Thursday, November 13, 2014

Is it Time for Equity Troubles?

The S&P 500 Index E-mini future (ESZ4) was painting an indecisive picture on November 3rd, after having already achieved 12 consecutive new session highs (a record for at least the last 5 years), when I cautioned there was ‘otherwise little reason to discount the prospects for a more protracted advance.’  Despite already stretched conditions and to that point - an 11% advance from the mid-October low, an additional 1.2% gain was added over the last 10 days.

There have been additional new highs, but the succession of consecutive new highs ended at 12.  Absent a three session pause though, there has now been 18 new highs to date in this nearly one month advance.  This is unusually long and a strong indication that this market is stretched.  In itself however, it does not say ‘sell’. 

Looking at the nature of trade beyond the mid-October low through the recovery of the mid-September previous record, the advance has been less than stellar.  The daily gains have been mild enough that you could draw a ‘rounded top’ to the price action since November 3rd.

Open interest rose by 66,000 as a result of trade on Wednesday and the last time open interest rose by a like or greater amount was, ahem, at the October 15th low.  This is telling.   

To call for a bearish reverse without seeing a closing level today would be premature.  We would also like to see confirmation of any bearish technical development today.

As it stands however, yesterday formed a bearish hanging man which, given the extended stretched conditions, now demands attention.  Today’s price action currently forms a bearish shooting star and a settlement at the current level of 2030, would confirm the bearish implications of yesterday’s reverse signal. 

Finally, I would also offer as supportive of changed market conditions that the dollar, which has been on a strong bullish advance, has stalled over the last week.  Similarly, gold which had been falling like a rock seems to have at least found a ledge on the face of a cliff to rest for a bit.  Lastly, the bearish trend in Treasury and Eurodollars since mid-October has not been strong enough over the last 3 days to keep us from concerns about intermediate rebound (moving toward slightly lower yields).

In short, there is more reason today than at any time since September 22nd to be short equities.   

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