The Mighty Gartman

Investment newsletter writer Dennis Gartman (a.k.a. “the Commodities King”) has been a target of ridicule at Zerohedge for a long time. His pompous style of writing and his uncanny ability to frequently make perfectly mistimed short term market calls have made him an easy target.* It would be quite ironic if a so far quite good recommendation he made last week were to turn into the call of a lifetime (see ZH: “Gartman: ‘We Are Officially Recommending Shorting This Rally'”).


A little collage devoted to the Commodity King. It is easy to see how he ended up being made fun of. Actually, by now he has garnered a quite sizable fan community at Zerohedge and other web sites that report on his frequently ill-timed flip-flops (often announced with great conviction). However, a major call on the stock market he recently made seems to have been perfectly timed.


Anyway, we are not quite sure why he insists on predicting things, given that he is a trend-following trader. Of course, we also write about our expectations, but never in absolutes: we know the best one can possibly do is weigh probabilities to some extent, and even that is usually quite difficult (not to mention imprecise)**.

Anyway, regardless of the fun factor provided by Mr. Gartman’s eccentric prose, what we have seen of his recent missives contained actually little we would disagree with. He is quite correct in being wary of an egregiously overvalued stock market characterized by weak internals and plenty of complacency –  which is faced with an increasingly hostile monetary policy backdrop to boot.

Moreover, the question of whether the market may potentially be hit by a wave of genuine panic selling is definitely not off the table just yet. We recently pondered previous panics (see Crumbling Piles of Sand for the details) after learning of certain similarities visible on the daily charts. We now have good reason to revisit the topic.


Seasonal Trend or Panic Cycle?

Price charts are a reflection of market psychology and one should not dismiss pattern repetitions out of hand – particularly when important framework conditions characterizing previous cases are similar as well. In fact, this is the main reason for devoting time to the idea of crashes, which are otherwise  extremely low probability events.

When the market jumped strongly following the mid-term elections, there was near-unanimity in the financial press on the “reason” for the rally and on what the market would do next. It went like this: for one thing, “gridlock” is good for stocks. Everybody knows this and it has been shown to be true many times in the past.

We have our doubts about that conclusion. What about the past two years? There was no gridlock, which allowed for the unimpeded implementation of tax cuts and regulatory relief. The stock market was not exactly disappointed by this situation, as is evidenced by the fact that election day 2016 was the launch pad for a rally in the DJIA from around 17,900 to 27,000 points – not exactly chickenfeed.

Next the press rediscovered seasonality. There is nothing wrong with that in principle, after all, our friend Dimitri Speck regularly reports on the topic as well in these pages. Seasonal statistics can be very helpful, but as we have frequently pointed out in recent months, all of 2018 has so far run counter to the normal mid-term seasonal pattern. Here is what the situation currently looks like:


Instead of flipping back to its normal seasonal pattern (a rally into the end of the year), the market seems to be in the process of re-synchronizing with a potential panic pattern. Dimitri discussed the Halloween effect last week – and as we already noted in our introduction: this year may turn out to be an exception.


At first it appeared to us also as though the market had rejected the panic scenario and was trying to sync up with the “normal” seasonal pattern again, implying a rally into year end. Readers may recall that we mentioned that three to four positive closes in a row would likely indicate that the immediate threat of a panic had passed.

We only started having doubts about this when the DJIA rallied by more than 500 points following the mid-term elections, with a number of sub-sectors remaining quite weak. The rally was simply too large for a single, completely surprise-free day. One sees rallies of this size routinely in the very early stages of developing bear markets, but rarely in continuing bull markets.

Below we will revisit several of the charts we already showed in Piles of Sand. We remarked on the importance of time on that occasion, which is the focus here as well. First the charts of the 1929 and 1987 crashes – in both cases precisely the same number of trading days passed between the market top and the secondary peak immediately preceding the panic.


The two infamous crashes had numerous similarities – one of them was the fact that precisely the same number of trading days separated peak and secondary peak in both cases – namely 29 trading days. As coincidences go, this is a pretty impressive one for two such rare events separated by almost 60 years.


Next up, two charts showing the current situation. We made the first chart on Friday already, so Monday’s sell-off is not shown on it, but it is included on the second chart that also depicts a number of support lines – several of which were already violated on Monday.

What is most interesting here is that 28 trading days passed between the top and the secondary peak, which is quite eerie. That said, the rally into the secondary peak seems more vigorous than its antecedents in the two historical panic examples. Consider though that the large white candle that started the rally from the initial low to the secondary peak in 1987 was actually the largest ever rally in the DJIA in terms of points at the time.


28 trading days have passed between peak and secondary peak – and then market has started to weaken rather dramatically again, even though percentage-wise 600 points are actually not all that much anymore these days. However, other major indexes such as the NDX fared worse.


To provide additional context, here is a chart showing the S&P 500 Index, the NDX and the NYA (the broad market is the weak sister).


SPX and NDX have broken back below their respective 200-day moving averages. The SPX could not even hold its 38% retracement level. The NYA never even regained its 200-day ma, a sign of extraordinary weakness.


None of this looks particularly encouraging. While the DJIA lost less ground to begin with and managed to take back quite a bit of it, the other indexes have fared noticeably worse.


Selected Technical Data

We will close out with an overview of selected technical and positioning data. With another hat tip to Bob Prechter of EWI*** who recently pointed this remarkable datum out, here is a chart showing the net speculative long position in e-mini futures (ES) as a percentage of open interest.


The blue line shows the hedger net short position in ES futures in terms of contracts, the red line shows the net long position of large speculators as a percentage of open interest. It is close to a record high – what makes this remarkable is mainly the fact that previous corrections ended only after their net position had moved well into net short territory.


Note that this indicator is cherry-picked: other stock market index futures contracts do not exhibit similar extremes and the overall picture is largely neutral. It is still striking that the extremely popular ES futures (the underlying index is the SPX) are showing behavior on the part of speculators that is so different from that observed near prior correction lows.

Generally we would say that most short term sentiment and positioning indicators are actually in line with what one would expect to see near a short term low, while virtually all longer term indicators (such as mutual fund cash levels, margin debt, money market fund assets, etc.) remain near record extremes of over-optimism. At some point one would expect the latter to count for something – and perhaps that point has been reached. The next chart shows a broad overview of put-call volume ratios. These are nowhere near the levels one would expect to see near a durable correction low – not even by the standards of the bull market since 2009.


Various put-call volume ratios with the 10-day averages of some of them. Note: the OEX put-call ratio is not considered a contrary indicator, but rather a confirming indicator. One would normally expect to see much larger spikes in P/C ratios near a durable low.


We were also astonished to see that the bounce in the SPX new-highs/new-lows percentage index (NHNLP) was extremely weak. While a new sell signal has yet to be issued, it once again won’t take much for that to happen.


NHNLP – the most recent rebound was the weakest yet. This does not bode well – and we have yet to see a proper “oversold” signal.


Lastly, as a kind of bonus chart, here is an estimate by Bloomberg on recent outflows suffered by AQR, the by far largest group running systematic funds, i.e., fully automated quantitative strategies. Some of these strategies have performed poorly this year and we believe several of them may fall prey to major shifts in inter-market correlations (it will take time to adjust to such shifts and in the meantime negative surprises seem possible). Admittedly, at this point in time this is more of a guess than anything one can make definitive statements about.


Bloomberg estimate of outflows of AUM from AQR funds



Keep in mind that the above is not a prediction – we are merely considering possibilities, based on the fact that the market is very overvalued and in a technically and fundamentally vulnerable position. Note that over the past two months, the monetary environment has become even more negative for stocks (we will post an update on the details shortly).

A panic is only one potential outcome and it is definitely not the one with the highest probability – on the contrary, it remains the least likely path. More likely outcomes would e.g. be a retest of the recent lows followed by another rebound, or a transition to a “normal” bear market. However, extremely overvalued markets have historically almost always experienced some kind of panic sell-off not too far off their peak, which is one more reason to give the matter some thought.

Lastly, should the market recover right away and get back on track for a rally into year-end, historical precedents would suggest that the next possibility for a sharp downturn would present itself around March, provided a peak is established near the turn of the year. That doesn’t seem very likely to us at the moment, but it should be mentioned for the sake of completeness (an example is the Nikkei in 1990).

Readers should also take a look at the charts of individual stocks which are (or in some cases, were) market leaders. The market’s decline on Monday was inter alia driven by surprising weakness in AAPL and GS (a recent and a former leading stock). Sharp breaks in important big cap stocks are happening more and more often lately, which is also a very negative sign for the market’s underlying health.

The negative news flow accompanying these breaks is merely incidental: the news are regarded as negative because they coincide with declines in stock prices. They would have been shrugged off in a clearly bullish phase.


Charts by: Seasonax, Zerohedge, StockCharts, SentimenTrader, Bloomberg




*Mr. Gartman actually strikes us as a fairly typical trend-following futures trader. As a mo-mo trader he presumably finds handling trend-less “whipsaw” markets difficult, which may explain the odd preponderance of wrong-way flip-floppery. We  personally like him for his flowery prose, which is at times lough-out-loud funny.

**Our own very unscientific process – which partly depends on tacit knowledge that cannot be easily verbalized – consists of visualizing ranges of potential outcomes almost literally as 3-D images of receding or approaching/growing waves of probability. Our mind’s eye provides these images once we have hoovered up and digested all sorts of information. Even if it does not involve precise calculations, the process shares some similarities with the visualization of possible future positions in a chess game. Sometimes we sense that what we “see” is in tune with the market, at other times no clear picture emerges. The more convinced we become, the more we will focus on a topic. Keep in mind in this context that one can always find plenty of data supporting one’s bias – any potential outcome can be “justified” in a seemingly rational manner. And yet, most of the decisions people take in financial markets are not based on rational deliberations at all, but are the result of herding and other psychological effects.

*** EWI always offers interesting things to read, and one does not need to be an e-wave practitioner to find value in them – note that we are an affiliate.




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One Response to “US Stock Market – Re-Coupling with a Panic Cycle?”

  • Hans:

    Excellent write up, Mr Tenebrarum. There is a lot to
    consume in your article.

    I was discussing the market decline of October
    with a financial advisor, suggesting it was due to
    a seasonal trend. However, I urged him to watch
    the general indexes trend for the first two weeks of
    November, to determine whether or not the markets
    will resume the march higher. Market action looks rather
    discouraging at this time and fully priced according to
    Herr Shiller’s Index.

    The only “bargains” are resource stocks, namely miners
    and natural gas producers. There maybe a six to twenty-three
    month rally in the natty sector, holly dependent upon
    Global Cooling. (AGC) We are positioned in two pure
    NG plays (UPL; SWN), as I suspect we are in for a long and
    cold winter and with reserves at a 2005 low.

    The other sector with bargain basement pricing is the venerable
    precious metal sector. Stocks of silver and gold producers are
    trading at near record low prices: that positioning into this
    industry may provide a healthy hedge against future calamities
    certain to come. Debt default by the billions are coming and will stoke the
    fire of precious metals. Their downside is limited and upside large.

    Cheap protection – low premium, high payout

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