Reading history on the #MarginDebt chart

Posted on by diogenes227

For anyone who pays attention to FINRA margin debt this market crash was no surprise.

If there was anything surprising about what is now 30% plunge in the SPX, it was that it took so long to happen.

I had a clear warning here as far back as six months ago in this post:

Margin Debt – setting up a S&P 50% plunge?

Now all I can say is anyone who was not paying close attention to margin debt or was disregarding its warning was asking to get their stock profits ripped apart.

Once margin debt starts down, it feeds on itself with margin calls leading to stock sales and more margin calls leading to more stocks sales with each jolting decline in the market. And besides the profits lost, there is time lost, sometimes a lot of time lost, before the market can even begin to recover.

If we take a look at the history on the chart below it’s pretty obvious the divergences between margin-debt and price of the SPX foretells the market sell-offs. In 2000 and in 2008 margin debt dropped down (the black boxes on the chart) while each time the market went higher for a few months before plummeting. Again these last six months (another lower black box lower than the previous peak), history repeated.

Granted it’s hard to believe as the market keeps going up and up the bull will ever end — earnings seemed good, the Fed was on board, Trump was bragging on Twitter at each new high — but long-term investors could not ask for a better advance notice it was their time to sell or at least tighten their stop-loss levels to preserve capital. All this market needed was one small trigger for the full unwinding of margin debt to usher in a bear market, instead it got a big one. But if it hadn’t been the Covid-19 pandemic, it would have been something else.

Now that the bear market has begun, margin debt is indicating it is not done yet.

History says, like in 2000 and 2008/2009, the S&P500 is going down around 50% before this bear market is finished. If history repeats again, there is another 20 or so percent more downside to go.

Margin debt during this long bull market went higher than either 2000 and 2007 so there’s no telling how that’s going to play out. From its 2019 peak it has a lot farther to fall – and if the news keeps getting worse — since the US, thanks to a lying President and his incompetent Federal administration is getting a late start on coming to grips with the pandemic it’s possible it could be more than 50%.

If the dire damage being done to the economy is not mitigated sufficiently by a Congress that was supposed to have a stimulus package out last week and hasn’t managed get one done yet or if the stimulus is too small or if it’s aimed at the wrong people, we could be looking beyond a historical 50-percent decline to something more like 1932.

You ask me, we’re at a point when we need a Franklin Roosevelt in the White House and instead we’re still stuck with worse than a Herbert Hoover.

But as history shows on the chart, whatever the final decline is to be, it’s likely it won’t be until after a big bounce any a week, any day, any minute now.

This market is massively oversold and it’s a positive sign that governors and mayors, allied with scientists and health-care providers across the country, have taken over the front-line fight against the pandemic as Washington goes on dithering.

The trouble with the margin-debt numbers is they are reported a month late so one pretty much has to guess, based the price action during the month, where the debt level might be in the current month. While we can see the SPX crash here in March on the chart, the margin debt line is only up to date through February. I would assume from the current price action in March it’s now a lot lower, probably akin to that drop in 2008 marked by the black vertical line.

If so, we may be closer to a bear-market bottom (six months or so) than the pattern in 2000 (which took about three years).

Regardless, the bounce, which could be spectacular, is not going to be a resumption of the bull underwater long-term holders are hoping for. More likely it’s going to be a bull to be slaughtered so severely by the next bear move no one, as despair sets in, will be looking to buy any stocks.

In despair is when a new bull market can be born.

But I could be wrong. It could be different this time. Uh, huh…

(CLICK ON THE CHART FOR A LARGER VIEW)

Reading history on the #VIX chart…

Posted on by diogenes227

Ah, yes, I remember it well… In fact I’ll never forget…

I began investing in the stock market in September of 1987. My wife was having our second child that month. I figured I had to make some financial provisions for the future. I was beginning to make some extra money so I put our savings into the stock market. I bought stock in Compaq and Intel. The stocks were roaring up and continued to rise. I was a very happy young father.

Then about four weeks later on October 19th, the market crashed. In a panic I sold all the stock. That was on the Tuesday after Monday’s crash. That time was in so much chaos it wasn’t until Saturday before I got the fills to learn we had no savings left.

I didn’t tell my wife. She was busy with our newborn. I had a job so we had money coming in. I didn’t want to worry her. But I was virtually catatonic for weeks, until Dec 4th, 1987 (coincidentally our anniversary), when the market made a successful retest of the crash lows.

That was the day I learned what matters most in trading the market – no matter what happens, it’s all happened before.

History, history, history.

There is the famous curse, usually attributed to George Santayana, that “he who does not learn from history is doomed to repeat it.” In the stock market it’s the opposite – “he who learns from history is is blessed to repeat it.”

Which brings us to the VIX, the Volatility Index.

The mass psychology of the market – because money is always at stake – is either in some degree of fear or some degree of greed with both emotions filtered by time.

While history serves as context, the VIX measures the market endless wheeling back and forth between fear and greed. The index itself runs opposite the other major indexes, the S&P500 (the SPX), Dow Jones Industrial Averasge, the Nasdaq Composite…in other words, it runs opposite the market.

When the VIX is low the market is in a bull market, and most stocks are rising, virtually all stocks, and when it is high (as it is now), the market is a bear market, and stocks go down, virtually all stocks.

But the VIX says more than the obvious.

Right now because we’ve just finished a very long bull market there is a lot of belief that the recent stock crash is just a temporary drop and prices will soon be hurtling upwards to new highs.

And yet…right now the VIX says “not so fast.”

Consider the chart below showing the VIX with a monthly chart of the SPX.

I’ve outlined the effect of the VIX on the general market.

First, let me say what I consider the key levels on the VIX itself. Under 15, the market is in a steady advance, a bull market. At 25, the market is in a normal “correction” and the price will soon continue to climb. But if the VIX rises through 25 convincingly and vaults past 40, it ia a bear market. At that point the VIX will have to convincingly fall back through 25 before stocks can in general begin to move up again.

On the chart the red vertical rectangles mark the periods in which the VIX last went through 40 and dropped again below 25. In the 2008 bear market it took eight months before prices began to rise again. Although it doesn’t show here on a monthly chart, a weekly chart of 2010 has the VIX also above 40 (marked by the red circle on this chart) when it took five months for the prices to rise again. In 2012, it took four months for prices to rise gain.

These are measures of time.

I am suggesting this is the time it’s going to take for the current bear market to subside so prices can rise again in a steady climb. Months at best, and even then only for those not holding long term. This crash has caused a lot of damage and a lot of stock holders are trapped at higher levels (the entire advance from the day Trump was inaugurated as President has been erased). William O’Neil of Investor Daily called this “overhead supply,” meaning those holding stock above current prices will be looking for bounces to get out so going forward is going to be a choppy ride and it’s going to take time to work off the effects of the bear.

To say nothing of the fact there are very few signs the market has, as yet, quit falling.

Still, there’s more…

By my reckoning the VIX is also a calendar. The market always has a bullish bias (this is America after all!) but there are months and even years lost along the way.

The shaded blocks on chart below illustrate the time it takes for prices, once the bear market has begun, to regain their former highs. For instance if one invested in the market at the top in mid-2007, it would have taken more than five years to breakeven; in the 2015/2016 and 2018/2019 corrections approximately a year each to regain the losses, or move sideways to new highs.

When the bull is going strong, everyone forgets it takes just one down day for a bear market to begin. Of course, until it’s later and one can look back, no one can know which down day, like February 20th this year, is THE DAY.

Which is also why since December 4th, 1987, as a day and swing trader, and having learned the market’s history, I sell, every time, on the first day down.

(CLICK ON THE CHART FOR A LARGER VIEW)

$UAL $DAL $AA – time for buyouts instead of bailouts?

Posted on by diogenes227

Bloomberg reported yesterday that the major American airlines used their free cash flow for buybacks and may be bankrupt by May.

See this CASH FLOW LINK and this BANKRUPTCY LINK.

Trump is already talking a taxpayer bailout.

How about buyouts instead?

Again and again, these industries (last time it was the banks) recklessly practice free-market capitalism and eventually a crisis comes and again they need a socialist intervention to go on with their business as usual.

Don’t these guys ever plan ahead? Don’t they ever realize all good times come to an end to one degree or another (all bad times too for that matter)?

Isn’t it time for this periodic sucking on the taxpayer tit stops? Maybe a lesson needs to be learned. If the taxpayer is going to have to subsidize and/or finally bail them out in the end, maybe it’s time the taxpayers take ownership.

Not that Trump would know what to do being on the opposite side of his own bankruptcy history but he won’t be President forever (at least I hope American voters have wised up enough to flush the con king).

Anyway, this is what these once high flying birdS look like crash landing together:

(click on the chart for a larger view)

#SectorTrading – when the bear bites everything bleeds

Posted on by diogenes227

Got the bounce Friday in a frenzied last half hour as suggested Thursday in this post: #MarketTiming $SPY – Buy now, resell later….

No doubt it was primarily short covering but the rapidness of the run-up was bolstered by the announcement that the confused disingenuous Trump Administration is trying to catch up to the actual facts of the Covid-19 virus.

Trump and his team of appointed incompetents had no choice since the scientists within the CDC are coming to the fore and not putting up with the bullshit anymore, and Governors Jay Inslee of Washington State, who Trump called a “snake” (I guess because Inslee was teaching him leadership by example), Andrew Cuomo of New York and Gavin Newsom of Califonia, as well as hundreds of mayors across the country, who could not wait any longer on the dithering Feds, were moving aggressively to confront the virus in order to protect the citizens in each of their states and municipalities.

Regardless, this bounce, even if it becomes a rally is not going to last. As also noted in the post Thursday, the economic damage that’s begun hasn’t even begun to move through the market. Companies may begin warning this week of earning shortfalls.

There are going to be a lot of earnings shortfalls.

The S&P is down 16% for the year, even after Friday’s nine percent bounce. If is FINRA Margin Debt is unraveling (it’s reported a month late), and it probably is, and if history means anything, the S&P has another 30 or so percent to the downside to go over time. Margin calls feed on themselves as the calls bring more selling and more selling brings more margin calls.

The point is it is not buy-the-dips anymore, it’s sell the bounces. Friday’s was a big bounce. Did anyone sell or just started praying for more?

In the meantime, I thought I’d take a look at a few stock sectors I follow to see how bad it’s been even with Friday’s bounce in the numbers. Interesting among the biotechs: both REGN and GILD are up for the year so far, the only glimmers of green. Those are among the drug companies working on a vaccine for the virus. I will get to the tech stocks later. They have held up somewhat but the bear will bite them too before this is over. And the marijuana stocks…ah, the weeds, they are worthy of a blog post all their own.

The tables below are a year-to-date (less than three months). Take note of the percentage decline columns next to of the raging red bars:

BANKING STOCKS

HOUSING STOCKS

ENERGY STOCKS

COAL STOCKS

BIOTECH STOCKS

#Stocks – and out of the blue the brokerages fell…

Posted on by diogenes227

Reportedly, this slam down in the brokerage stock is a result of Charles Schwab (SCHW) announcing a no-commission policy for online trade with presumably its competitors to follow.

And this is precipitated, according to reports, by the brokerage Robin Hood, which has been not charging for trades since its beginning. Robin Hood? Compared to these others, is that even a competitive trading house?

Regardless, SCHW, AMTD, ETFC, and IBKR are (at the moment) down either double-digit percentages or close to it in an out-of-the-blue across-the-board plummet. AMTD is down 23% (Holy cow!).

Whatever.

I would note the NYSI (long-term breadth) is falling. When it is, “accidents” like these often happen.

(click on the chart panel for a larger view)

#IPOs – a stealth bear market since summer

Posted on by diogenes227

It appears while the main indexes have held near their highs this year, there’s seems to be a stealth bear market going on with many of this year’s prominent IPOs.

As has been written about here before (last visited in the link below), this is maybe the easiest trade there is in the the market — buy above the high of the opening day, using that high or the low of the first day (depending on one’s individual risk tolerance) and hang on for the long term:

#IPOs – A Great Year For “Dummies”

Well, it was a great year for the likes of SWAV, PINS, ZIM, BYND, SOLY, that is until summer. While none of these stocks have been stopped out (the high of the first day) they have not been going well since summer but as can been seen in the chart panel below there were opportunities to take profits to preserve profits, especially in crazy run ups in say SWAV or the famous IPO for BYND.

Sometimes when stocks just go silly even the most disciplined IPO investor needs to take notice and thank his or her lucky stocks.

In the larger market picture, this is the kind of weakness that can be seen in many sectors. It is just easy to see here.

P.S. Once again, the LYFT chart is included as a cautionary tale to not buy unless an IPO takes out the high of its IPO day.

(click on the chart panel for a larger view)

Margin Debt – setting up a S&P 50% plunge?

Posted on by diogenes227

FINRA margin debt is a long-term indicator and always reported a month late.

So now we have the August numbers, down 6% month over month, as reported by Advisor Perspectives Monday (see the chart below). But it’s not the margin number that is concerning, it’s the chart pattern for the long term.

In the 1990s margin debt chugged along in a reasonable bullish fashion before finally going ballistic in 2000 just before the dot-com bubble burst. Then again, coming out of the 2003 bear market, it moved up gradually before going ballistic again in 2007 on a bubble in housing, fueled by excessively low interest rates for too long a time, and we had the financial crisis of 2008/2009. And now in 2018 margin debt has pushed higher than ever before on deregulation and tax breaks to corporations fueling stock buy backs, and some would say on a lot of hot air.

It the fall of last year it topped and has not gone higher this year. That is ominous for long-term investors.

Consider the pattern on the chart below.

Note that in both 2000 and 2007 the market made a new high after margin debt topped and fell. Each time on the chart, the debt numbers formed a plateau lower than the peak as the market made those new highs.

What comes next?

That is always the most important question in the stock market.

In 2000, the S&P plunged 50% (the Nasdaq, 78%), and in 2008 the S&P plunged again down 56%. Note the pattern in place on the chart now. Same old same old.

So is another 50% bear market imminent? It’s likely because although they always say it’s different this time it never is, even though it sometimes takes a long slow time to get it done.

This is a bit tricky at the moment because of the late reporting. One has to guess what is happening with margin debt behind the monthly market moves. Since the August drop in price is reflected in the margin debt drop (big professional players lightening up, maybe desperately lightening up), and since the market has rallied so far this month, one can guess margin debt may move up a bit here in September but not a enough to head off what is to come.

And since the market likes to fool everyone into complacency at the last possible moment, a new high here would probably be just enough to lock long-term investors in when they should be at least shuffling, if not running, to the exit.

If by chance it doesn’t move up, October could become an October of old, which is to say…uh, crash… crash… crash.

(click on the chart for a larger view)

$SPY – the slow roll over?

Posted on by diogenes227

Given how sprightly the rally since December has been it’s hard to call a top. Actually it’s hard to call a top anytime but bear-market rallies are especially tricky.

Weeks ago it was suggested here this would be the rally to make everyone one believe the bull market has resumed, and it has been that kind of rally.

There is famous, familiar chart of investor emotions in the market (see below) that shows the various stages of market emotions from despair to euphoria and back again (see below). It’s worthwhile review that chart every so often and ask one’s self how am I feeling now. This is especially true for long-term holders and retirees who have their savings tied up in the market.

Looking at the chart below I would suggest we are at the “Return to Normal” stage. For any swing trader who played the upswing this has been a fantastic rally. For investors it’s been a big sigh of relief.

But… There are signs now that sigh may be about to become a gasp.

Long-term breadth, as measured by the McClellan Summation Index, the most important indicator of mass market psychology, turned bearish four days ago after several warnings from the declining highs on the McClellan Oscillator itself. My nifty-50 stock list has failed to get overbought since the rally’s kick-off’s first few days. While the indexes have worked higher, the stocks have rotated and paused and in some cases fallen under the surface (take a look at the rollover in the banking sector).

Weed stocks lead again (check out CRON up 87% on the YTD summation index run up or GWPH up 71%). While there’s a growth logic to the marijuana sector, that’s still just as crazy as the dot-com bubble of yesteryear.

Despite all those warnings until prices follow internals and drop with conviction (which could happen any day now, even tomorrow), and the VIX jumps back above 15 (it closed at 14.74 today), the sell off may not happen, and if the SPX, or in this case the SPY run up past the resistance at recent highs, it might go to all time highs before the bear market resumes.

Doubt that but we’ll see.

(click on the chart for a larger view)

$SPY $TQQQ – if Santa’s rally is coming to town…

Posted on by diogenes227

It appears it started today and triggered the likelihood of more to come tomorrow…

This should be a rally all the way to Christmas and possibly a bit beyond.

Why?

Because the market has been pounded hard to the downside since, in some index cases, early October. But more importantly short-term and long-term breadth, measured by the McClellan Oscillator and Summation Index (see the chart for today below), has simultaneously given buy signals for tomorrow’s, Tuesday’s, open. And they have done it with a telling divergence – see on the chart how deep the breadth plunge was on the lows in late October, and how the breadth numbers failed to confirm the price lows at the same levels last week.

In addition, my nifty-fifty stock list had 44 sells on the first plunge (usually the sign of a swing bottom) but could not muster more than 39 on sells during the last sell-off. Forty-five of them are now on buys.

I have major 3xleverage ETFs giving new individual buy signals for tomorrow’s open – FAS, SOXL, FNGU, TNA, TQQQ, UNPRO — and major bellwether stocks doing the same – AMZN, NVDA, TWTR, GS, BABA, FB. But neither TSLA nor NFLX can be ignored on any market bounce.

While AAPL missed an individual buy signal today by a whisper, this market is not going anywhere without it. However, I see, it closed at 174 and is down to 170 after-hours (a better bargain?). That AAPL has an after-the-close sell down raises the possibility the downside is not yet done.

Highly likely we are now in a bear market with Finra (NYSE) margin debt unraveling. If so, there’s going to be downward pressure on this rally almost every day. This is the time for traders to take advantage of sharp upside bounces like today and for long-term investors to lighten up on their holdings if not to get out completely. Every time margin debt has come apart (and this time it is from a higher level than both 2000 and 2007) the SPX has lost 40% to 50% before the bear market ended in 2003 and 2009. See this LINK – the divergence that kills the bull.

Bear-market rallies tend to be fast and furious so we’ll see how this one goes, but if it is truly a bear-market rally, it will as time goes by take a lot of time to recover from the its eventual bottom whenever it comes and at whatever price level.

(click on the chart for a larger view)