Big Bounce Barely Moves the Needle – Volatility Remains High Across the Board

A Bull Market in Volatility

Today’s report will focus on the broad market environment, namely the S&P 500. Volatility is high across the board as we are seeing huge moves in stocks, bonds (TLT, AGG), gold (GLD, GDX) and currencies (UUP, FXF). The 20+ Yr Treasury Bond ETF (TLT), 7-10 Yr Treasury Bond ETF (IEF) and Gold SPDR (GLD) are still in uptrends, but these uptrends come at a price (high volatility – yellow shading)

Of the 200 ETFs in my master list, only a handful are above their 200-day SMAs (TLT, GLD, IEF, UUP, TIP, SHY, AGG, MBB, VMBS, BIL and FXF). Note that I use unadjusted data and you need to precede symbols with an underscore to get unadjusted data at StockCharts. All stock-related ETFs are below their 200-day SMAs. Most were extremely oversold with Friday’s close and got big bounces the last two days. I added the China Tech ETF (CQQQ) because it is the closest to its 200-day SMA (of the ETFs below their 200-day SMAs).

Two Day Surge Does not Move the Needle

So we got a monster rally on Tuesday and some follow through on Wednesday. These gains, however, did not move the needle for the breadth indicators. The chart below shows the percentage of S&P 500 stocks above the 200, 50 and 20 day EMAs. The red zones mark bearish periods and the green zones mark bullish periods. S&P 500 %Above 200-day EMA (!GT200SPX) turns bullish with a move above 60% and bearish with a move below 40%. S&P 500 %Above 50-day EMA (!GT50SPX) turns bullish with a move above 80% and bearish with a move below 20%.

Both were bullish from early February 2019 to late February 2020. The S&P 500 is up over 10% the last 2 days and still some 7% below its 20-day EMA. Furthermore, less than 5% of S&P 500 stocks are above their 200-day EMA and less than 2% of stocks are above their 50-day EMA. Bottom Line: this 2-day surge did not move the needle and does not change the broad market environment.

Bear Market Projects

As part of the goal to “up my game” during the bear market, I tested Optuma software for charting and quantitative analysis. In fact, I am now a subscriber. The chart below is from Optuma, but I am also placing a link to the StockCharts chart as a courtesy. As you will see in the coming weeks, Optuma has a lot of flexibility with charting options.

Channeling October 2008

The S&P 500 surged 9.38% on Tuesday and this was the third biggest gain since 1950 and the 11th time since 1950 that the index gained 6% or more. Even though there were eleven 6+ percent gains, these big gains occurred in just four periods: Oct-Nov 2008, October 1987, March 2009 and March 2020. What’s the deal with October and March?!

The biggest one day gain since 1950 was 11.58% on October 13th, 2008. This surge also occurred after a crash and the index then started some wild swings. The chart shows SPY with the red and green zigzags marking price swings greater than 10%. After the big gain on October 13th, the ETF then produced seven more 10% swings (three up and four down). And moved to new lows in November during the process.

Failed Morning Star in October 2008

The next chart focuses on October and November 2008 with candlesticks. First, notice that the big morning star reversal (green shading) failed miserably. This did not bear fruit because short-term bullish patterns and setups are more prone to failure in bear markets and long-term downtrends. Second, notice the pop and drop after the morning star. Third, notice the gap down and long black candlestick the following Monday.

Frankly, the only way to make money trading in October 2008 was to buy after an outsized loss and sell after an outsized gain. This usually involves buying and selling near the close of the day, and then a sleepless night waiting for the next open. The indicator window shows RSI(5) bouncing in the 10 to 60 zone in October because the bounces were very short. RSI did not become overbought until November. There were not many “traditional” overbought signals during this period and we could see the same thing happen now.

Morning Star and Spinning Top

History does not repeat itself, but it often rhymes and March 2020 is looking similar to October 2008. SPY fell sharply on Friday and then stabilized on Monday with a close well above the intraday low. Technically a “star” type candlestick did not form, but Steven Nison suggests a bit of flexibility on interpretation. Monday’s candlestick shows some indecision and Tuesday’s long white candlestick shows a strong gain. All three form the “essence” of a morning star reversal (sharp decline, gap and indecision, gap and sharp advance).

Despite a candlestick reversal on the charts, we know that SPY is well below its falling 200-day SMA and the broad market environment is bearish. This means bullish candlestick reversals have a lower success rate. Wednesday’s spinning top shows indecision and SPY already hit a danger zone as it retraced around 38% of the prior decline.

Personally, I do not want to trade this market because volatility is too high and I do not want to watch prices intraday, and make decisions just before the close. As noted above, trading in the current environment often involves buying after an outsized decline and selling after an outsized advance.

Big Swings on TLT and GLD

The next charts show the 20+ Yr Treasury Bond ETF and Gold SPDR with big swings over the last four to six weeks. The 1-week Rate-of-Change exceeded 4% in each of the last four weeks for TLT and exceeded 3.5% in five of the last six weeks for GLD. Both are above their rising 40-week SMAs and close to new highs. Thus, they are still in uptrends. 10-week RSI also bounced off the 40-50 zone recently. These charts look much better than the charts for other bond ETFs (AGG, LQD) and silver (SLV), but such volatile uptrends carry above average risk.

Fiscal and Monetary Response

The covid-19 crisis is not the same as the Financial crisis in 2008, but you can be rest assured that Governments will throw a whole lot of money as the problem. Time and money will eventually work, but timing is still tricky. The current package is $2 trillion and the Fed is pumping to infinity. The rescue money may just be getting started. Here is an outtake from Wikipedia from the 2008 Financial Crisis:

On October 14th, 2008, the Government announced a $250bn Capital Purchase Program to buy stakes in a wide variety of banks in an effort to restore confidence in the sector. The money came from the $700bn Troubled Asset Relief Program. Over the next six months, TARP was dwarfed by other guarantees and lending limits; analysis by Bloomberg found the Federal Reserve had, by March 2009, committed $7.77 trillion to rescuing the financial system, more than half the value of everything produced in the U.S. that year.

Roller Coaster Begins

I cannot predict the news flow or the path of the covid-19, but I think we should prepare for a news roller coaster over the coming weeks. This also means we can expect a market roller coaster with some big swings. Possibilities over the next few weeks:

  • Infections and deaths increase dramatically (negative)
  • Infection rates slow elsewhere (positive)
  • Crime increases as economic recession hits (negative)
  • Announcement of promising vaccine (positive)
  • Hospitals overflow (negative)
  • Announcement of promising treatment (positive)
  • Disappoint with promising treatment (negative)
  • New infection hot spots appear (negative)
  • Fiscal response and bailouts (positive)
  • Bankruptcies and dividend cuts (negative)
  • National lockdown in US (not sure)

Note that within the US, different states and cities are at different stages regarding lockdown procedures and the spread of covid-19. This means we are likely to see different outcomes across the country. Some cities and states will manage to suppress the virus quicker, and better, than others. Cities and states that do not manage to suppress the virus could become the next hot spots. I am still not sure about the exit plan and I think getting back to “normal” will be a process with ups and downs.

Ranking Tables and ChartList

The ranking tables are updated, but I have not yet updated the ChartList at StockCharts. There is not much to do with the stock-related ETFs because of the bear market environment. I will go through the charts and update the list by noon ET.

Note that the ETF ranking tables at the top are separate from this commentary. The ranking tables are designed to help with trend-momentum strategies, while the analysis below is based on price structure, setups, chart patterns and pattern breaks. Click here for a detailed article and video explaining the Weighted Average Stochastic Score (WASS) and how it can be used for a rotation strategy.  

Thanks for tuning in and stay safe!

-Arthur Hill, CMT
Choose a Strategy, Develop a Plan and Follow a Process

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