Orsley: "Every Time The Market Was This Overbought, A Significant Correction Followed"

Submitted by Mark Orsley of PrismFP

  • Potential for a 60-day tariff exemption extension another vol killer
  • S&P’s hitting a historic extension level that would suggest a correction within the next month
  • More signs of “Techlash”

With Trump said to be willing to extend the deadline for higher tariffs another 60-days, we are really looking at another two months of compressed volatility for risk assets. Making matters worse is the Fed’s neutral stance which means fixed income volatility will continue to not realize the implieds.

All this has obviously been a boon to the US equity market which continues to benefit from those who are returning to the equity market after the December debacle. Any and all indicators show that positioning is returning to more normal levels and the cash that had been on the sideline being deployed.

So now what? My view has been a near term FOMO rally to 2800 and then we shall reassess. It fits my Elliott Wave count where the 5th and final wave should be completed around there, and it is where the market has roughly failed three times prior since October. Also note in the below chart that you are seeing the MACD indicators narrowing which is a sign of waning momentum, and the RSI now hitting over bought conditions.

Therefore, expect a mind numbing grind to that 2800 region and then let’s see where the fundamentals stand at that point.

I will flash one indicator that jibes with the idea that the parabolic rally off the December crash lows is nearing the final stages. The level of the S&P futures versus its 50-day moving average is severely extended. In fact, over the last 20 years, it has only been this extended twice.

Both those occasions saw a significant correction one month later.

The risk of a bull trap is something to consider as Spoos grind up in a mind numbing manner. It is well known that the Fed pausing their rate hike cycle helps, more positive trade war rhetoric helps, and Cisco “beating” helps but there are developing regime shifts occurring that make just being blindly bullish more difficult than it ever has been.

I have discussed the “Techlash” theme quite a bit but to quickly recap it is the idea that the government imposing regulations on Silicon Valley put the tech sector’s best days behind us. On that front, we have seen some potentially game changing headlines this week. Both are in the early stages but let’s just put it on the radar for now:

  • California Governor wants a digital dividend aimed at Big Tech - would let consumers share in the billions of dollars made by technology companies off of those companies sharing personal data (similar how to how Alaskan residents share in the state’s oil revenues)
  • Sen. Marco Rubio to introduce a bill that would tax corporate buybacks like dividends in an attempt to spur companies to spend on  capex, wages, etc instead of doing share buybacks

Where will S&P’s trade if buybacks are reduced?

Bottom line, if you aren’t long already; you are too late. Also, its time to start thinking about profit taking on longs and conceivably attempting shorts around that 2800 level.