Weekend Analysis for Sunday 6/28/20

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Updates 4:55 PM EST - Sunday 6/28/20
We would like to welcome all new subscribers.   Please read our FAQ for more explanations on terms, labels and abbreviations that we use.

Long-term portfolio and medium term trades
Our latest analysis of market conditions reveals a lot of bearish signals.   This does not bode well for long-term equity portfolio, or medium-term long positions.   

However, Dive2 is not necessarily taking off this coming week, or even in July.   Instead the transition to Dive2 may be a choppy market that frustrates both bulls and bears.
   
We project that Dive2 will arrive in a big way after the next FOMC announcement on 7/29.   August is the worst month for the Dow and S&P since 1987, according to the Stock Trader’s Almanac.   

Let's examine the signals in more detail.

Signals from the Fed
The Fed has been sending out some big messages, yet retail investors and financial headlines so far have not zeroed in on these messages.   Here they are:

• The Fed does not expect the economy to recover until 2022.  Hence they are keeping rates unchanged until then.   That's a long way to go for unchanged rates.
• The Fed is worried about liquidity and insolvency of banks.  They have said they are very concerned that US biggest banks may get saddled with as much as $700 billion in losses on soured loans.  Last week the Fed ordered these banks to cap dividends and suspend share buy backs to conserve cash.  In our opinion, it was really this move that rattled Wall St.
• The Fed has not announced any new tools for combatting the downward spiral of the economy.  Nothing major came from the Fed in the last 2 FOMC announcements.   So $SPX $NDX IWM all dropped down to major support zones after 4/29 and 6/10. 

Signals from market internals
Volatility:  See further below for expanded discussion.

Market breadth:   
NYSE and Nasdaq A/D charts are all bearish currently.   However, the most concerning chart is Nasdaq  A/D cumulative chart ($NAAD on Stockcharts.com).   It shows the same bearish divergence observed between Jan and Feb 2020, and between Aug and Oct 2018.

The divergence is this.   There were less net advancing Nasdaq stocks in Feb 2020 compared to Jan, even though $NDX rose to a new high between Jan and Feb.   There are now even less net advancing Nasdaq stocks than back in Jan, even though $NDX rose to a new all-time high last week.   At some point soon, prices will wake up to this bearish divergence and start to head down as well.

Equity put/call ratio:
This daily chart for this ratio (PCCE on TradingView.com) shows a W bottoming pattern, indicating it is likely to rise up substantially.   When this ratio rises, it is bearish for stocks.

Percentage of bullish stocks:
Again we are observing the same bearish divergence here.   $NDX has been forming higher highs since 6/10 while this index ($BPNDX on Stockcharts.com) has been forming lower highs.

Signals from bond market
TLT  chart shows long term bonds are coiling to rise.  Meanwhile junk bond ETFs (JNK HYG) have trending down since the start of Jun, despite buying from the Fed.  Junk bonds tend to behave more like stocks because they tend to rise in risk-on environment.

The message here is that big money is moving more into risk-off defensive mode, and poised to move out of equity.   This could be due to mid-year portfolio rebalancing by pension and hedge funds.   But it could also be due to big money sensing the arrival of Dive2.

Subscribe to read the rest of this post which covers:
Signals from monthly charts
Signals from $VIX
Short-term trade setups

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