“There is a very important difference between being a theoretical contrarian and dealing with it in practical terms. In order to win as a contrarian, you need the right timing and you have to put on a position in the appropriate size. If you do it too small, it’s not meaningful; if you do it too big, you can get wiped out if your timing is slightly off. The process requires courage, commitment, and an understanding of your own psychology.” ~ Michael Steinhardt
In this week’s Dirty Dozen [CHART PACK] we look at the current risk on/off picture, discuss the lack of a true sentiment washout, the need for improving fundamentals, but also note the deeply oversold levels recently hit and what this all means when put together. We then cover bonds, gold, and Argentina, plus more…
1. Our Trend Fragility indicator which hit 100% before the start of this selloff, has now fallen to slightly more neutral levels at 70%.
2. Market internals are starting to turn up suggesting a short-term bottom may be in. But… there’s been a lot of technical damage on this front and it’s going to take some work for internals to recover and give us confidence that this shakeout is completely over.
3. Sentiment reached euphoric levels before the start of this move, as shown here in CBOE Put/Call ratios, smoothed with moving averages. They’re trending lower now but need to move lower still to imply hot hands have been fully shaken out and a bottom is likely in.
4. We got a big reversal last week in SPX so the short-term bottom is likely in. But the upside is also capped until we see improvements in underlying internals. This means we should expect volatile sideways chop with downside risk until sentiment is fully reset and internals improve.
5. New lows tend to cluster and we just saw a large spike in them these past two weeks.
6. @mark_ungewitter shared the following on X last week “Initial cracks often precede cyclical tops. #NoteToSelf”
7. The McClellan Summation Index (green line) has rolled over from elevated levels. We’d like to see this one reset and turn up before we start aggressively pushing longs again.
8. Not to be too gloomy, SentimenTrader shared these two charts pointing out that the Nasdaq was deeply oversold at over -1.5% below its lower Bollinger Band. And historically, this leads to strong returns over the longer run.
9. This looks like a bottoming pattern in Bonds…
10. Falling long-term yields would of course be good for precious metals. Gold continues to consolidate in a sideways rectangle pattern. Meanwhile, speculative positioning has been coming off the past few weeks and…
11. Gold has entered its strongest period of seasonality.
12. Looks like Druck is adding to his Argentinian holdings. ARGT showing a big weekly reversal off its lower weekly Band. We like this one long-term for a number of reasons.
Thanks for reading.
