“If you live in a world where everyone assumes that everything goes up forever, then it is inconceivable that prices might go down. Big price changes occur when market participants are forced to reevaluate their prejudices, not necessarily because the world changes that much. The world really didn’t change that much in 2008. It was just that people finally noticed there was a problem.” ~ Colm O’Shea in Hedge Fund Market Wizards
Summary: Positioning, breadth, internals, along with our various risk measures, remain supportive of the broader uptrend in stocks, albeit with increasing volatility — the smooth bull trend is over and at risk of vol swings from data surprises. While the Nasdaq has crowded positioning and weakening breadth, we’re seeing the opposite conditions (strong/improving breadth + low positioning) in the other major US indices, as well as international markets. We’re also tracking several USD short setups, along with looking for opportunities to add to our bullish PM miner thematic, plus more.
***The MO port is up +25% 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.***
Join The Collective
1. Powell’s Jackson Hole speech seems to be a bit of a Rorschach test. About half the talking heads are calling it hawkish, the other half a dovish turn. Personally, I found it to be more of the latter. Regardless of what you think, it was enough for the market to ramp into Friday’s close.
SentimenTrader pointed out that the NYSE Up Issues Ratio saw multiple 75%+ days. Historically, when the S&P has been at multi-year highs and there’s been consecutive 75%+ up days, the market ramped higher over the following six months every single time.
2. Our Aggregate Breadth Indicator continues to sit at +3, which is a neutral to bullish reading, meaning it’s supportive of the broader uptrend. Corrections occur when this indicator falls to +2, and larger tops at +1 or below.
3. The Dow Jones completed a 12-month inverted H&S continuation pattern on Friday with its close above the neckline. We’ve got buy stop orders in to go long (chart is a daily).
4. Nasdaq has the most concentrated long positioning as well as the weakest breadth, out of all the major indices right now. In contrast, we can see that breadth in the MSCI World Index is strong and trending higher with a number of major international markets breaking out to new highs (ie, FTSE 100, Nikkei 225, etc.)
5. The APAC region specifically is experiencing a strong underlying thrust in breadth. Here, SentimenTrader shows the % of APAC stocks above their 200dma recently crossed above 95%, which historically has preceded average annualized returns of +29%.
6. International markets are receiving a nice tailwind from a lower USD. This chart from DB shows that the USD had its worst first-half showing since 1973.
7. The dollar’s inability to sustain a bid over the past two months despite its deeply oversold technical conditions, its crowded short positioning, and consensus bearish narrative, is an important signal in and of itself.
We are increasingly of the mind that the USD is just starting what will be a major cyclical bear market. One of the USD pairs we’re tracking with the most interest is USDJPY. Dollar-Yen is putting in what looks to be a massive 2yr+ H&S top.
The current setup provides a decent early entry for going short, with the natural stop placement above the recent pivot high and upper weekly Bollinger Band.
8. As you can see on the charts below, spec positioning has come off a good deal over the past few months. Our 26-week CoT oscillator has even fallen into contrarian buy territory (long JPY vs USD). Our yield spread oscillator shows interest rate momentum is moving in the yen’s favor, and bombed out breadth is starting to accelerate to the upside (see bottom right chart).
I wouldn’t push this trade aggressively until there’s a decisive break below its larger pattern, which in this case is the neckline. But I’m watching the daily chart for a move out of its shorter-term trading range.
9. Long CHF is another trade I’m tracking. We were trading the Swissie to the long side for much of the year, and it looks like it’s setting up for another entry. The chart is in a compression regime, and positioning has cooled with both large and small specs net short.
10. Take a few minutes and read the latest note from Crescat Capital (link here). It’s a good read, and I agree with a lot of what they have to say.
11. Gold and silver miners have been diverging higher from their underlying commodities. This isn’t something you see too often, and it’s a positive development as it shows that a broader pool of investors is starting to convert over to the bullish precious metals thesis, which is something we at MO are ardent long-term believers in.
The chart below is of Americas Gold and Silver Corporation (USAS), which is one of the top-performing stocks ytd in the junior silver mining ETF (SILJ).
Join The Collective
Thanks for reading.
