by Mahesh Kalbhor | Jul 13, 2024 | Weekly Update
Hello, market enthusiasts!
The market is on fire, with the pace of trading accelerating to new heights. The excitement that has propelled the S&P 500 ($SPX) is now spilling over into small-cap stocks like those in the Russell 2000 Index ($RUT; IWM). This surge in small caps has expanded market breadth, turning a previous negative divergence into a positive one. Cumulative Volume Breadth (CVB) has been hitting new all-time highs alongside $SPX almost every day in July, signaling that this is no longer just a NVIDIA (NVDA)-driven market.
Put-Call Ratios: A Closer Look
Equity-only put-call ratios are hitting new relative lows, levels we haven’t seen since the last bull market ended in late 2021. As shown in Figure 2, during periods like July 2023 or March 2024, these ratios can stay low while the stock market continues its upward trajectory. It’s important to note that while these low levels indicate an overbought condition, they are not a sell signal. A true sell signal will emerge when these ratios begin to rise sharply from their lows.
Improved Market Breadth
The inclusion of small caps has significantly improved market breadth. Both breadth oscillators are currently on buy signals and have finally moved into overbought territory, confirming the strength of the market’s rally.
Volatility and VIX
The $VIX continues to trade at very low levels, supporting the ongoing rise in stock prices. The trend of the $VIX buy signal, generated back in March (highlighted in Figure 4), remains in place. However, caution is warranted if $VIX rises above its 200-day Moving Average, which is currently at 14.40 and starting to decline again.
Our Strategic Stance
We continue to maintain our “core” bullish position, complemented by several other long positions based on buy signals from various indicators. We are also rolling calls up to higher strikes when they get deeply in-the-money, optimizing our returns amidst the ongoing market strength.
Stay tuned for more updates and insights as we navigate these exciting market conditions. Keep riding the wave with us, and happy trading!
by Mahesh Kalbhor | Jul 2, 2024 | Weekly Update
## Why I Sold My Tactical Long Trading Positions and Raised Cash to 30%
Last Friday, I made a significant move by selling all my tactical long trading positions and raising my cash level to over 30%. Additionally, I plan to hedge the remaining strategic long positions by selling covered calls. Here’s why I’m taking these steps:
### Seasonality
July is typically the last strong month for the stock market before the summer and autumn correction period sets in. This seasonal pattern has been consistent, and I’m cautious about the upcoming correction phase.
### Earnings Season
With the earnings season kicking off, there’s heightened anticipation as guidance has been raised across the board. While expectations are high, there’s also a risk of disappointment if results don’t meet these lofty projections. Moreover, even positive earnings reports might not translate into favorable price actions if the good news is already priced in.
### The Bond Market
The bond market has been reacting sharply since the Biden TV election campaign mishap last week. We’ve witnessed a significant bear steepening, breaking the upward trend of the TLT ETF. Treasuries are now pricing in the potential of a Trump 2.0 scenario.
Long-term US government bond prices have plummeted since the presidential debate, with the 10-year Treasury yield rising from 4.29% on Thursday to nearly 4.50%, the highest level since May 31. This increase comes despite favorable economic indicators, such as the lowest year-over-year print for the personal consumption expenditures deflator since March 2021 and another sub-50.0 report for the M-PMI on Monday.
Economic expectations for the long term are shifting, although the Federal Reserve’s interest rate policy outlook has remained relatively stable. The 10-year TIPS yield has increased by around 14 basis points to 2.15% since Thursday.
### Bottom Line
If Trump wins, the market anticipates a combination of stronger economic growth, higher inflation, and increased Treasury supply. This outlook is particularly bearish for hypergrowth stocks. Given these factors, I believe it’s prudent to lock in profits and observe how the US navigates the presidential battle between the old white men.
In the comments, I’ve included a chart of the Nasdaq 100. Late in 2023, I projected an index level around 20500 for the Nasdaq 100 as my target for 2024. Last Friday, the Nasdaq 100 briefly crossed 20000 before reversing, which might indicate a top. Alternatively, we could see another upward move in July before the anticipated correction. However, several negative divergences under the surface are too complex to detail in a short blog post.
by Mahesh Kalbhor | Apr 21, 2024 | Weekly Update
🚨 **Market Alert: Navigating the Shifting Tides of the S&P 500** 🚨
📉 The S&P 500 has long been a beacon of resilience, steadfastly holding the 5050 support line. For weeks, this seemed a reliable floor, guiding us through uncertain times. Yet, recent developments have sent ripples through the financial landscape as the 5050 threshold was not just approached but decisively breached.
This shift isn’t just numerical; it’s symbolic. The breach has transformed the 5050 mark from a support to a formidable resistance, highlighting further resistance levels at 5150 and the zenith at 5260. Amid this, a silver lining emerges just above 4900, with major support waiting at 4800 – a historical pivot point that merits our attention.
But the narrative deepens beyond price levels. The equity-only put-call ratios, a harbinger of market sentiment, have risen, echoing the sell-offs and solidifying bearish sentiments.
📊 Moreover, market breadth tells a tale of decline, with daily advancements dwarfed by retreats. This isn’t merely statistical; it’s a signal, reminding us that an oversold market isn’t an automatic buy signal. It’s a nuanced landscape, where brief rallies may not suffice to herald a bullish reversal.
🔮 $VIX is presenting us with some very interesting data for the first time in a while. Not only that, but there is some conflict between the major $VIX signals. A “spike peak” buy signal would occur when $VIX closes at least 3.00 points its highest price reached during this most recent spike. So, that’s the good news.
The bad news is that a trend of $VIX sell signal has occurred. That took place at the close of trading on April 17th, when the 20-day Moving Average of $VIX crossed above the 200-day Moving Average (and $VIX was above the 200- day MA, too). It is shown in the circle in Figure 4. These are often intermediate-term signals.
🐻 In response, our stance has evolved. No longer are we anchored in bullish optimism. Instead, we’ve pivoted towards a measured bearish posture, anchored by a bear spread that responds to the $SPX’s recent closure below the 5050 line.
As we navigate these turbulent waters, our guiding principle is agility. We stand ready to adapt, responding to the market’s signals with precision and prudence.
To my fellow investors: Let’s embrace this period not with fear, but with the resolve to seek opportunities within the challenges. The path ahead may be fraught, but it is rich with potential for those prepared to navigate its contours.
Stay informed, stay agile.
#Finance #Investing #SPX #MarketAnalysis #Volatility #Adaptability
by Mahesh Kalbhor | Apr 14, 2024 | Weekly Update
This past week, the stock market has seen increased selling activity, highlighted by a significant downturn on the day the Consumer Price Index (CPI) report was released. Contrary to expectations, the CPI showed a minimal increase of 0.1%. However, the subtle uptick has had profound implications, suggesting that the anticipation of rate cuts may be premature or overly optimistic. This revelation triggered immediate selling, resulting in the S&P 500 Index ($SPX) retracing back to its previous trading range between 5050 and 5180, which historically acts as a support zone.
Resistance looms at the 5260 mark, hovering near the all-time highs established a few weeks ago. At present, the market is experiencing a mild pullback, which could potentially serve as a healthy correction, provided the $SPX can muster a rally to breach new all-time highs. Nevertheless, a drop below the 5050 mark spells trouble, activating a technical sell-off due to the breach of a significant support level.
In terms of market sentiment, equity-only put-call ratios have shifted. After flirting with sell signals for several weeks, we’ve observed a notable uptick, signaling confirmed sell indicators. These will likely persist until a downward trend emerges, signaling a reversal in sentiment.
Market breadth, another crucial indicator, has been lackluster. Despite intermittent days of positive market breadth, sell signals were activated on April 2nd following a wave of selling, and these signals have remained active. Market breadth is known for its potential rapid shifts, yet, for the time being, the sell signals persist.
The Volatility Index ($VIX) has also seen a gradual increase as the market has wobbled in recent weeks. However, it has yet to trigger any sell signals or enter a “spiking” phase, nor has it indicated a “trend of $VIX” sell signal, suggesting a wait-and-see approach for now.
Given the $SPX’s resilience in staying above the pivotal 5050 support level, we maintain our core bullish stance, albeit cautiously, with out-of-the-money calls. We’ll continue to navigate the market, responding to confirmed signals as they arise.
In summary, while the market has encountered a slight retreat, fueled by rate cut speculations and technical indicators, the overall bullish sentiment holds, tempered by caution and a keen eye on emerging trends.
by Mahesh Kalbhor | Apr 10, 2024 | Weekly Update
The Gold Surge: How China’s Shifts Are Elevating Gold Prices
Inside recent months, the allure of gold has intensified, a phenomenon significantly influenced by economic movements within China. The World Gold Council’s latest reports reveal a stunning 33% increase in China’s gold purchases in the initial quarter of 2024, and a reduction in their acquisition of U.S. Treasuries. This shift is not arbitrary but rooted in strategic financial decisions and changing consumer behavior within the nation. Here’s why gold is experiencing this upward trajectory, largely thanks to China:🇨🇳
Central Bank Strategy: Hedging Against UncertaintyIn 2023, The People’s Bank of China elevated its gold reserves by 225 tonnes, marking an all-time high. However, China isn’t isolated in this endeavor; globally, central banks have amassed 1,037 tonnes of gold on a net basis last year, making it the second-highest record. But why this gold rush among central banks?Central banks, operated by some of the world’s most astute economists and bankers, are increasingly wary of the vulnerabilities of major reserve currencies, particularly the U.S. dollar. With national debts ballooning and interest rates climbing, the cost of servicing these debts threatens to eclipse national revenues, potentially leading to a currency crisis. Gold, therefore, emerges as a formidable ‘Plan B,’ offering a stable reserve in times of monetary uncertainty.
Shifting Sands: China’s Middle Class Turns to GoldThe Chinese middle class, traditionally inclined towards real estate as a primary savings vehicle, is now facing a stark reality. The plummeting real estate prices, coupled with a looming demographic decline, have rendered property investment untenable. Additionally, the disillusionment with the Chinese and Hong Kong stock markets, exacerbated by non-business-friendly policies, has eroded confidence in equities as a safe haven for savings.This confluence of factors has pivoted the middle-class savings habit decidedly towards gold. Sales of gold jewelry and bullion have skyrocketed, showing a 60% year-on-year increase. The accessibility of gold, through jewelry shops, the ubiquitous WeChat app, and the Shanghai Gold Exchange, has democratized gold investment, making it a feasible option for the average Chinese citizen.
Conclusion
The dramatic uptick in China’s gold purchases is more than a mere statistic; it’s a reflection of a broader economic strategy and a significant shift in consumer behavior. As central banks bolster their reserves to hedge against currency risks, and as the Chinese middle class seeks refuge from the volatile real estate and stock markets, gold’s position as a bastion of financial security is only expected to strengthen. This pivot towards gold in China is not just reshaping the nation’s investment landscape but also setting the stage for a sustained increase in global gold prices.
by Mahesh Kalbhor | Apr 5, 2024 | Weekly Update
Navigating Market Turbulence: A Strategic OutlookIn recent weeks, the financial markets have experienced a whirlwind of activity, with the S&P 500 Index (SPX) showcasing significant movements that have caught the attention of investors and analysts alike. On March 28th, the SPX reached new all-time highs, both closing and intraday, signaling a robust market performance. However, the landscape shifted slightly at the start of this week, marked by a minor pullback and some deterioration in market internals, though these changes initially seemed insignificant.By the afternoon of Thursday, April 4th, the SPX was on the verge of surpassing its recent highs, reflecting a market poised for continued growth. This momentum was abruptly interrupted by comments from Federal Reserve Governor Neel Kashkari, whose hawkish statements led to a sudden increase in selling pressure, illustrating the market’s sensitivity to monetary policy cues.
The SPX subsequently retreated below its first support level at 5180, stirring concerns among market participants. Nonetheless, an established support zone ranging down to 5050 offers a cushion for the market, suggesting that the bulls may still have room to maneuver. This zone is visually represented with a scatter pattern on the accompanying charts, providing a clear indicator for potential reversal points. Should the SPX breach the 5050 threshold, a more significant technical sell-off could be triggered, highlighting the critical nature of this support zone.
Despite these challenges, the current pullback has brought the SPX to its rising 20-day moving average, a development often seen as a normal correction within an overall bullish trend. The market’s resilience, as demonstrated by this reversion to a key technical indicator, reinforces a fundamentally positive outlook on the SPX.
Market sentiment, as gauged by the standard and weighted put-call ratios, has shifted, with both indicators accelerating to the upside, signaling increased selling activity. Similarly, market breadth—a measure of the number of stocks advancing versus those declining—has shown signs of weakness, further complicating the market’s trajectory.
The Volatility Index (VIX), a key measure of market fear and uncertainty, remains a critical barometer in this environment. While there has been a slight uptick in the VIX, it has not reached levels typically associated with major market downturns. A significant bearish signal would be indicated by a sustained upward trend in the VIX, especially if both the VIX and its 20-day moving average surpass the 200-day moving average. Currently, the VIX is above its 200-day moving average, but the 20-day moving average remains below, suggesting that any immediate sell signals may not be imminent.
In response to these developments, we are maintaining our core bullish stance on the SPX, albeit with a note of caution. The introduction of a bearish component to our strategy, informed by the sell signals from equity-only indicators and market breadth, represents a balanced approach to navigating the current market dynamics. As always, our strategy remains flexible, with a commitment to adapting our positions in response to confirmed market signals.In conclusion, while recent market movements have introduced a degree of uncertainty, the underlying strength observed in the SPX suggests a continuation of the bullish trend, supported by key technical levels. Investors are advised to stay vigilant, monitoring market indicators closely, and be prepared to adjust their strategies in alignment with evolving market conditions.
It is another heavy week as far as economic reports and Federal Reserve speakers go. There are a couple of inflation numbers being released, including the latest CPI and PPI numbers. In addition, the notes from the Fed’s last meeting will be made public Wednesday. The latter part of the week is heavy with Fed speaker engagements. Quarterly earnings remain quiet, but the latest round is just over a week away. Have a safe, healthy and prosperous week!
Apr 10: Consumer Price Index
Apr 10: Wholesale Inventories
Apr 10: FOMC Minutes
Apr 11: Jobless Claims
Apr 11: Producer Price Index
Apr 12: Import Price Index
Apr 12: Consumer Sentiment
