In our last submission, I said that in a nutshell, everything looked great, with the trend up, the market making new highs, improved growth, and Market Breadth very strong. I also noted that those who lend money to companies in the financial industry were commanding exactly ZERO extra risk premium on money loaned over non-financial companies -- meaning that there was very little chance of something going wrong behind the scenes in the financial industry.
I was thinking that with some excessive Bullishness at AAII and some negative seasonality, there was something of a set up for a little correction. That said, I thought that if we did get that pullback, traders ought to be quick to buy. I frankly thought it possible that once we were to get into the more positive seasonality, the market could take off in a way that would leaves many scratching their heads. And so it did!
(You can read our last contribution here: http://stockcharts.com/articles/tac/2017/09/mark-s-young-wall-street-sentiment---to-the-moon.html)
So, what do we think now, after an 8% drop? Is it the end of the Bull?
In four words: I don't think so.
Sure, the weekly MACD has turned down and all breadth measures are negative, even as Investors Intel and NAAIM have been been rather Bulled up. But that doesn't tell the whole story.
Earnings are improving and so is the economy even as it seems clear that corporations repatriating operations will be adding capacity and efficiency.
Meanwhile, while rates have risen, they are still low. More importantly, Capacity Utilization is also well below inflationary levels.
This is now what you expect to see at the end of a Bull Market. We're still dealing with the same problem we had last time--if we aren't investing in equities, where are we going to invest to beat inflation?
Moreover, if we're afraid of some sort of shock to the Financial System (as a result of the Wells Fargo issues or something else), well, we need only look at those who lend money to companies in the financial industry. They are commanding hardly extra risk premium on money loaned over non-financial companies. This again means that there's very little chance of something going wrong behind the scenes in the financial industry.
For comparison, look at where things were prior to the last Bear Market.
Now, normally, after a hard drop that turns a lot of good indicators negative, I'd be more than a little circumspect about the market's near-term prospects. That would seem to be prudent.
The thing is, market bottoms are more punctuated events. They typically don't linger. As of last night, we had a "Secred Hedge Fund" Buy. Those are almost always timely. We also had an ARMS over 3.6, which is rare and also very Bullish. The VIX was over 37 which is also very high. Lastly, one of our favorite "bottom spotters", the Relative VIX shot up to decadal highs. This doesn't guarantee that the low for the correction is in, but it's unlikely that we'll see much lower prices, nor much lower prices for very long.
We are still in a Bull market. We're just days off all-time highs. There doesn't appear to be anything horrible looming either in the real economy nor in the foundations of the financial system. As such, we view this pullback as a correction within a Bull market. It was dramatic enough that almost all of our best bottom picking tools have flashed Buys. This is where aggressive traders get long (or longer).
Have a prosperous week!
Mark Steward Young
Wall St. Sentiment