Fading "The Beast"

Tyler Durden's picture

Authored by Sven Henrich via NorthmanTrader.com,

I had an opportunity to speak with the Fast Money crew on CNBC last night about the Nasdaq and following the interview I received a bunch of questions via twitter and email. There’s only so much you can pack into a 4-5 min segment so I wanted to briefly expand a bit on the reasoning behind my position.

In last night’s segment I called the Nasdaq a beast, but one we were interested in fading knowing we are within the confines of continued upside risk in markets as I outlined in the recent “Final Wave“. Seasonality is generally positive in April and markets tend to have a very solid month before turning more shaky into May.

So why the thought of fading “the beast”?

Firstly for reference here’s the full clip of last night’s show including the FM crew’s comments:

Firstly we talked about negative divergences. On the $NDX specifically we see recent new highs coming on lower relative strength, that’s a negative divergence:

I’ve drawn some basic fib retraces presuming current highs hold which we can’t be certain of, but it highlights the extent of the move since the November lows and how basically uncorrected it remains.

Why are negative divergences important? Because they signal underlying problems with a rally. In this case also note that new highs have continued to come with fewer and fewer of the $NDX components above their 50 day moving average:

As I also outlined previously tops are processes and take quite a while to play out whereas bottoms tend to be more likely to be events. Take a long term chart of the $SPX as an example:

I also mentioned negative divergences on the $NDX and its components on multiple time frames.

Here is a monthly chart for example and note the resistance against a multi year trend line:

Similar divergences can be noted in individual stocks:

In addition, I mentioned large scale disconnects from longer term moving averages that make a reconnect at some stage ever more likely.

Finally i mentioned the $VIX. The pattern I discussed recently on Trading Nation is still active and I highlighted the 2 recent tags of the 200MA and note the tag again yesterday:

Is it a reasonable expectation to presume that the $VIX will never close above its 200MA in 2017? Frankly no. We are already in the historically most compressed time period in recent history with valuations at the very high end and mega cap tech stocks technically vastly disconnected.

I’m not saying any of these companies mentioned are bad, or are doing badly. I’m not saying this at all. Nor am I saying a top is in. But what I am saying is that they are technically stretched, the index and many of these stocks are completely uncorrected and to a large degree probably over-owned. In short, they have been in beast mode and risk/reward is setting up for a sizable corrective move. Even a beast needs some rest at some point.

What happens after the first real $VIX spike, when we get it, will then determine whether this market can make new highs or not. If it can’t then we may embark on what I described the coming bear market.

Given how moderately many asset classes have performed since the highs almost 2 years ago in May of 2015 a rebalancing of pricing may pose a challenge for a wide array of narratives:

Banks and tech, for example, have done very well. Other sectors or indices are either kinda flat or very much challenged.

So far $SPX has made an all-time high at the beginning of March. Yesterday $NDX made a new high almost a month later. The last time we saw an $SPX peak followed by an $NDX peak almost a month later? 2007.

My take fwiw: Bulls need a new $SPX high in April or the beast may turn on them.

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trumpala's picture

Financial crises more frequent than ever = Capitalism eats itself, will collapse soon

Ghost of PartysOver's picture

Ah, yes.  More doom and gloom.  Folks, the sky is not falling.

(let the down votes commence)

Bay of Pigs's picture

It's called a Parabolic Blowoff.

And no, I didn't down vote you. BTFD at your peril.

Ghost of PartysOver's picture

Just a little factoid.  In the late 1990's there were over 8000 publicly traded companies.  Today less than 5000.  Supply is shrinking while demand is growing.  QE may have ended but the profits made from QE are still out there chasing a shrinking supply of stocks.  If you have ever heard of the Wilshire 5000 Index,  well that is Fake News.  There are NOT even 5000 publicly traded stocks.  How ironic.   Traditional tech analysis has gone the way of T-Rex.  Murphy's Law applied to QE.  And this does not even address the issue of corporate buy backs thereby further reducing the supply of stocks.  The only major asset that has seen its supply increase is Sovereign Debt.  Go figure.  I am not saying that a 15-20% correction (also known as a buying opportunity)  will not happen, just saying that a total collapse is not in the cards.

Bay of Pigs's picture

Thanks. I understand your point. But as you know, there are lots of "other facts" about this "market" that aren't bullish at all.

Raging Debate's picture

 Nice post. The reality is that the quality of life of 80% of the population has already collapsed. And of course the 20% cannot support asset prices in definately, especially with flat wages for a decade or more. Out of six neighbors I have two snowbirds. Both from Canada and on .gov pensions steadily maintaining lifestyles. The rest, barely treading water. I am in an upper middle class neighborhood. We are near 3rd world with a massive military. The joke of the devil of empire and free trade has been on the American people.

besnook's picture

the collapse is in the cards but not from the usual source. the collapse will be the result of a 1987 like forex disaster. as soon as the china/russia money changer system is up and working the demand for the dollar will be quickly eroded. the consequences of less demand for the dollar is total western economic disaster. it will happen in the next ten year with the next 5 years being a real possibility.

SweetDougisaTwat's picture

You wouldn't know a parabolic blowoff if it goosed you up your ass.  Better look at the charts again.

Bay of Pigs's picture

I guess "large scale disconnects" would be more your speed then?

ctiger2's picture

With sentiment like this, the DOW is set for a rather quick doubling to 40K.

Consuelo's picture

 

 

No down votes from me as your comment stands on its own.    You won't know the sky is falling until you're crushed by it anyway.

Raffie's picture

'collapse soon' could mean in the next 50 years since we don't know how deep the criminal pockets are and how much longer they going to keep the Pump N Dump in the casino.

We seen many times where it should have fallen apart then the criminals do the HAIL MARY play and the game keeps going on.

Fukn old at watching all the illegal practices they do and no arrest.

turdhopper's picture

that was a thoughtful and complete analysis with excellent charts, reasoning and conclusions. please dont ever do it again

chicken_goose's picture

Oh there's no doubt that we are in a second Tech Bubble right now with the Nasdaq incredibly overvalued especially when considering many of the components rely heavily on advertising revenue which looks increasingly shaky as of late. Am I shorting it though? No, not yet. Too much dumb money piling in still, I will wait for a sustained move down.

sunny's picture

Bearish hope springs eternal.  Eventually a bear will be right.  Don't hold your breath waiting.

mily's picture

It looks like Northy quickly recovered from the heart attack, don't push it man!

BigFatUglyBubble's picture

Those CNBC guys are practically dripping with slime.  I'd rather let my daughter date mick jagger.

Consuelo's picture

 

 

 So long as dinner/toilet/nude/whatever selfies, $monetizing blogs on Youtube and various other forms of massive data bandwidth and storage demands keep increasing, there may not be any real slowdown in the NAS.    Perhaps all things 'robotics' maybe...? 

thecondor's picture

The last time we saw, the last time we saw, the last time we saw, the last time we saw!

besnook's picture

i have better indicators. mcd trading at 24 times earnings on falling revenue. tesla worth more than ford. amzn at 175 times earnings. fb just because......there are many other great shorts that just require some patience to hit a homerun.