Wednesday , November 21 2018
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How many pennies are left in front of the steamroller?

Summary:
A reader commented on the weekend, “TBH, being long here sure feels like picking up pennies in front of a steamroller”. I agree. While I have been steadfast in my belief of a “Last Hurrah rally” before a significant market top, that scenario is looking far less likely. As the market tests a key resistance level, it is displaying both a negative RSI-5 divergence, which is tactically bearish, and faltering internals, which is intermediate term bearish.  There is a distinct possibility that we may be seeing a final market top in the major US equity indices this week. While the market may rally to new marginal highs, I believe that the risk/reward ratio is turning unfavorable for the bulls, and there may not be many pennies left on the road in front of the steamroller.  Risk appetite

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A reader commented on the weekend, “TBH, being long here sure feels like picking up pennies in front of a steamroller”. I agree. While I have been steadfast in my belief of a “Last Hurrah rally” before a significant market top, that scenario is looking far less likely.

As the market tests a key resistance level, it is displaying both a negative RSI-5 divergence, which is tactically bearish, and faltering internals, which is intermediate term bearish.
 

How many pennies are left in front of the steamroller?

There is a distinct possibility that we may be seeing a final market top in the major US equity indices this week. While the market may rally to new marginal highs, I believe that the risk/reward ratio is turning unfavorable for the bulls, and there may not be many pennies left on the road in front of the steamroller.
 

Risk appetite is deteriorating

Here are some of the worrisome signs that the bulls are losing control of the tape. The ratio of high beta to low volatility stocks breached a significant relative support level, indicating a significant deterioration of equity risk appetite.
 

How many pennies are left in front of the steamroller?

In the credit market, the relative price performance of high yield (junk bonds) to their duration equivalent Treasuries is not confirming the recent equity rally. Needless to say, the relative performance of EM bonds has been terrible.
 

How many pennies are left in front of the steamroller?

Equally disturbing is the inability of the SPY/TLT (stock/bond) total return ratio to rise after its upside breakout and pullback to test the relative resistance turned support level. This is another negative divergence that is bearish sign for risk appetite.
 

How many pennies are left in front of the steamroller?

My inner investor has been opportunistically lightening up his equity exposure since my market warning two weeks ago (see Market top ahead: My inner investor turns cautious). My inner trader sold his long positions, and reversed to the short side today.
 

Disclosure: Long SPXU
 

About Cam Hui
Cam Hui
Cam Hui has been professionally involved in the financial markets since 1985 in a variety of roles, both as an equity portfolio manager and as a sell-side analyst. He graduated with a degree in Computer Science from the University of British Columbia in 1980 and obtained his CFA Charter in 1989. He is left & right brained modeler of quantitative investment systems. Blogs at Humble Student of the Markets.

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