While we are the last to put much weight in the predictive power of technical analysis, lately it has become all too clear that the only thing more worthless than technicals is fundamentals. Which unfortunately means that with the lowest common denominator (and marginal price setter) in the market being robots, in turn programmed by 20 year old math Ph.Ds who only know charts, it may be time to revise our skepticism. Enter Citigroup's Tom Fitzpatrick, who together with Goldman's John Noyce, are the two best sellsiders in this particular field. In short, neither has much good to sayl in fact when it comes to near-term bearish sentiment, it will be hard to find someone as pessimistic as Fitzpatrick, even among the Janjuahs and Rosenbergs of the world. Citi's conclusion from a just released note should be enough to scare anyone who believes that the bear market rally started just about a month ago will persist: "While we respect the October monthly close on the S&P 500, we did not close above the 12 month moving average...we believe the bear market rally is behind us and anticipate a move towards the 1,000-1,015 target over the weeks and months ahead." And while charts will never be a good guide as to what words may come out of G-Pip's mouth next, with so much market action these days being purely backward looking, we would urge caution.
What to make of the monthly close on the S&P 500
- October 2011 saw the largest monthly gain on the S&P 500 in almost 20 years (since December 1991)
- We also saw a bullish outside month posted in October
- Does that mean everything is fine and we are set to go higher? No
- While the monthly close may seem constructive it alone is not enough. The charts below instead suggest that the downtrend has resumed and a move towards our 1,000-1,015 target area lies ahead
To all who say the market looks like either 2007 or 2008, relax: you are both right!
- The price action over the past few months closely resembles that seen after the Oct 2007 high.
- More recently the bounce in Oct reminds us of the bear market rally in the second Quarter of 2008.
- That 2008 rally could not sustain above the 200 day moving average.
- The same has been seen this time with the 200 day now coming in at 1,273.
...Throw in some 76.4 Fibonnaci, rinse and repeat
- Held the 76.4% Fibonacci retracement of the May-Oct 2011 fall on the log scale chart which comes in at 1,294 (it is at 1,300 on the linear scale).
- Triple negative divergence is now in place reflecting weakness in the bounce and warning of a turn down.
- We also saw triple negative divergence at the high of the bear market rally in 2008…
- Triple negative divergence was also in place when we failed to push through the 200 day moving average at the peak of the bear market rally in 2008
In other markets we see:
- Key pivots holding on U.S. curves suggesting a trend of curve flattening ahead
- The double top in U.S. 2’s-10’s in particular stands out as it targets 100 bps from a current level of 180 bps. We struggle to see how that target will be tested on the curve with rising yields and instead foresee a bull flattening suggesting a move towards the 1.25% area on U.S. 10 year yields (long term multi year channel base)
- A worsening situation in the periphery of Europe (as per our daily charts yesterday)
A worsening situation in the periphery of Europe (as per our daily charts yesterday) While we respect the October monthly close on the S&P 500, we did not close above the 12 month moving average. The charts above, our long term overlays (1910, 1940 and 1977) and the recent setups/developments across other asset classes makes it very difficult for us to abandon our medium term bearish stance on equities here.
Instead we believe the bear market rally is behind us and anticipate a move towards the 1,000-1,015 target over the weeks and months ahead.