A man may see straight and clearly and yet become impatient or doubtful when the market takes its time about doing as he figured it must do. That is why so many men in Wall Street … lose money. The market does not beat them. They beat themselves, because though they have brains, they cannot sit tight. ~ Jesse Livermore
Summary: Friday’s tape bomb likely extends the correction in both depth and duration, but doesn’t kill the bull trend. This will just rebuild the wall of worry for the next leg to climb. Until then, we must remain agile and patient. Wait for signs of capitulation and a reset in sentiment. We have long setups in bonds, rare conditions setting up for a bottom in crude, and both Ethereum and Bitcoin holding key levels despite Friday’s bloodbath.
***The MO port is up +44% ytd, and we’re not seeing a shortage of great opportunities in this market. If you’d like to join me, the MO team, and our Collective of sharp, supportive investors and traders as we navigate these markets, then click the link below. I look forward to seeing you in the group.***
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1. Early last week, we highlighted the renewed weakness in the McClellan Summation Index and Oscillator, suggesting that we likely see weakness and some consolidation over the coming weeks. Noting that this would fit with October seasonality, where the market tends to chop and vol a bit until a seasonal bottom around the 27th.
2. While we were expecting some vol, we weren’t expecting Friday’s trade war-induced vol, which caught us off guard. This, of course, raises the level of uncertainty and could lead to a slightly more extended correction, depending on the news flow. And while we’ll have to adjust our fire as US-China discourse evolves, we’re still viewing this as the start of a correction within a strong bull trend. And this latest bout of vol will help rebuild the wall of worry that fuels the trend higher.
The time to start reloading is when we see a strong reversal higher in the McClellan Oscillator (light green).
3. When we look at the McClellan Summation Index on a divergence from trend basis, we can see that the larger trend remains intact, and the indicator is far from signaling a significant sell signal.
4. Our good friend and long-time Collective member Tony writes a killer vol-centric newsletter named The Free Dominion. He just published a great video highlighting the rare inversion of VIX futures and what that means for risk assets over the short term. You can watch the video here.
5. We’ll be tracking the capitulation indicators on our HUD to let us know when it’s time to jump back into the market and start buying things on sale.
6. Yields continue to be an increasing tailwind for stocks. 10s are now roughly 2std below their 12m average.
7. It’s important to stay open-minded about narrative shocks like this, as they can develop in a number of ways. However, a major constraint that Trump faces is the midterm elections next year. Which means he’s unlikely to make moves that put the US economy or market at significant risk. And it looks like he’s already making an effort to cool things down a bit.
8. Chris D, our head systematic trader, covers the recent selloff, some setups in gold, FX, energy, and more in his latest weekly market prep video (link here).
9. The crypto market got nuked on Friday, and many retail traders were wiped out (here’s a great thread on that). However, despite Friday’s steep selloff, both ETH and BTC were able to bounce back and retain key weekly support levels, which is telling.
10. The short end of the curve continues to set up nicely. Here we have 2s completing a large inverted H&S bottoming pattern.
11. We took a small stab at long oil the other week but were quickly stopped out. We continue to see a setup develop with its relative valuation at its second-lowest level in history (the first being the 87’ crash), and global growth leads inflecting higher.
12. While sentiment and positioning are at historic extremes… Here we can see that net money manager positioning is at its lowest level in nearly 20 years. The only other time it was this low was in late 06’, right before the vertical 12m+ rally in oil.
