timwest

SPX500 Monthly PATTERN reveals MASSIVE FEAR

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FX:SPX500   S&P 500 Index
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Hope, fear and greed can be measured in many ways on Wall Street and we are told to "sell hope and buy fear" by the great investors, sages and textbooks of all time. It is difficult to buy fear and even more difficult to sell hope, since hope tends to go on longer and go higher than anyone can imagine. But the downside is more consistent and similar, as you'll see in the chart.

What I'd like to show you here with this chart is the price action of the US stock market in a unique way that shows "sentiment" (see the blue line labeled "RgMov" together with a price & volatility pattern that has many people nervous for the past couple of years. Sentiment as measure by the blue line "RgMov" peaked 2 years ago in August 2014 and has been declining in a significant way that is reminiscent of major stock market bottoms as in 2003 and 2009. Note the magnitude of the drop and the duration and severity. We have had many months where all or most of the price action has been on the downside, which makes people "feel" like stock prices are always having a rough time.

Compare this pattern of "psychology" which prevailed at the 1993 time frame and led to a sideways 1994 market before the bull market continued in 1995-1999. Note how the 1987 crash was the PEAK VOLATILITY event and then there was CONVERGENCE during the rally phase into 1994, for 7 years. Note also how the 2009 market was the PEAK VOLATILITY event and there was CONVERGENCE during the rally phase into 2016, for 7 years. Average True Range Percentage (ATR%) declined to its lowest level this month as it did back in 1993. People naturally get scared when volatility declines to a low level, as it has been "THE CALM BEFORE THE STORM" in the 2007 example, so analysts, commentators and investors are looking at this pattern and drawing the conclusion that we are repeating 2007 again.

I think we are repeating 1994 right now and if the right tax laws change as they did in 1994 where Bill Clinton reduced tax rates on start-ups to 15% and made the "internet tax-free" - we could see upside. In 2007, to explain why we aren't repeating that time frame, the Gov't slammed the breaks on bank lending by cutting bank leverage from 40:1 down to 11:1 which crushed real estate, lending and asset prices. I don't see that now or anytime on the horizon since we are at 11:1 leverage now. This time in the US is closer to 1993-1994 than 2007-2008.

October 23, 2016 9:29PM EST

Tim West
Comment: Also, note 1982 where a smaller pattern with volatility expansion and then convergence to a low point combined with a price rise with converging trendlines and this 1982-1983 pattern occurred with extremely high interest rates and inflation. See if you can see the pattern on the far left portion of the chart.
Comment:
Here is the example from 1982-1983 that set-up a rally after an extremely low volatility level and a rising, narrowing and converging price advance.
Comment: The Election provided probably the most extreme negative sentiment seen in the US in many years. Fear of the future and fear of an uncertain President Elect.
Comment: When you read the "common financial press", you will see JUST HOW DIFFERENT my analysis is. So many analysts jump to the conclusion that "low volatility" is bearish for stock prices. You can see it is clearly NOT a simple pattern. Low volatility can be a precursor to Upside Movement, Choppy-Sideways Movement, and Downside Movement. There are FAR MORE FACTORS than just "volatility" all by itself.

I don't know why we as a people don't demand more "prove it" types of logic to back up claims, but the proof is in the future over many iterations.

I hope my charts and published comments are helpful and useful to you so you can profit in the financial markets.
Comment: I think this chart is the most fascinating chart I have produced here at TradingView.

I know, I have published long term projections of the movement of the overall stock market many times with eery accuracy based on rational, logical back-and-forth tug-of-war between bullish and bearish factors in the marketplace.

What THIS CHART IS, however, is very different. This is PRICE-ACTION-INDUCED-SENTIMENT that can predict future price action. Using PRICE ACTION to PREDICT PRICE ACTION may seem logical to many of us chart-watchers, but it is not logical to the rest of the world.

What THIS CHART shows is the people were expressing their extreme bearishness by selling stocks, but all of the while stocks were not breaking down in price. What this means is that we completed a bear market at the recent low in November and even though we can't believe why a new bull market can start from "THIS LEVEL OF VALUATION" (we all hear this argument all year long), the market is saying that enough people are on the sidelines, out of the market and unless something changes dramatically, the sideliners will likely come back into the market over time and at least build a level of support at current levels.

Here's wishing us all many Happy Returns for 2017 and I hope you have been enjoying a fantastic 2016 with the variety of successful market calls this year.

Tim 12/23/2016 1:43PM EST
Comment:
The concept that goes into making the RgMov indicator is shown in this graph, which reveals plenty of downside movement in the market during the month, which led to massive short positions that built up over the past 6 months. I can theorize it will take as much "positive movement" in the market to overcome the significant negative movement, before the market balances out and then we can have the chance for a downside break. Any setbacks before we exhaust the upside movement should be buying opportunities. Sometime in Summer we should be out of "upside movement" which will set up a decline into year-end, which matches the 2017 Forecast I made in January.
Comment: Correction: "Short positions that built up over the past 2 years!" Should have been my quote, not over just 6 months. Certainly they accelerated into the election, but there was plenty more shorting before that. See the large downside movement shown as large, yellow triangles = That movement is what creates bearish sentiment and then selling. They go hand in hand. Either can cause the other. (Bearish Sentiment, shorting or downside movement).
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Comments

With utmost respect for all readers and commentors here, this illustrates why this "astute discovery" is not shared anywhere else, at least as far as I know. Because it is difficult to see it. To me, this makes total sense and I congratulate you for this very smart and thoughtful analysis.
+2 Reply
timwest carl.vanhaes
Thank you Carl. I'm glad that the pattern is visible to you too. Thanks for the support. It's a rough crowd sometimes.
+1 Reply
We have massive short positions being built up with the market moving in stratosphere, with low volumes. Also the put premiums are expanding and that is creating the revenue effect of the P/C ratio. Also, too many people are expecting the correction. And, of course, it is going the other way. We have to wait until everyone throws in the towel coming closer to the 100 day Trump honeymoon or an event. Earnings were good. Dividends are OK. PE ratio is tolerable. PS is doing OK. And, forecasts are positive for 2017 (small though).

But, the biggest issue that your graph above is showing is that even though the range movement is saying that we should have had the correction, it is a HUGE ROLLING correction that is progress. Too many good stories and the bad stories are being punished. This is 'goldilocks' at its best. Yellen wants to keep her job and renew her contract, and she is 'watching her words' whereas Bernanke and Greenspan are both saying this market should get a consolidation (different times in the last 6 months). So, you see, how this can probably be interpreted as Institutional-Political-Economist Manipulation.

Either way, guard the principal, and be ready to grab some great ideas when they correct. UL was a good steal, but took off and got 'recognized'.
+1 Reply
Im young for this, so could you please share your thoughts to all of us in the same basket as i am - how would you think it is best to tackle that much uncertainty (given you expect the sideways scenario). Markets climb a wall of worry they say, so i wonder if it will be indeed slowly grinding up, taking fearfull people out with dips here and there.
+1 Reply
@2use, I'm sorry I missed your question from a month ago until just now. "Slowly grinding up" is what we've seen since the election. Grinding up the bears too. The "tackling of uncertainty" has been done by people selling shares to raise cash as they hope for a price correction so they can buy cheaper. The market doesn't let everyone get what they want. People see that Trump means "Lower Tax Rates" to get America competitive again in the world markets and stop the bleeding that has occurred for the last 8 years with tens of thousands of jobs permanently leaving the US. If you want to find support for the current market, use the 75% VIX Retracement rule (see my old charts). To find stocks that have potential, look for the revenue growth to be far above normal and debt to be low. Look for a new product or service. If you can't find one, go to the mall and walk around or ask a teenager. That works for me! Message me a private chat @2use an we can chat in the chat room to "Key Hidden Levels"
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Agree with you Tim, great write up on all counts. Re; Technicians thoughts, the PE ratio is not high, nor in an abnormal range, this is widely misreported and misunderstood, but having gone through this argument before its frankly too complex of subject matter to be worthwhile to type out why in any great depth. (I hope I can be excused for that seemingly being dismissive, it's not my intention, just we all have to budget our time at the margins).
+1 Reply
timwest SPYderCrusher
It's all relative too. Inflation is low, interest rates are low and growth is low and Governments around the world are desperately deep in debt. It's a situation where a small return in an inflation protected equity provides a lot of long term "potential safety" as long as there is liquidity in the system to keep stock prices afloat. And for that "floating" matter, all markets need liquidity to float and we will keep an eye on that as closely as we can since boats rise and fall with the tide of liquidity. Either way, if I own a company yielding 6% in earnings with a good potential for that company to be able to raise prices in the event of inflation, then I am well covered and protected. If that same company has a lot of long term fixed debt, then inflation would help wipe out that debt, so that would be good. The companies we want to avoid are any that have vast amounts of floating rate debt or short term debt, since it will have to be rolled over at higher rates in the future. Either way, all companies rise and fall based on the perception of investors about the ability of the company to invent new products, expand their market dominance and maintain or increase pricing power. So, to the extent that people are nervous about PE's currently, then they just haven't thought through the full multi-variate schematic of valuation. The simple story goes along like this: First, you have sales, then you have costs (labor, overhead, interest), then you have taxes, then you have earnings and then you pay a dividend. There are so many possibilities for any of those variables to change. Good fortune to you. Tim
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This one was absolutely spot on, huge rally after.
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Nice perspective! Thanks for sharing. It seems to me stock market is more or less simailar to the 1995 to 1996 period where the bubble is start to build on the extended wave 5;-)
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