The Seasonal Trend Inversion Continues

By now it has been pretty well telegraphed that the Fed will likely announce that it is going to end its “automatic 25 bps rate hike every quarter” policy and replace it with some sort of “incoming data dependent” version. Normally one would expect this to constitute a “buy the news” event, especially in view of the recent sharp decline in the stock market. However, there are still a few problems with this idea –  the chart below illustrates one of them.


The eerie, almost perfect inversion of the usual seasonal mid-term election pattern continues unabated – and even though we have pointed this out for quite some time, we are also a bit surprised by how persistent this phenomenon has been.


The market continues to act in an atypical manner – it usually rallies strongly at this time of the year, and particularly so in midterm election years. In fact, so far this is easily one of the weakest December performances in market history.


FOMC Decision: To What Extent Is It Priced In?

There is also the problem that a well-telegraphed FOMC decision may already be  priced in, which would make a potential “buy the news” response less energetic than it might otherwise be. Since short interest has recently declined to the lowest level since 2010, bulls cannot really pin their hopes on a short-covering spree either.

In the meantime some people are even calling on the Fed to rescue the stock market by ending the “QT” policy (the Fed’s QE portfolio is currently reduced by around USD 50 billion per month). We doubt that such a sudden policy shift is in the cards, and even if it were, there is no telling how the market would interpret it.

The next chart shows a selection of major benchmark indexes. What is noteworthy about it is that as of now, there are no longer any short term price divergences in play – all five indexes have reached new lows for the move this week.

Since late in the trading day on Monday the market has tried to find its footing (normally the market actually tends to rally ahead of FOMC announcments), but it was not a particularly successful attempt. The two weakest indexes in our selection, namely the NYSE Index (NYA, a very broad market measure) and the  Russell 2000 (RUT, small caps index) continued to drift lower.

We have added a potential worst case wave count to the RUT chart. The same wave count can actually be applied to the other indexes as well, but it is harder to see on their daily charts (it is more readily visible on 60 minute charts). Note that we are not really the most experienced Elliott Wave practitioners, so take this with a big grain of salt.

We mainly want readers to keep in mind that a negative outcome cannot be ruled out, even though several technical measures indicate that the market is quite “oversold” by now.


Five US benchmark indexes – DJIA, SPX, NDX, RUT and NYA. Both the broad market as represented by the NYA and the small cap universe represented by the RUT are actually much weaker than the big cap segment represented by the other three indexes. The Russell 2000 was a leader to the upside and has in the meantime turned into a leader to the downside. The price divergences between these indexes have been erased this week, i.e., they are now confirming each other.


One of the technical indicators we like to watch, namely the SPX new high/new low percent index, has finally begun to head down in earnest. However, at this point it still has some room to fall before it signals genuinely oversold conditions.


The SPX NH-NL percent index has finally begun to head down more sharply, but remains well above the “target range” that would indicate extremely oversold conditions.


Sentiment – The First Stirrings of Fear

The sentiment and positioning backdrop has certainly improved in some respects, but we caution that overall, it is actually a bit of a mixed bag. Many prominent sentiment surveys such as e.g. the AAII survey have definitely seen their bull-bear ratios decline close to levels last seen at major correction lows.

We see this as mildly supportive for the market, but context is important in this case. If a bear market has begun, the goal posts will shift – just as they shifted when the bull market got underway in early 2009.


By now the AAII bull-bear ratio is very close to the level seen at the lows of the early 2016 correction.


The next chart is an update of a trio of indicators we last discussed in a previous market update in early November (see “Crumbling Piles of Sand”) – namely the equity put-call ratio, the TRIN and the VIX. We have grouped the TRIN with sentiment indicators because at extremes it reflects an extreme urge on the part of investors to get in or out of stocks in size.


There were finally spikes in the equity put-call ratio and the TRIN consistent with previous short- to medium term lows – but the VIX continues to be the “odd man out”, as demand for SPX puts remains anemic.


As the chart annotations indicate, we have now finally seen a few signs of fear in the form of spikes in the equity P/C ratio and the TRIN (a.k.a. Arms Index – here is an explanation of what it shows). Note that both downward and upward spikes in the TRIN can somtimes turn out to be “kick-off” signals, they do not always result in countertrend reactions.

What is more puzzling is the continued sluggishness in the VIX. Since SKEW is very low as well, we know there is very little demand for tail risk protection (SKEW measures the “options smile”, which depends on the implied volatility premiums embedded in far out of the money SPX options).

This is surprising – when exactly did investors think they would need tail risk protection if not now? SKEW was actually close to a multi-year high in mid August and thereafter headed sharply lower until hitting levels close to multi-year lows in early December. Since then it has turned up again, but not by much (not yet, anyway).


SKEW – from close to multi-year highs in mid August to multi-year lows in early December.


Speculator positioning in E-mini SPX futures (ES) is another oddity – it has still not reversed, with the large speculator net long position at a hefty 174,000 contracts at last count and the small speculator net long position at almost 105,000 contracts. That has to be smarting by now.

NYSE margin debt has in the meantime declined by around $60 billion since its peak in May, which leaves it at a still eye-watering $608 billion. You can probably see why we say that sentiment and positioning data are actually a mixed bag at this stage.



The market is likely close to a short term low by now – at least in time. It is not  necessarily close to a low in price, as that really depends on how much more fear is going to creep in over coming days and/or weeks. Keep in mind that regardless of the short term reaction to the FOMC announcement, the monetary backdrop clearly remains hostile for the time being.

We would guess that if a rally were to begin from here, it may well be fast and furious, but it ultimately wouldn’t last long. Moreover, the data indicate to us that there definitely remains panic potential as well. All in all, we would continue to advise caution.

As an aside: a minor short term positive for the market is the fact that cryptocurrencies have recovered over the past three days (recently they have slightly led the short term gyrations in stocks). We would not rely on that correlation though, as it may well turn out to be a fluke.

The recent breakout in credit spreads is probably of greater importance to the stock market. Perhaps the sell-off in corporate bonds is also due a brief pause, but there have been a few worrisome developments in credit-land recently –  we will discuss these in a separate post shortly.



Since late last week, the Modified Ned Davies Method is on a 50% sell signal again, but as Frank Roellinger tells us, he is actually out of the market entirely, i.e. he is now 100% in cash. He doesn’t like the looks of this market, and obviously, neither do we.


Charts by: StockCharts, SentimenTrader,




Emigrate While You Can... Learn More




Dear Readers!

You may have noticed that our so-called “semiannual” funding drive, which started sometime in the summer if memory serves, has seamlessly segued into the winter. In fact, the year is almost over! We assure you this is not merely evidence of our chutzpa; rather, it is indicative of the fact that ad income still needs to be supplemented in order to support upkeep of the site. Naturally, the traditional benefits that can be spontaneously triggered by donations to this site remain operative regardless of the season - ranging from a boost to general well-being/happiness (inter alia featuring improved sleep & appetite), children including you in their songs, up to the likely allotment of privileges in the afterlife, etc., etc., but the Christmas season is probably an especially propitious time to cross our palms with silver. A special thank you to all readers who have already chipped in, your generosity is greatly appreciated. Regardless of that, we are honored by everybody's readership and hope we have managed to add a little value to your life.


Bitcoin address: 12vB2LeWQNjWh59tyfWw23ySqJ9kTfJifA


Your comment:

You must be logged in to post a comment.

Most read in the last 20 days:

  • The Gold Debate – Where Do Things Stand in the Gold Market?
      A Recurring Pattern When the gold price recently spiked up to approach the resistance area even Aunt Hilda, Freddy the town drunk, and his blind dog know about by now, a recurring pattern played out. The move toward resistance fanned excitement among gold bugs (which was conspicuously lacking previously). This proved immediately self-defeating - prices pulled back right away, as they have done almost every time when the slightest bit of enthusiasm emerged in the sector in recent...
  • Monetary U-Turn: When Will the Fed Start Easing Again? Incrementum Advisory Board Meeting Q1 2019
      Special Guest Trey Reik and Board Member Jim Rickards Discuss Fed Policy On occasion of its Q1 meeting in late January, the Incrementum Advisory Board was joined by special guest Trey Reik, the lead portfolio manager of the Sprott Institutional Gold & Precious Metal Strategy at Sprott USA since 2015 [ed note: as always, a PDF of the complete transcript can be downloaded further below].   Trey Reik of Sprott USA.   Also at the meeting, Jim Rickards, who is inter...
  • Acting Man Returns - A Brief Housekeeping Note
      Pater Temporarily Keels Over Regular readers have no doubt noticed that the blog has fallen silent for around three weeks and may be wondering what has happened. In a nutshell, we were hospitalized. After a lengthy time period during which our health gradually but steadily deteriorated (we have complained about this previously), we finally keeled over. Thereupon we were forced to entrust the ruin that houses our mind to an experienced team of doctors (depicted below).   A...
  • Watch Europe - Free Pass for the Elliott Wave European Financial Forecast
      Europe at an Important Juncture European economic fundamentals have deteriorated rather noticeably over the past year - essentially ever since the German DAX Index topped out in January 2018. Now, European stock markets have reached an important juncture from a technical perspective. Consider the charts of the Euro-Stoxx 50 Index and the DAX shown below:   The Euro-Stoxx 50 Index already peaked in early November 2017, the DAX followed suit in January 2018 – such divergent peaks...
  • Why Warren Buffett Should Buy Gold
      Riding the Tailwinds of Fiat Money Inflation to Fame and Fortune Warren Buffett bought his first shares of stock when he was 11 years old.  He saved up $114.75 and “went all in,” purchasing three shares of Cities Service preferred stock.  The day was March 11, 1942 – nearly 77 years ago.  Buffett recently reminisced about this purchase in his annual letter to shareholders:   “I had become a capitalist, and it felt good.”   The Oracle of Omaha – he was...
  • Fake Money’s Face Value Deceit
      Not the Brightest Tool in the Shed Shane Anthony Mele stumbled off the straight and narrow path many years ago.  One bad decision here.  Another there.  And he was neck deep in the smelly stuff. These missteps compounded over the years and also magnified his natural shortcomings.  Namely, that he’s a thief and – to be polite – a moron.   Over-educated he ain't: Shane Anthony Mele, whose expressive mug was captured by a Florida police photographer first in...
  • Rise of the Zombies - Precious Metals Supply and Demand
      Rise of the Zombies - Precious Metals Supply and Demand Last week, the prices of gold and silver fell $35 and ¢70, respectively. But what does that mean (other than woe unto anyone who owned silver futures with leverage)? The S&P 500 index and the euro was up a bit, though the yuan was flat and copper was down. Most notably, the spread between Treasury and junk yields fell. If the central banks can lower the risk of default premium, they can make everything unicorns and...
  • Bitcoin Bottom Building
      Defending 3,800 and a Swing Trade Play For one week, bulls have been defending the 3,800 USD value area with success. But on March 4th they had to give way to the constant pressure. Prices fell quickly to the 3,700 USD level. These extended times of range bound trading are typical for Bitcoin Bottom Building in sideways ranges. This 60 minute chart of Bitcoin shows (represented by the yellow candlestick wicks) how the bulls defended 3,800 USD :   BTCUSDT 60 minute chart...
  • The Magic Doesn't Always Work - Precious Metals Supply and Demand
      The Week Ends with a Surprise The weekly closing prices of the precious metals were up +$5 and +¢11. But this does not tell the full story of the trading action. Prices were dropping until Friday. More precisely, Friday 8am in New York, or 1pm in London.   Gold and silver - back in demand on Friday... [PT]   At that moment, a light cabal conspiring to jack the price struck traders began buying. The end result was the prices, especially of silver, rose on the day...
  • Intraweek Profit Opportunities
      In 6 of 10 Countries a Single Day Outperforms the Entire Week! In the Seasonal Insights issue of 13 February 2019 I presented a study illustrating the power of intraweek effects. The article was entitled “S&P 500 Index: A Single Day Beats the Entire Week!” The result of the study: if one had been invested exclusively during a single day of the week since 2000  – namely on Tuesday – one would have outperformed a buy and hold strategy, beating the broad market. Moreover,...

Support Acting Man

Item Guides

Austrian Theory and Investment


The Review Insider


Dog Blow


THE GOLD CARTEL: Government Intervention on Gold, the Mega Bubble in Paper and What This Means for Your Future

Realtime Charts


Gold in USD:

[Most Recent Quotes from]



Gold in EUR:

[Most Recent Quotes from]



Silver in USD:

[Most Recent Quotes from]



Platinum in USD:

[Most Recent Quotes from]



USD - Index:

[Most Recent USD from]


Mish Talk

Buy Silver Now!
Buy Gold Now!