By Poly

This is an excerpt from this weekend’s premium update from the The Financial Tap, which is dedicated to helping people learn to grow into successful investors by providing cycle research on multiple markets delivered twice weekly. Now offering monthly & quarterly subscriptions with 30 day refund. Promo code ZEN saves 10%.

It is a difficult to update my viewpoint when the equity markets had one of the smallest (top 10) price variances in history this week. The action brought little clarity to long term direction, with traders remaining of two minds as to whether the new high portends a breakout with force. And with the VIX at significant lows, traders do not appear to be particularly concerned with downside risk. Although the market eked out a gain this week, its failure to either break strongly higher or drop lower means that equities remain in an extended (12 week) consolidation period.

But as equities have repeatedly made small new highs, the Bollinger Bands have begun to expand. Once the bands begin to widen after a long tightening period, experience has taught that a fast moving market generally follows quickly. Very rarely do markets move back into a tight, coiling range once the Bollinger Bands have begun to expand.

Ordinarily, with equities in their current position – the 5th DC of a 32 week IC – I’d state, almost unequivocally, that they are on the verge of a substantial fall. Over the past 15 years only one Investor Cycle – the most recent – has made it further before topping. And it topped on week 32. The cycle count is really strong evidence to support a drop for at least the duration of the current Daily Cycle.

Netting it out, regardless of the direction the market decides to take, I’m confident the move will begin in earnest next week, and will be extreme in its strength.

5-23 Equities DailyMainstream analysts are starting to catch onto the fact that economic reports are weaker than expected. And it’s more than just unemployment numbers, which have a serious time lag issue and are very noisy. Additional leading economic data points point to at least a slowing of the economic “recovery”.

This slowdown is why we’ve seen the FED narrative shift so quickly. A chart of broad surveys (below) shows that 2014 had a fairly robust expansion, at least on a year-to-year basis, such that the FED began to taper its asset purchases. By the end of the year, the FED was calling this a sustainable recovery, and expectations for raising rates were accelerated substantially. And the prospect of higher rates is why the markets have stalled lately; higher rates and less liquidity would undermine the foundation of the current cyclical bull market.

The view that we’re experiencing an economic slowdown doesn’t reflect an individual survey or a one month period. It rather is the conclusion from multiple surveys spanning almost 2 quarters, so the data are substantial. The data show that since the 2015 began, a significant slow-down has taken hold. (more…)

By Chris Ebert

altimiterFor those who trade by the chart, known as technical analysts, it is never a good idea to ignore the chart, even when the chart appears to be giving mixed signals. To ignore the chart is like ignoring an airplane’s altimeter.

There is an old saying in aviation: “Always trust your gauges!” and it holds true for traders who use technical tools as gauges of stock market behavior. Nevertheless, it doesn’t hurt to tap on the gauge a few times to make sure it is working properly. That’s the situation this Memorial Day holiday in the U.S. – the gauges appear to be malfunctioning yet it is important to always trust the gauges.

The gauge in question is the Options Market Stages, which measures option performance on the S&P 500 index. This past week, Long Call option trades began profiting for the first time in three months. Specifically, $SPY or $SPX Long Calls opened at-the-money 4-months ago returned a profit when they expired this past week. Normally Long Call profits are a sign of bullish strength.

OMS 05-21-15a

All strategies involve options opened at-the-money 4-months (112 days) prior to this past week’s expiration using an ETF that closely tracks the performance of the S&P 500, such as the SPDR S&P 500 ETF Trust (NYSEARCA:SPY)

The problem, as can be seen on the chart above, is that the only reason Long Calls turned a profit is because (more…)

By Chris Ebert

go back 3 spacesWith the S&P 500 closing near its all-time record once again, now is a great time to evaluate whether the stock market has reached a top, or whether it is about to rocket much, much higher. It would be terrific if there was an easy answer, but there is not. There never is. That is what makes tops so dangerous – dangerous to buy because the bottom could fall out – dangerous to short because the top could blow off.

Perhaps the most important question a trader can ask right now is:

” Whether the S&P rallies explosively, or whether it crashes in coming months, is it likely that the S&P will never again return to its current level (2130ish)?”

Depending on the individual trader’s answer, there are a number of ways to play the current market. For those who believe 2130 will soon be left in the dust, with the S&P never making a return to that level, the choices are quite restricted: Bullish traders who think the S&P will never again fall to 2130 pretty much have to buy stocks right now; either that or buy Call options or sell Put options.

For traders who think the S&P has topped out in the 2130s, the choice is equally restrictive: sell stocks or short them, sell Call options or buy Put options.

But, is it realistic to suppose that the S&P will never again return to the 2130s? Given historical performance, such a supposition is likely to be flawed. The S&P tends to return to previous levels often. The only levels for which a return is not a high probability are very low levels that were left behind many, many years ago. For example, a trader who is betting on a return to SPX 800 is likely delusional; for even if it was to occur it could be years away, with that trader likely missing thousands of opportunities to profit while waiting.

A return to the 2130 level is actually quite a high-probability event. It does not matter whether the stock market rallies higher from here or whether it crashes lower; either scenario is almost certain to see a return to the 2130s at some point in the coming months. That’s good news for traders – all traders, long or short – because it provides hope that any losses suffered from today forward could be temporary if the trader acts appropriately.


A trader who goes short when (more…)

By Chris Ebert

roseThe S&P 500 closed at an all-time high of 2123 this past week.

The Dow closed within a few points of its all-time high, as did the Nasdaq.

Each of those events taken out of context can seem to paint a rosy picture of the stock market; it’s difficult to argue with the market when stock prices are climbing higher than they have ever been before. However, put into the proper context the picture becomes one of gloom, and perhaps of impending doom.

There is and always has been an abundance of doom and gloom when stocks reach new highs. It’s simply the nature of the marketplace to always have a percentage of participants who interpret the economy as being one of decline, thus these participants are bound to see record highs in major stock indexes such as the S&P as being irrational, overbought, unsustainable, manipulated, dangerous, bearish, and any number of other adjectives. Record highs do not make sense in a period of economic decline.

Doom and Gloom can be Risky

A trader who joins the doom and gloom party can soon be faced with losses, even if the doom and gloom is justified, because the stock market is not the economy and the economy is not the stock market. They are two entirely different creatures. As such, economic decline can actually fuel rallies in stock prices, at least in the early stages. Obviously a period of protracted decline will eventually have a negative effect on stocks. The early stages of decline are different.

In the early stages, corporate earnings may just be beginning to falter, but are still relatively good. GDP, unemployment numbers, home sales or other tell-tale economic numbers may start to falter as well, but again the numbers are often relatively good when compared to a period of economic recession. When these numbers are made public, the news initially tends to act as a catalyst that drives fear and causes some traders to sell their stock positions. Stock prices often pull back.

The problem for traders, in the early stages of an economic slowdown, is that during a Bull market traders have been conditioned to buy the dip. Thus, any decline in stock prices, whether justified by a news catalyst or not, tends to get bought up quickly. Stock prices soon return to their highs, and in some cases surpass them, as happened this past week.

When stock prices climb back to their old highs, or exceed those highs, some traders on the sidelines will be enticed to buy stocks so as not to miss out on the rally. Others may actually have their hands forced, since those who short stocks may need to buy stocks to cover their short positions. In extreme cases, traders who short stocks may be required to buy stocks to meet margin calls during a rally.

Doom and Gloom is Sometimes Justified

The fact that all the buying drives stocks to record highs has nothing to do with declining economic conditions, except for the fact that the decline may have been the catalyst that precipitated the rally to new highs. The two events are otherwise unrelated. The doom and gloom is often justified, even when stocks do not reflect the doom and gloom. The only thing that is unjustified for a trader is taking actions in the stock market that assume the doom and gloom will immediately cause a decline in stock prices. It’s almost never immediate.thunderstorm

It is thus very easy for a trader to begin to second guess his own actions and interpretations of the market. On the one hand, doom and gloom can seem justified. On the other hand, the stock market does not seem to agree. This scenario can quickly lead to a lack of self-confidence for a trader. “What does the market know that I don’t?” becomes a common sentiment.

It is that very sentiment that can drive stock prices even higher. As traders lacking self-confidence capitulate with the rally, their actions add even more fuel to the rise in stock prices. This fuel is the reason that stock prices have long been said to climb a wall of worry. It’s not that worry is (more…)