Everything is BEARISH so it’s time to be open minded

 

We’re only two weeks into 2016 and already it has been a brutal year for markets worldwide.

Why? This isn’t a question I ever try to answer, as a trader who focuses exclusively on price action, but we’re going to try today.

Fundamentally

  • Crude oil continues its death spiral lower, sinking below $30 a barrel
  • The Fed no longer appears to be the market’s friend as their views on the health of the economy and possibility of future hikes no longer seem accommodating
  • Currency pressures as Chinese devalue the Yuan
  • Upcoming US presidential election adding to the uncertainty of the next term

 

The Technicals

  • US equity markets had their worst start to a new year ever.
  • We’ve sliced through all prior technically significant support levels
  • We’ve been unable to bounce despite extreme oversold readings
  • Every chart, technical reading, and indicator looks bearish and destined lower

 

This is a horrible list of both technical and fundamental reasons explaining why we’re down nearly 13% from highs in the S&P500. After reading through these points any rational investor could easily understand why markets have been acting the way they have and would probably conclude there is more to follow.

But I’m going to argue it’s time to be open minded about taking the other side of the trade for at least the near term.

That above list of bearish bullet points wasn’t hard to come up with. It’s being published everywhere. And this is a very important concept to understand about markets.

If many of the same concerns are being written about and published on a wide scale, then the market has likely already fully priced those events in.

The truth is the market began pricing in all of the points above back in late December, before the majority knew what was going on (myself included). This doesn’t mean the market is done pricing those events in and it’s safe to buy; there’s always an overreaction on plunges, and there’s always new information surfacing every day that the market adjusts for.

But let’s take a look at sentiment readings and the internals of the market.

The Sentiment

  • Markets in turmoil headlines everywhere
  • Comparative analysis everywhere between 1987, 2008, prior crashes
  • Call to put ratio spiking to extreme levels which historically has marked short term lows
  • No one wants to own stocks on a 3 day long weekend

 

The Internals

  • T2107 % stocks above 200 day MA at 13% which we haven’t closed a week at since 2009
  • T2108 % stocks above 40 day MA at 8% which we haven’t closed a week at since 2009
  • CNN fear & greed index reading is a 10 indicating extreme fear
  • McClellan Oscillator closing at -78, extreme territory

 

We can see we have extreme readings in both sentiment and market internals. Investors are concerned, and there’s no evidence of blind euphoria or discussion that the market will be at new highs soon. Further, we can see under the hood of the indices that stocks have been beaten up to the point of prior crash level lows.

So to summarize, we have extremely bearish fundamental and technical outlooks, combined with extremely negative sentiment and internal readings.

From a contrarian’s perspective, everything’s in place to take the other side of this market.

But it’s not that simple, so here’s what to keep in mind. Nothing suggests Tuesday will be the turnaround, or that we can’t fall any lower. No one can predict the timing behind these types of counter trend rallies.

There is still risk to the downside as the market will continue to price in new information. So that means if oil continues to plunge lower to $20 a barrel, and China continues to devalue, these events will continue to weigh on prices.

If more new bad news develops, the ugly mechanics of markets will surely take over as forced selling, margin calls, and further capitulation will overwhelm all rational decision making.

My intent is to keep you open minded and to warn you about worrying about things that everyone else has already pointed out. Let them worry for you, and instead spend time focusing on future catalysts or the underlying price action for your investment decisions.

Personally I did start accumulating UPRO on Friday and hold a position in the mid 47s for a multi-day trade. It’s not large, it’s calculated, and I understand and accept the risks of that trade. By having sidestepped the majority of this recent leg lower, I can afford to take a shot in the dark here.

Last but certainly not least, remember our goal as traders is first and foremost to protect capital and manage risk. Cash is a brilliant position during times of heightened volatility and uncertainty.

If you are interested in trading with us, or just want more information about how we approach markets, check out our membership page here.

 

 

Enjoy what you read? Share it below and be sure to tag @thetraderisk.

Find similar content on the following:
Posted in ,
Tagged with

Evan Medeiros

Evan is the founder of the Trade Risk. With 20+ years of coding experience and a B.S. in computer science, Evan brings a systematic discipline to investing in the stock market.

Don't miss out on more educational articles just like this!

Please enter your name.
Please enter a valid email address.
Something went wrong. Please check your entries and try again.

Leave a Comment