timwest
Long

SPX500 Monthly PATTERN reveals MASSIVE FEAR

FX:SPX500   S&P 500 index of US listed shares
3062 39 72
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:
snapshot


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:
S&P500 MONTHLY BEAR-TRAP


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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Very well written and thought out, As I was reading I began to wonder if another reason why the markets did not decline as before with sentiment is because the fed held it up with QE... the UK with there prop job. So... taking this all into consideration the question is does price suddenly drop to catch up or do we begin another leg up through manipulation? Interested in your thoughts.
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timwest PRO flrtrader
If we get a tax-law change, then anything can happen. If corporate tax rates decline, then the stock market can go up 30%-50% with a 5%-10% tax rate reduction. This is a possibility. The trillions of cash sitting overseas could be brought back to the US and that could drive a capital spending boom here for a few years. We need massive spending in our bridges, tunnels and highways to bring them up to speed. We could invest a trillion in infrastructure easily. That could create a decent wave of growth. The trillions of wealth transferring over to younger generations (has been going on for the past 10 years) is pumping hundreds of billions of tax revenues to the Gov't. (Ok, that may seem off the beaten path, but no one seems to talk about it).

I don't have a crystal ball, but I do like to find patterns that are reliable and that tell a story.

Stock markets are a store of value and a means to create capital to grow jobs and businesses. The only jobs that have been created in the last 30 years are from new companies. The old companies have only lost jobs over time. The Central Banks understand this and want to keep the markets up as much as possible to keep capital flowing and forming.

Keep tabs on the VIX readings to help with short term market timing since that will help with the waves in the market. Longer term, keep an eye on the "Key Earnings Level" of the DJIA (see charts) and that will help you know if the market is accumulated or distributed.

(Sorry for the meandering reply - it's late and I'm off to get some sleep)
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just FYI flrtrader there has been absolutely no QE for going on 24 months, so that idea doesn't add up.

http://money.cnn.com/2014/10/29/news/economy/federal-reserve-ends-qe-bond-buying/

There has been no QE since that last program ended.
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flrtrader SPYderCrusher
Just so YOU know... After ours ended they started it up across the pond! It continues to this day! Expand your news sources Sir.... (Amazing)
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timwest PRO flrtrader
I think it is fair to say that Margin Debt levels correlate more closely to the equity index pattern than the Central Bank balance sheet chart does. So, as important as QE has been, other leverage sources have been important too. Let's look at the Japanese Yen too. The Yen had been sold to finance speculation around the world for many years. But this year, the leverage available was reduced dramatically and magically the Yen started to rise as investors and traders closed out some of their leveraged short positions. This "unwinding of leverage" blew through financial markets around the world. Additionally, the leverage in the US banking system was throttled down in 2008-2012 and knocked the stuffing out of asset prices, particularly real estate in the US. I don't believe that has been throttled down yet in the whole of Europe. So, again, as important as QE is, it is also important to know where all sources of leverage are and what is happening to them.
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this chart is about the US index in case you missed it, not the UK
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Is the most current blue line showing that there is a BIG thirst for US stocks and that even though the RgMov has declined down already in 2016, and SPY has NOT corrected, maybe, the 'correction' is over and gotten absorbed by the 'new buyers'. Maybe, the new buyers are suckers or part of the retail market (individuals) and therefore classicly wrong. Or possibly that, the current times is a correction, but the bulls=bears is showing that 'this time it is different'.

According to PE, PB, PS and poor ROE ratios, I am not buying that we will stay up here, but in talking to so many traders, they are ALL tired of hearing that we should soon have a correction, and therefore hang in there! In the meantime, Dow goes above 18000.

Market Timing is harder than keeping teenagers in line or have a smooth sailing 30 years of married life, so I am not sure what I am talking about above, but all I can say is 'time will tell'.
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timwest PRO kenny1924
Random thoughts to reply to your comments: Someday we will get everyone's opinions here each day to see what people really think about the day, the week, the month, the year for each market they want to vote on. That way we don't have to rely on what you hear from the people you talk to. From what I read on Twitter (I follow quality publishers, not just traders), there are about 90% bears and the bears are big money managers and they are vocal about a market correction that will be deep. Since they not only have a lot of money invested in the market and have a lot of followers, I have to assume they carry more weight than a handful of traders. But it is hard to measure. That is why I prefer "real money" measures, one of which is VIX and the unique way that I apply it here at TradingView and have applied here for many years. Check out my research on that here. I believe the people saying we are about to repeat 2007 are incorrect. The valuation measures you are looking at at not out of line when compared to low interest rates. If you adjust all of your valuation metrics for the fact that bond yields are as low as they are, then you get a different picture altogether. Stocks have an earnings yield double that of Government bonds. P/B hasn't been very helpful for timing the market. P/S is more skewed now due to companies requiring very little in the way of capital to grow, very little debt and a global sales platform in the form of the internet. Margins are in the high end of the historic range (90th percentile and above for the past five years) and sales are growing faster in the high PSR companies (like Facebook, Amazon, Google, for example, which make up a large portion of the high PSR bunch). I find plenty of stocks that are yielding in excess of 10% in free cash flow, which seems remarkable to me considering that Gov't bonds yield so little and have zero protection from inflation. The world is betting on massive deflation given the current valuations of stocks vs bonds. That's the only way to get a return by owning bonds at this point.

As for patterns, I think the pictures in the graph speak volumes about what is going on under the surface and the fortune telling that has been going on by "chartists" and "technician's" haven't factored in enough fundamentals to make a compelling story.

And about family/marriage and staying even keeled... I have raised 4 children (now aged 12, 17, 20 ,23) and it is quite a challenge. I'm older and less bolder for sure, and respect anyone who has raised a family and stayed married.

Thanks for the reply and do check out my previous ANNUAL FORECASTS because they have been pretty spot-on for predictions going out a year.

All the best kenny1924,

Tim
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2use kenny1924
How about, the markets needs to find a way to screw all the suckers again, but it cant do it the way it did before - everyone is prepared, so the signs lead to a buy and it waits for everyone to buy it, once everyone get on the boat once Dow starts running, it will will everyone one down *insert_new_unknown_reason_here* - after all, all the reasons for the previous crashes and solutions were new and never tried before - so why now expect something similar?
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If the Gov't needs tax revenue, they could raise the capital gains taxes and start a financial transactions tax, since the stock market is "where all of the money is at the moment" - so that could certainly change the ball game in a "grand-slam" kind of way (as noted before where I said any tax-law changes are significant). I was somewhat surprised to hear that Hillary is on board with lowering taxes on corporations to get them to "bring the money home" for investment (which isn't a sure thing). That is more of a Republican strategy. But, I do recall Bill Clinton moved from an extreme-liberal to a middle-of-the-road capitalist in his first year on the job. Stranger things have happened indeed! Good fortune to you and to us all.
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Are you already short? I'm waiting for a good opportunity to get in since 2 weeks.
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The chart is explaining to be "long". Please re-read the pattern explanation.
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So you conclusion is spx500 will go further up?
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2use watsonzou26
yes as the chart is a Long one
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Thanks. Some smart professional trades do think spx500 will go further UP since we see resistance above is quite weak and Wave 5 is not finished yet.
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But this is not to be seen as a divergence?
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Yes, a bullish divergence.
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Tim, thanks for this valuable input. Your chart really tells a story. And it is an interesting story indeed.

However, what if we add some more measures to put things more in perspective. What if we add some market valuation ratios such as the multiples at the current levels and compare it to the historical turning points you outlined(more precisely to the phase where we had similar conditions,1993-1995)

If we have a look at P.E and other metrics, at the current levels, valuations seems stretched to the upside.
Having that in mind, there are two possible scenarios,
1) An adjustment in p.e ratio lower before any sustained upside leg( further downside correction, or acceleration in corporate profits or both)
2) Another leg up which accumulate to this overvalued market and result in a bigger bubble.

Accordingly, which scenario is the likely? we have to answer this question... Two questions look critical to me,
1) As you mentioned, tax reforms in a key, however the question is whether the U.S. will implement any if Clinton is the new president?
2) Inflation and the Fed monetary policy path. Will inflation stay low ? an unexpected rapid rise in inflation would lead the FED to play catch-up game..
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timwest PRO Technician
Thanks Luay for your questions:

All year long I've been looking for a sideways market, just from the perspective that the long rationale was as strong as the short rationale. The valuation metrics are challenging to digest, but given the rates of return that are offered by equities even at these relatively high multiple levels from a historical perspective, but we haven't had this low of a reference rate (from low inflation, high productivity of assets, and accomodative Global Central Banks) that makes stocks still cheap or more probable to hold here and advance in price than to decline to allow the sideline sitters a chance to buy stocks extremely cheap.

Your two scenarios are correct, I believe: Hold sideways here as values build ever more to the point that prices take off <OR> advance immediately and then come tumbling back down to current levels in a correction. Either of these scenarios excludes a major correction unfolding from current levels. I think we can rule out a decline simply because we have not had a bear market with AAII sentiment this low (at record lows over 50 weeks).

What changes the future odds? Any tax reform at all could blow this out of the water. The talk about lowering corp tax rates to make the US more competitive to the world would launch a massive bull market in equities. A major trade war with collapsed trade agreements could destroy economic activity initially and allow for a market melt-down. The ballooning national debt in the US and the ballooning financial disaster of healthcare insurance in the US is removing spending power to drive new spending and capital formation. This is the "tug of war" going on in the equity market. Inflation will stay low for the simple reason we still have the benefits of the world-wide-web and very low costs of capital for new companies to deliver goods and services to the world. Look at what Amazon is doing and project that into the future and you can see how competition, robotics, automation and the WWW have come together to drive inflation out of the system. The US Gov't desperately needs infusions of new debt to keep the lights on at the White House and with that they need to stay in harmony with the markets and do what they can to keep the system stable with risk factors low so that interest rates stay low. I believe a "Ronald Reagan type of Investment Tax Credit (ITC)" is the remedy to encourage new investment in the US, so that could be the reduced tax to bring back the trillions overseas in untaxed profits to the US. That burst of investment could jump-start the economy and produce a burst of activity and follow-on spending. So, if an ITC is created then there could be a strong enough economy to allow for a FED inflation-fighting rate rate-hike cycle. But it is still years away.
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G13Man Technician
@Technician, with QE adding to the money supply , why shouldn't pe levels rise ?
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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.
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timwest PRO 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.
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Tim,

you would need to explain what exactly is your RgMov indicator before we can have an intelligent discussion.
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I'm considering a full disclosure, but I hinted at what it measures in the dialogue: "We have had many months where all or most of the price action has been on the downside, which makes people feel disgusted that stock prices are declining." (I'm paraphrasing the end of the first paragraph since I can't copy-paste it to here). I have subscribers that pay to have access to it, so I have to consider their rights. But essentially it is looking at price movement from the previous close, both up and down, and plotting it on a continuum.
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It is my honor to read your article about SPX500, how do you understand RgMov and price movement? Sometimes they are in one direction and sometimes in two ways just like the price movement rightnow?
What is the RgMov ? where can i get it?
Many thanks.
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Thanks for your questions. RgMov is a measure of trend and I use it two ways: 1. TO determine trend. If it rises to a 44-day high, it is an uptrend. I then look for shorter term oversold readings to buy. Conversely, if RgMov falls to a 44-day low it is a downtrend. I then look for shorter term overbought readings to sell short. 2. I use RgMov to help me identify major market bottoms. Each market seems to have its own personality for how many "points" of RgMov it needs to wipe out all bullish psychology, which creates the bottom. I've found this to be particularly powerful and useful. It has helped me identify the 1990 bottom, the 2002-2003 bottom, the 2007-2008 bottom, and the 2015 bottom very well. The pattern is just that, a pattern and I sure hope it continues because at least it is based on logical human emotion (Sounds funny that way, doesn't it!).

Does that help? Absent a full disclosure of the equation of RgMov, of course.
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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).
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timwest PRO 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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so the S&P500 in 93-95 was trading at a level around 500-600, it peaked then 2 times to 1500-1600. national debt was 5 trillion in 93-95 here we are today at price 2000-2100, 4 times the price of 93-95, national debt 20 trillion, 4 times from 93-95.You figure the possibilities of intacting this bull market
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So in 93-95 the S&P was trading around 5-600,national debt was around 5 trillion. Here we are today at 4 times the price level ranging in the2000s because of QE, 4 times the national debt, 20 tril also because of QE, you tell me the possibilities of this bull market staying intact and going to the sky
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timwest PRO GaryWang
There are many great charts showing our debt relative to our stock market. I have been arguing that we aren't going into a crash, as so many are forecasting. The economy isn't very strong at all and wont likely be strong for over a decade given the weak demographic cycle that we are in here in the US. Big houses being sold and traded down for smaller houses, medical spending sapping our productive spending and time spent repairing our outdated infrastructure and aging homes will keep productivity, profits and inflation at bay for two more decades and beyond. So, it's important to go for smaller stocks for your upside "to the sky" potential and don't look for the market to give you that return by sitting back and doing nothing but "holding on for the ride." The bears, I believe, are seeing it wrong and they will lose on a sideways move since the cost of being short is paying dividends, borrowing shares and opportunity cost from owning productive investments. So, that's how I see it. (October 27, 2016)
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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.
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@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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Great stuff.
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timwest PRO IvanLabrie
@IvanLabrie, Thanks Ivan. You can see I've spent a fair amount of time on the subject. I suppose I have to release "Range Movement" calculation, but then someone would take it.
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"black swan" - the ones i like or hate the most. depends if they happen when i am in or out of the market.
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@2use, There's plenty of black swans out there. A nuclear strike, for example. Russia rolling into Europe with tanks could cause a big hiccup in prices. If a black swan does happen, that's why you own cash and some gold so you can either buy shares really cheap or at least use the gold to transact in goods and services if the system fails.
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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'.
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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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