPX index, the a=c off the lows comes in around the 3020SPX region.

On the chart accompanying that update, I noted the upper end resistance between 3011-3020, with the high being struck at 3013 before we turned down in earnest.

Now, for those of you who think that a Trump tweet about additional tariffs was the “cause” of the market decline, I have a question for you. Did these exact same tweets about prior tariffs “cause” the market to rally 9% in 2018 – because the market did rally 9% in 2018 during these tariff escalations!?

How can the similar substance of tariff tweets “cause” the market to decline today, yet “cause” the market to rally in 2018? Were tariff tweets good in 2018 and bad in 2019?

Again, I am quite certain many of you will offer your after-the-fact reasoning as to why the tariff tweets are bad now, yet were good in 2018. But, again, the intellectually honest amongst you are likely questioning this issue. It simply begs for such questioning.

Personally, I cannot tell you how many times I have seen markets approach a resistance point, consolidate near that resistance point, and then see a turn upon the announcement of some news. While the substance of the news will sometimes support the directional turn to the market, and other times it will not, it is always assumed that the news event caused the move due to the proximity of the announcement to the market turn.

Yet, when the substance of the event should have caused the market to move in the other direction than it did, it is simply shrugged off because the turn occurred at the time of the news announcement. So, of course, it must have caused that turn no matter what the substance of the news.

There is an old saying that correlation is not akin to causation. And, if you are tracking the markets, I would strongly suggest you learn what that means. It will save your hide many times and avoid you getting whipsawed by clinging to market fallacies. And, we had two instances this past week which put that on display – again, assuming you are being intellectually honest.

For those of you that still have the strong desire to form reasoning to explain this phenomena, I am again quite certain we will see many posts below with logic that is akin to scratching your right ear with your left hand by going over the top of your head.

In fact, I have even heard the “logic” that the tariffs should be good for the market because it will force the Fed to cut rates even more which would support a stock market continued rally. Sigh. As Ben Franklin would say, “so convenient a thing is it to be a reasonable creature, since it enables one to find or to make a reason for everything one has a mind to do.”

I have personally given up on this type of convoluted reasoning long ago. And, if you would take the time to read the studies of those who have analyzed the facts rather than take the path of the convolutions, you would give up as well.

In August 1998, the Atlanta Journal-Constitution published an article by Tom Walker, who conducted his own study of 42 years’ worth of “surprise” news events and the stock market’s corresponding reactions. His conclusion, which will be surprising to most, was that it was exceptionally difficult to identify a connection between market trading and dramatic surprise news. Based upon Walker's study and conclusions, even if you had the news beforehand, you would still not be able to determine the direction of the market only based upon such news.

So, while news events can and certainly do act as a catalyst for a market move, the substance of that news will not always be instructive as to the directional move, as evidenced by Mr. Walkers 40+ year study.

And, just because you see a market move in an expected direction based upon a recent news event, it does not necessarily mean it was the true cause of the move. In order to believe it was a true cause for that move, you have to force yourself to ignore all the others times the market moved in the opposite direction relative to the substance of the “causative” news. Analyzing markets in this manner is quite common, yet it is quite superficial and inaccurate.

If you are being honest with yourself, this type of superficial analysis has likely led many of you to scratching your heads when you see a market move after a news event in the exact opposite manner in which you would have normally expected.

At the end of the day, believing that “the fate of markets is inextricably intertwined with the ebb and flow of geopolitics” is simply placing your head in the sand when markets so often do not react as expected, and only lifting your head when they do. In fact, this perspective has led most to miss the 2016-2018 and remain bearish during one of the most bullish periods of market history.

But, I have seriously digressed, and have to get back to our more important perspective on where we believe price is heading.

Based upon my analysis, as long as we remain below the 2970-3001 region, I am expecting some wild market action. In fact, whipsaw will likely be the name of the game, as the market makes its way down to lower levels over the coming weeks/months. Major support resides between 2600-2766, and I think we will test that support over the coming weeks/months. So, strap yourself in, as it is likely going to be a wild ride.

NOTE: The article I promised regarding a further discussion of The Behavioral Investor will be delayed by about a week, as I have more immediately pressing matters to discuss in articles this week.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.