6-18-17 Market Commentary



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Market Breadth: With this past week’s market decline, our Bull/Bear Point and Figure Ratio at 1.22 fell slightly from 1.27 last week, remaining within bullish territory. The total count of securities in bullish or bearish patterns decreased 2% to 3014. The count of bearish stocks decreased fractionally, while the count of stocks in bullish patterns decreased 4%. The Sand 2 Pirls P&F Market Breadth Summary Chart shows us a market now four weeks in bullish territory. Paid subscribers have access to the OpenOffice Calc data from which the chart is generated.

The well known market breadth indicator, the NASDAQ McClellan Summation Index (NASI) rose 1 point for the sixth advance in eight weeks. At a positive 161.33 points, it continues below all six tops above +100, and it continues above all five bottoms below -100 in the last 3 years. 

Volume Analysis: In this week’s volume analysis, the NASDAQ Composite Index ended in Distribution mode with average daily volume higher than the prior week. In the last two weeks the NASDAQ had one (1) Accumulation day and three (3) Distribution days. (Accumulation days are counted when the index closes up on higher volume than the prior day while Distribution days occur when the index closes down on volume higher than the prior market day.) Last week the NASDAQ ended in Distribution mode on higher average daily volume.

Momentum: Now at -77.17, down from +41.06 last week and dropping below +100 at Friday 6/9 close, the CCI(20) daily Woodie’s CCI(20) up trend ZLR Long trade simulation ended at Monday 6/12 open with a gain of 55.31 points on the NASDAQ Composite or $0.65 per share of QQQ. The trade began at Friday 5/19 close forming a valid ZLR (Zero Line Reject) long entry signal for Monday 5/22 open. The CCI(20) daily now continues in a Woodie’s up trend, but with 3 consecutive days below zero.
In Woodie’s CCI trading system, six consecutive bars above or below zero are required for a change of trend. The Weekly CCI(20) of the NASDAQ Composite Index began a Woodie’s up trend fifty-nine weeks ago, while the Daily CCI(20) began a Woodie’s up trend thirty weeks ago.
The CCI(20) weekly has fallen to 93.60 from 135.40 last week. We await the return of the CCI(20) weekly to the +/-50 range for another CCI(20) weekly trade.
Industry Rotation the last two weeks: All of the top five industries are  positive and all of the bottom five are negative. Summary: Brokers, Banks, and Oil on top; Gold & Silver, Retail, and some tech on the bottom. Bullish: Brokers and KBW Bank continues in the top five. Gold & Silver PHLX has re-entered the bottom five. Bearish: Semis PHLX and Disk Drives have entered the bottom five. Comp Tech, Disk Drives, and S&P Retail continue in the bottom five. Networkers has left the top five. Oil Services PHLX has left the bottom five. 
Focus this week: From www.zerohedge.comDeutsche Bank: The Market’s Current “Metastability” Will Lead To “Cataclysmic Events”“. The following are some key points and diagrams.

  • With the VIX slammed at the close of trading on “quad-witch” Friday, sending it just shy of single-digits once again and pushing stocks back in the green in the last seconds of trading, the much discussed topic of (near) record low volatility simply refuses to go away, which means even more attempts to i) explain it, ii) predict what ends the current regime of “endemic complacency” and iii) forecast the “catastrophic” damage to markets when it does finally end…
  • Overnight, applying his typical James Joycean, stream-of-consciousness approach to capital markets, Deutche Bank’s derivatives analyst Aleksandar Kocic penned his latest metaphysical essay on this topic, which covered most of the above bases, and which postulates that far from “stable” the current market equilibrium is one which can be described as “metastable”, the result of widespread complacency, and which he compares to an avalanche:”a totally innocuous event can trigger a cataclysmic event…
  • He also inverts the conventionally accepted paradigm that lack of volatility means lack of uncertainty, and writes that to the contrary, it is the ubiquitous prevalence of uncertainty that has allowed vol to plunge to its recent all time lows, keeping markets “metastable.”
  • Complacency encourages bad behavior and penalizing dissent – there is a negative carry for not joining the crowd, which further reinforces bad behavior. This is the source of the positive feedback that triggers occasional anxiety attacks, which, although episodic, have the potential to create liquidity problems. Complacency arises either when everyone agrees with everyone else or when no one agrees with anyone. In these situations, which capture the two modes of recent market trading, current and the QE period, the markets become calm and volatility selling and carry strategies define the trading landscape. But, calm makes us worry, and persistent worrying causes fear, and fear tends to be reinforcing.
  • … such “metastability” is in itself unstable: “Persistence of low volatility causes misallocation of capital. This is how complacency leads to buildup of risk – it is the avalanche waiting to happen.”

    Three equalibria types diagram

    Unlike Kolanovic who quantifies the “metastable” regime’s thresholds in terms of VIX (warning of catastrophic losses for vol sellers once VIX rises above 15), Kocic instead merely qualifies the factors that build up in the final phase of the “metastable” regime, eventually spilling over (as shown in the chart above), forcing its end in a violent burst of volatility (and a market crash):

    Endemic complacency, which continues to take hold of the markets, is likely to play an increasingly adverse role the longer markets continue to operate as they recently have. However, although volatility remains depressed, the risk continues to be pushed to the tails. This is a buildup of metastablity. The longer the stick [balanced vertically on the tip of a finger] remains still, the more surely it will fall.

  • The simplest analogy to “Austrians” like Mark Spitznagel, is the lack of controlled “forest fires” to eliminate old trees (i.e., systemic excess and “zombie corporations” from central bank intervention and record liquidity), ultimately resulting in a catastrophic conflagration of epic proportions –  a lack of “creative destruction” sowing the seeds of the system’s collapse…
  • To Kocic, the natural equivalent is an avalanche. Whether one uses a raging inferno, however, or an avalanche as the analogy of what will eventually happen to the market, the message is clear – every passing day that the market remains “metastable” adds to the violent whiplash that will be unleashed once markets inevitable revert back to their “unstable” disequilibirum in the near future.

–Donald Pirl www.s2pmarketsignal.com

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