Thursday, August 10, 2017

Soldiers are Faltering

The generals are marching on, but the soldiers are having a hard time following the leaders.  The Russell 2000 peaked out in late July above 1450 and made a 2 month low breaking 1400.  That would be the equivalent of the S&P dropping over 80 points in 2 weeks.  And you can't blame a weaker dollar for this divergence.  The USD index has basically been flat over the last 2 weeks.

I am sure if we get a selloff that the mainstream media and investors will blame Trump and North Korea for it, but the broader market has been selling off for 2 weeks already.  It only has gotten more extreme lately.  Typical of late stage bull market behavior is the lagging small caps and deteriorating breadth of the market.

As much as the market has changed with quants taking a bigger share of trading activity, the underlying tendencies remain.  Investors start crowding into the winners and high growth names as they have a harder time finding earnings growth in the rest of the market.  Volatility is really the only missing ingredient for a top at the moment.  And I am sure that will not last for long as a VIX at these levels makes no sense when the major indices are so far above their long term trend lines and moving averages.  Also, the prevalence of vol selling strategies to generate income probably contributes heavily to this kind of dead market.  You can not tell me an S&P 500 that closes between 2470 and 2480 for 3 straight weeks is normal and random.  It just sets up a spring coiled to go the other way when these vol selling trades unwind.

Human nature never changes.  They are magnets for catchy headlines like Nuclear War when boring headlines about central banks are much more important to asset markets.  It seems like yesterday's bullish reversal from a bad news gap down surprised traders but that playbook has been in play for several years now, just rarely in 2017.  How soon people forget.

We have another gap down today, perhaps it is delayed North Korean jitters (I am sure that will be the rationalization if we go down), but the truth lies underneath the Dow and S&P 500.  Still feel like there will be a pullback down to 2440 but just watching at this point, as I don't like selling short when traders are nervous about war, and definitely not buying this pig unless conditions are near perfect.

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