Down $78- UP $14

By Gary Kaltbaum October 31, 2018
Before we do markets, we must mention that the president, who picked supreme court justices based on interpreting the constitution and “settled law” now lets us know “just kidding!” Yummy! 
With another wild action day yesterday, culminating with finally, a decent close…combined with this morning’s  gap to the upside, for the first time since the high, we are thinking (hoping) that maybe, possibly, could be A low for now. This simply means the lows of the past couple of days will not be taken out in the near term. Of course, don’t blink! We say this for a few reasons:
As we stated over the weekend, pessimism has finally pervaded the air wiping the smiles off the bull’s faces while thrilling the bears. We would like to see some more puking  but we get what we can get.
Markets, sectors, stocks are about as stretched, extended and and oversold as we have seen  in ages. There is a lot of territory between price and just the 200 day average, let alone short-term moving averages. Bounces eventually do happen to relieve these conditions.
The down $78, up $14 syndrome. We are using Facebook as an example on this. Down from $218 to $140…and as we write this pre-market, it is trading at $154 off of their earnings. While the stock now rallies, down $78 and up $14 does not make a great uptrend. (And yes, Facebook sand bagged their numbers! Guidance was for earnings to BE DOWN! ) Just about everything else has this syndrome to a certain extent, some even worse. Again, bounces eventually do happen. Want another example? AMAZON is up $30 as we write this. Down $550…up…you get the hint. Of course, these stocks can rally further to fill some of the drop.
If we are indeed in a bear market and we are in the first innings, remember one of our main mantras of the bear…”in bear markets, rallies are strong, make you feel better, get everyone calling a bottom, suck you in and bury you soon after.” We have to mention this because we haven’t had a real bear since the maniacs at the Fed decided it was their job to move markets with their asinine bubble making policies. We do not know yet if this is a full blown bear but we do know many names and areas have defined one.
Can this be THE low? Anything is possible with these wild markets. Anything is possible with a president who jawbones the Fed even though they are sitting at an easy money 2%. Anything is possible with such fast trading. But there has been a ton of technical damage and we mean a ton. We suspect if this is THE low, there is going to be a decent amount of backing and filling and working  through all the resistance. On top of that, we are going to have to see some leadership. Leadership is so far negligible. Just remember, in February’s steep drop, it took months before markets found their footing. This drop has been much worse internally.
As we stated over the weekend, seeing good patterns in DISCOUNT RETAIL, UTILITIES and CONSUMER STAPLES, the most defensive areas. There are also a few regular RETAIL names showing up on our screens …like a NORDSTROMS (JWN) but not much else.
Let’s call it a start but THE low? Not so sure. Need a few more cards coming out of the deck…and thinking the type of drop we have just seen does not lend itself to such a quick THE low…but am open to anything. Just don’t blink!

 

PRE MARKET

Futures were strong earlier but now down…down much more on the NASDAQ/NDX. Big TECH continues to be yonked.

We were even surprised how weak the market was yesterday. When a market is stretched. extended and oversold, bounces usually occur. So far, they haven’t lasted a day. Continue to sit back and be patient.

Our thesis on MARIJUANA stocks is now being played out. We expect this frothed up, ridiculously valued area to be slaughtered, akin to the “coin mania.” You just cannot have $15 billion market caps with very little sales. The comeuppance seems to be at hand.

If this is indeed a real bear, anything losing money will have the curtains come down. Think clearly.

WEEKEND NOTES AND BEAR MARKET

BIG GAP TO THE UPSIDE IN THE PRE-MARKET….NO REAL NEWS EXCEPT IBM BUYING RED HAT IN WHAT WE BELIEVE IS AN ACT OF DESPERATION…AND THEY OVER-PAID. WE WROTE THIS REPORT OVER THE WEEKEND BEFORE THIS MORNING’S GAP!
The evidence at hand is all one really needs yet so many continue to turn a blind eye to:

Every major index trades below short, intermediate and long-term support with some trading way  below long-term support.

 

So far, despite very stretched and extended conditions to the downside, rallies have been anemic and short-lived.

 

Perceived good news has been sold off. Netflix gapped to the upside $30 on strong subscriber growth and is down a measly $80 from that day. That is just one example. There are many more.

 

The SOX is at new yearly lows potentially showing a major, gigantic top in placee.

 

FINANCIALS…see SOX!

 

Just tons of earnings blow-ups in many industries. Just on Friday, you get AMAZON (internet retail), MOHAWK INDUSTRIES (carpet), SVB FINANCIAL (regional bank), EQUINIX (data centers and other stuff), GOOGLE (search, ads), PROOFPOINT (software security), MOODYS (ratings service), WESTERN DIGITAL (disk drives)…and many more…just on Friday.

 

We can list dozens and dozens of names from the past couple weeks. Very simply, these kind of blow-ups do not happen in bullish markets.

 

1050 NEW YEARLY LOWS…15 NEW YEARLY HIGHS

 

WORLD MARKETS even more bearish…just about all below long-term support.

 

We repeat, this downdraft did not just start in early October. Almost half the market, as well as many markets around the globe were already bearish. Through the years, we have always emphasized it is these narrow leadership markets that are easier to sell off when markets decide to sell off.

 

We repeat, margin remains near all time highs. Margin is a bull market’s best friend. It is a bear market’s biggest enemy.

 

We repeat, be careful about listening to “the economy is strong, earnings are strong” reasons for why the market has to come back soon. We are all for that but news flash, the market does not have to come back soon if it doesn’t want to…and for the hundredth time, markets look forwards, not backwards. Every time we have said that, we have been shrugged off. The nine recessions since 1956 began a median of eight months after a primary S&P top. Repeat: The nine recessions since 1956 began a median of eight months after a primary S&P top.

 

Have we seen anything that represents light at the end of the tunnel? As far as market action, not a one. But there are other things we keep in our file manager.

 

We watch sentiment. Price moves emotions. Price moves fear and greed. It should be obvious that unabated greed is turning into fear. Pessimism has most definitely picked up but haven’t seen the extremes that usually stanch the bleeding but no doubt heading that way.

 

We watch the calendar. November and December are very often decent months. BUT…and it is a big but…we pay attention to price first, everything else second. Price still sucks…and the NY Giants offense still sucks.

 

Shorter-term is anyone’s guess. Eventually the daily bottom callers will get a strong bounce. The fact is a strong bounce can happen at any time. It can happen tomorrow. It just cannot be predicted. Big bounces can come out of thin air. Remember, big bounces in bearish phases are to be sold into.

 

Our most important words of advice during bearish phases is that we would rather be a little late than too early. How do we know? Did you buy anything in the past week?

THE TREES/THE FOREST PART 2

By Gary Kaltbaum October 26,2018
We were asked on tv yesterday whether it was good that right after a 600 point drop, the market got back 400 the next day. We simply replied that we did not see it as down 600, up 400. We saw it as down 2400, up 400. In other words, the trees were the two day, down/up move. The forest was everything that has happened all year and the nausea since the recent highs. In a nutshell, we hope that explains the thought process. The trees are the short term…a 1 out of 10 on the importance scale. The forest is the big picture…a 10 out of 10 so once again, the big picture.
The big picture is:
Before the BIG 4 indices gagged, about 50% of the market was already bearish. For weeks and weeks, we listed for you AUTOS, GAMING, PAPER, STEEL, COMMODITIES, CHEMICALS, HOUSING, HOUSING-RELATED as well as other areas…and to be clear, many of these areas have not just headed down, they have been smoked. Then came the all-important SEMICONDUCTORS and FINANCIALS. Then came the broader market measured by the SMALL and MID-CAPS. For months and months, we told you many important foreign markets were already in a bear market. The big picture had already weakened. In already weakened and narrow markets, it is easier to sell off the rest if they decided to as termites were already eating away at the market’s internals.
The big picture is that in early October, they finally came after the rest. On a daily basis, all the leading groups topped out. All the leading growth names topped out
The big picture is that we have always told you markets are great forecasters of the future. Sometimes this works in the short run as earnings and economic slowdowns can be fleeting. And sometimes, they are of import. The big picture is that NOW we are catching wind of what the underlying market had been telling us. Guidance is coming down…and is coming down everywhere. Texas Instruments to beer…to machinery…to the NY GIANTS offense. Global economies are slowing down. Also, as you can see, the head honchos, top dogs, big cheeses of the market are not immune as even the almighty AMAZON (AMZN) cuts guidance markedly.  To accentuate this theme, notice what is holding up best…UTILITIES, CONSUMER STAPLES and DISCOUNT RETAIL, all the areas that benefit most from slowdowns, as they are more resistant to the slowdowns. We must also add that over 1/3 of S&P companies that have reported have mentioned tariffs in their conference calls. Hear that Donald?
We do not know exactly how this plays out in the short run. We have no clue how we finish today…but again, the short run does not matter much. The big picture is everything. Also:
All major indices, in fact, just about everything now trades below not only short term, not only intermediate term…but now the longer term 200 day moving average. Absolutely nothing good can happen until price gets back above…a physical impossibility. Only bad can happen staying below these levels. It is imperative price gets back above before we can even think about talking positively. It is simply impossible to have bullish markets when trading below.
Secondly, and this is meaningful, margin is still at all-time highs. Remember, margin is the best friend of bull markets as margin accentuates positive returns. But margin is the biggest enemy in bearish markets as it accentuates the downside. As markets worsen, margin always comes off…which in turn, makes the drops harsher. The emotions of greed and fear will be moved by price. We suspect if we continue lower, fear will drive margin down, worsening the drop.
We wish we had better news but while many deal with the idea of hope and will call bottoms on every uptick, we have always dealt with the idea of reality AND PRICE IS REALITY. We are also a wee bit worried that almost no one is calling for a bear market in stocks. In case you have forgotten and we understand why, bear markets have not been extinguished…and many areas are already in bear markets.
Lastly, we expect that in the weeks ahead, Powell and company will start floating noise that incoming data is telling them to slow their roll. We suspect we are already at or near the end of the rate hikes…at only 2%…and Trump may just need to call helicopter Ben.

MARKET NAUSEA AND PRE MARKET

The trees….short term moves…a 1 out of 10 on the importance scale. The forest…bigger picture…a 10 out of 10 on the importance scale. Too many want to call the bottom. Too many playing in the trees. When you have a chance, go check out the charts of the DOW, S&P, NASDAQ, NDX, SOX, XLF, KRE, XLI, XME, XLB and everything else under the sun. For lack of better words…an October meltdown. JUST REMEMBER…this did not start with the popular indices coming down. We wrote to you each week that the BIG 4 ACT FINE but half the market as well as foreign markets are sickly. Narrow and weak internals are easier to sell off if they decide to sell it off…thus you see what you are seeing.

Futures pop back up this morning…THE TREES. Stay in tune with THE FOREST. Everything except the most DEFENSIVE of all areas like UTILTIES and CONSUMER STAPLES now trade below longer term moving averages. The Dow ETF closed below its 200-day moving average today for the first time since March 2016, ending its longest run in its history…and the DOW usually holds up best when markets are hit. We have no clue to today and the short term. Just remember…THE FOREST!