CNBC is interviewing Charles Barkley right now and damn he's funny. If you miss it, find it on their website later. I'd love to play golf and drink some beers with him.

Confirmed - today was just the 2nd day since 1979 Russell 2000 rose by more than 3% while S&P fell.

Going to do some research on when the last one happened to see if we can spot clues.

Read something that makes total sense, more so than rotation. And I went back to my "interesting plays" watchlist tab that I haven't looked at in a couple months. Comprised mostly of small caps that had good setups at the beginning of the year and almost all failed in some form or fashion as small caps took a beating this year.

The theory is that what we saw yesterday was massive short covering in small caps / IWM and profit taking/exiting longs in QQQ. What feels like rotation initially, would be nothing more than short term relief. Most of the stocks on that watchlist that were up huge yesterday had been in MASSIVE downtrends grinded down to nearly nothing. Think LUMN, BIG, PLUG, SEDG, NIO, EV stocks, renewable energy stocks, rental car companies (HTZ mstarted to make the move I was looking for after stoping me out), etc, etc.

This theory would mark the end of a pair trade. Is it true rotation if the shorts have left the market? Short interest is astronomically low and I've already commented how that leaves a huge hole during a selloff, as there is no covering needed to be done to provide a support level. So if this theory is true, when this rally in small caps and trash stocks ends, and it will, the ensuing selloff could be extremely fierce making the rally seem tame in relation.

IWM can now run to $220-$230 with downward pressure from long term shorts mostly out of the way. There's only been one point in time since inception that IWM has entered an upward phase while SPX was flat or down, and that was 2015. Every other time, IWM and SPX are moving in mostly unison. One might outperform the other, but they are following the same general trajectory. So I would expect everything to grind up in some form or fashion while IWM is running. But if this theory is correct, when it ends, with QQQ longs having exited and IWM shorts out of the way, I'd be very careful when the unwinding starts. It could be a complete market move to the downside.

Heineken-Ashi said:

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Read something that makes total sense, more so than rotation. And I went back to my "interesting plays" watchlist tab that I haven't looked at in a couple months. Comprised mostly of small caps that had good setups at the beginning of the year and almost all failed in some form or fashion as small caps took a beating this year.

The theory is that what we saw yesterday was massive short covering in small caps / IWM and profit taking/exiting longs in QQQ. What feels like rotation initially, would be nothing more than short term relief. Most of the stocks on that watchlist that were up huge yesterday had been in MASSIVE downtrends grinded down to nearly nothing. Think LUMN, BIG, PLUG, SEDG, NIO, EV stocks, renewable energy stocks, rental car companies (HTZ mstarted to make the move I was looking for after stoping me out), etc, etc.

This theory would mark the end of a pair trade. Is it true rotation if the shorts have left the market? Short interest is astronomically low and I've already commented how that leaves a huge hole during a selloff, as there is no covering needed to be done to provide a support level. So if this theory is true, when this rally in small caps and trash stocks ends, and it will, the ensuing selloff could be extremely fierce making the rally seem tame in relation.

IWM can now run to $220-$230 with downward pressure from long term shorts mostly out of the way. There's only been one point in time since inception that IWM has entered an upward phase while SPX was flat or down, and that was 2015. Every other time, IWM and SPX are moving in mostly unison. One might outperform the other, but they are following the same general trajectory. So I would expect everything to grind up in some form or fashion while IWM is running. But if this theory is correct, when it ends, with QQQ longs having exited and IWM shorts out of the way, I'd be very careful when the unwinding starts. It could be a complete market move to the downside.

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just a couple questions...I respect your market knowledge and was curious if you could just give me an idea of what time frame you are thinking on the below:

1) "everything to grind up in some form or fashion" - how long you thinking SPY continues to grind up?
2) "be very careful when the unwinding starts" = when, in your professional opinion, do you think unwinding starts?

EnronAg said:

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Heineken-Ashi said:

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Read something that makes total sense, more so than rotation. And I went back to my "interesting plays" watchlist tab that I haven't looked at in a couple months. Comprised mostly of small caps that had good setups at the beginning of the year and almost all failed in some form or fashion as small caps took a beating this year.

The theory is that what we saw yesterday was massive short covering in small caps / IWM and profit taking/exiting longs in QQQ. What feels like rotation initially, would be nothing more than short term relief. Most of the stocks on that watchlist that were up huge yesterday had been in MASSIVE downtrends grinded down to nearly nothing. Think LUMN, BIG, PLUG, SEDG, NIO, EV stocks, renewable energy stocks, rental car companies (HTZ mstarted to make the move I was looking for after stoping me out), etc, etc.

This theory would mark the end of a pair trade. Is it true rotation if the shorts have left the market? Short interest is astronomically low and I've already commented how that leaves a huge hole during a selloff, as there is no covering needed to be done to provide a support level. So if this theory is true, when this rally in small caps and trash stocks ends, and it will, the ensuing selloff could be extremely fierce making the rally seem tame in relation.

IWM can now run to $220-$230 with downward pressure from long term shorts mostly out of the way. There's only been one point in time since inception that IWM has entered an upward phase while SPX was flat or down, and that was 2015. Every other time, IWM and SPX are moving in mostly unison. One might outperform the other, but they are following the same general trajectory. So I would expect everything to grind up in some form or fashion while IWM is running. But if this theory is correct, when it ends, with QQQ longs having exited and IWM shorts out of the way, I'd be very careful when the unwinding starts. It could be a complete market move to the downside.

---

just a couple questions...I respect your market knowledge and was curious if you could just give me an idea of what time frame you are thinking on the below:

1) "everything to grind up in some form or fashion" - how long you thinking SPY continues to grind up?
2) "be very careful when the unwinding starts" = when, in your professional opinion, do you think unwinding starts?

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If I knew the answer to those, I probably wouldn't have a job as my omniscience would have made me extremely wealthy by now. That said, I've long held that election 2024 would be a turbulent time in the markets. It's still shaping up that way.

I had IWM as top as in. I had PLTR and CAVA as top is in. I currently have NVDA as top is in but if you read my post from last night you can see what I'm looking for to pivot and stay on the right side of the market. I use Elliott Wave primarily when looking for major inflection points. It provides the best framework to track market moves. As history shows though, nothing is perfect, and just because a stock or index hits a target outlined, even in a manner as expected, doesn't mean it won't extend. We're in a topping phase and all prior major topping phases are proof that it doesn't come quick and likely won't reverse quick.

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I was going to make a new post with this but it's fitting here. Hence the dashed line separating my thoughts.

I looked at a bunch of stocks last night during the 1999-2011 time period. I wasn't trading then as I wasn't out of college until the end of it, so I don't have experience trading, investing, or even having the slightest clue about the stock market during a "long-term top and reversal" phase. I wanted to see WHEN individual stocks put in their tops and the trajectory and drawdown they took to their bottoms. They seemed to fall in 3-4 groups..

1. Topped in 1999/2000 and never made new highs. Bear market bounce top between 2006 and 2008.
2. Topped in 2005/2006 and then bear market bounce to 2007/2008.
3. Topped in some form or fashion between April 2007 and Dec 2007.
4. Topped in early 2008.

Here's a handful in the 2006-2008 timeframe, , whether the top noted was an end of a long term rise, or the end of a bounce under a previous high from 2000, with the total drawdown at eventual bottom. I picked this timeframe because it was similar in that the FED had undergone a rate hike spree with rising inflation and left rates flat above 5% for a little over a year, with bond yields starting their move down in July of 07, very similar to the current time period.

COST - May 08 and 49% drawdown.
QCOM - Aug 08 and 50% drawdown.
INTC - Dec 07 and 57% drawdown
ALK - Oct 06 and 78% drawdown
T - Sep 07 and 51% drawdown
TGT - Jul 07 and 65% drawdown
KO - Jan 08 and 43% drawdown
XOM - May 08 and 42% drawdown
UBS - Apr 07 and 89% drawdown
JPM - May 07 and 72% drawdown
UNH - Dec 07 and 76% drawdown.
DE - Jan 08 and 75% drawdown
URI - May 06 with near double top in May 07, Jul 07, and Nov 07 and 88% drawdown
KIM - Feb 07 and 88% drawdown
MGM - Oct 07 and 98% drawdown
LOW - Feb 07 (double top from Dec 05) and 63% drawdown
PCG - Apr 07 and 49% drawdown
NRG - Oct 07 and 70% drawdown
JBHT - Aug 08 and 55% drawdown

Even in the worst stock market event in our lives, not everything topped at the same time. They happened over 2 full years. Most even tried to recapture their high after a relatively short initial drop before ultimately failing. Some were long and drawn out drops not bottoming until 2011. Some were quicker topping and bottoming in 2008. It's important that we realize that whatever is coming is most likely not going to be pull everything down immediately and at the same time. Some sectors will continue to rise as others start to crash. Some will have long and drawn out bear markets.

And there's a good chance we won't get an event like 2008. It could very well be that what's coming is a 20 year bear market. Some sectors might be in strength mode for 2-3 more years while some crash this year. Remember that the market had a blowoff top in early 2000. Then it entered a slowth growth bear market bounce period for 5 years before the financial crisis happened. Remember that the 70's inflation era had happened in 3 waves. The initial shock that required interest rate hikes, the calming down period, and then the re-inflation that required severe interest rate hikes. Some stocks did well that entire era as inflation was a tailwind for them. Some did awful. Some were range bound. Some chopped up and down continually.

The long story short is that nobody knows how the next phase will play out. Or even when this current strength phase will end. I've long held that when risks are high you should maintain high alert. What I'm currently seeing is a market with massive tailwinds that is stubbornly ignoring the deterioration of the middle class and general economy. Stocks are rising on inflationary price increases within a consumer and service import economy that is going further in debt to maintain status quo. I'm seeing stocks that are weak only rising by using cash from earnings to buyback stock. All the while, the transport sectors is extremely weak. The manufacturing sector is near recessionary. The financial sector is facing a liquidity crunch and a commercial real estate blowup. The risks are everywhere. But the market doesn't care. Stay with the trend, but be careful. If a major shock were to happen, stops might not get hit until far below where you set them. Think of it like a crowded theater trying to exit through a single door during a fire. You don't want to be in that crowd.

Inflation

I keep stressing that month over month numbers are meaningless. They tell you nothing. You are comparing last month to the prior. That's incredibly short sighted and ignores the bigger picture. You should be looking at year over year, and here's why.

As prices move up, a one month spike in either direction might be alarming. But what caused that spike in inflation? Is it a part of a bigger trend? Let's first look at crude oil futures YOY. We take the chart going back to 2020 with monthly candles, and we plot the same pattern, but moving it forward one year. Doing so helps you see the time period from exactly one year ago at any point in time, and what the current price is compaing against YOY.

Look at 2020 through 2022. Starting in February 2021, we got a sign that crude oil was going to show an increase over the one-year prior period for the first time in over a year. But look at the forward plotted historical pattern. The COVID low was still incoming as a period to compare against. There was almost no way oil would spike back down low enough to not read extremely hot. And it did. And as it kept rising, the YOY kept getting hotter and hotter until it peaked. Oil is one of the largest input costs in the world economy. It affects manufacturing, shipping, transportation, energy consumption, and everything in between. And it wasn't until September 2022 that we got a YOY reading on crude oil that was mild, and February 2023 that we got an actual negative YOY reading. It was negative for 6 months, which was the largest driver for the "inflation is over" narrative and why the market started expecting rate cuts.

One problem, price didn't keep mocing down. It bottomed and is showing signs of potentially moving back up. Even still, the past year of YOY readings have been mostly flat, which is why the economy and supply chain has seemed to stabilize and why inflation has continued to come down. This might last for another 2-3 months. But as you can see on the chart, what happens if oil starts to move back up? You can see the areas on the chart how a significant rise or fall in oil prices over the next year will affect inflation. And if it stays range bound, inflation data will not be affected at all by oil.



Nat gas


Copper


Wheat


Live Cattle


Bloomburg Commodity Index


While all of these matter, oil and gas are the heavy hitters. And there's a very good chance those are going to start showing hot readings again starting in October, with effects not felt down wind for a 1-2 month lagging period, right after the FED cuts in September and then again in October. 25 bps cut is fully priced in for September. November equates to 0.41% decline from present which is almost fully pricing in a second cut. And December is 2.5 cuts as of now. 1970's re-inflation is strongly on the table. When you look at the charts, you can see why the FED doesn't want to. But bond yield decreasing and unemployment falling has the FED in a corner and they are going to do what they always do, look at data that is backward looking instead of forward to protect the banks and system liquidity, even if it means is falling stock market.

Talon2DSO said:

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What I take this to also mean, and maybe I'm the pollyanna here, but should we have this kind of event, it's an opportunity to get into the market at discount prices if we're not planning a retirement within 20 years.

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Very possibly. Those who bought broader indexes in 2002 and held through 2008 felt a lot of pain, but came out hugely ahead by 2015 compared to those who didn't exit prior to 2000. Same with those who bought between 2008 and 2011.

But again, this is not the same economy as those and this is not the same broader financial conditions. We've never entered a risk period in the markets like this in such bad shape financially. We have been war-time exponentially deficit spending in a time of peace while the world is turning hot. We don't have the capacity to inject liquidity to create a 2008 type bottom, at least not with results that one gave us. I think it's most likely we see a long term deterioration in equities that you still won't be recovered from in 2045. That's why I think it's most important to recognize the risks and adjust an investment strategy that moves away from broad indexes and focuses on year to year sector strength. And that's difficult to do. I've never had to do it, but I've been learning how to get prepared and I'm hoping I can. And I'm going do my darndest to help everyone here. And If I'm wrong and we just continue to rocket to oblivion, my 50% exposure to metals and oil which is currently outpacing the gains I would have in broader equities will likely rotate out to AI or wherever the strength is.