Wednesday, January 20, 2016

Close to Capitulation

When you get these 30+ point gap downs in the S&P futures, within a few days of each other, you are getting closer to a climax bottom.  These climax bottoms can lead to very long term rallies in an uptrending market, like the numerous times we saw over the past few years.  Or they can lead to short term bear market short squeezes, which last 1 or 2 weeks, and then fade back to the previous lower levels.

Anecdotally, I am seeing a lot of investors on social media looking for a bounce, and there was very little fear as the market was going down from the gap up open yesterday.  A lot of investors are fighting this downtrend, thinking this is just like August and September of last year, when you have big rebounds.  I am much bearish than them, but do recognize that we are at levels that will bring in short covering.  The market is close to the SPX 1840 support level which should bring in buying this morning off the big gap down open.  The only troubling aspect of this selloff is the contained rise in the VIX, we haven't gotten any spikes except for last Friday.  So at least Friday was a sign that you are getting close to a capitulatory bottom.  Unfortunately, you had a lot of investors buy yesterday looking for a bottom.

There is still too much complacency considering the amount of damage done for me to view this as a long term sturdy bottom.  You will not do a V bottom from this level.  We are likely to get some bounces and then retracements to wear out investors.  China is a total mess and its effect on an overvalued US market is underestimated.  If the SPX was at 1500 or 1600, it would be much easier to be a dip buyer but we're still very overvalued.  How can you pay 17x P/E when earnings are flat and we are near peak margins?  There are no bargains.  The shorts have the wind at their back.

I am looking to catch a short term bounce in the first half of the day off the big gap down open.  Nothing long term here, just a quick trade.  Perhaps if we can get a nasty close, I might be interested in buying for a longer term trade.

Crude oil is on everybody's mind, but it is just an excuse to sell. There is underlying weakness outside the energy names and the market is much weaker than people think.   Short term bounce from these levels, but I wouldn't look for a monster V here.  We just don't have the firepower.

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