Final Phase of Bull: Hype and Greed (IWM,DIA)

We’re going to highlight a number of charts and indicators that we stumbled across this week that give some backbone to our story of a big equity bounce in the offing, and very likely a continuation of this mother of all bull markets to new highs in 2016.

 

And we understand also that we’ll be accused of fishing through the evidence to find items that support our view, but the simple truth is we can’t afford to do that. We make money by being right, and we’ve been singularly plug-hole right since we started this service some eight years ago.

 

Moreover, our story is a far sight more compelling than that of the bears; much of what they’re offering is just outright unconvincing.

 

So let’s start with the following.

 

Below is a chart of fund managers’ cash allocations –

highest levels chart

As you can see, the global fund management set has pulled more money out of the investment pool than at any other time since 2001 – more even than at the bottom of the Lehman Bros. fiasco of 2008/2009.

 

And considering that the indexes are just a few percentage points off their all-time highs, that’s astounding.

 

Cash allocation, at extremes, of course, is a contrarian indicator, and speaks plainly to the buying opportunity currently at hand.

 

Just Ask the Bankers

 

Remember that just last week we cited a tidbit from Bloomberg News that reported massive insider buying on the part of bank executives during the latest selloff, another ‘make you go hmm’ thread in the buy-the-freakin’-dip tapestry we’ve been weaving here at Normandy for the last few weeks.

 

But maybe it’s best just to look at the recent market action to get our bearings. After all, stocks know where stocks will go, and the following charts amply demonstrate that all the near term action is pointed upward.

 

To begin, consider the following paste-up of the Dow Transports, one of the hardest hit sectors during the last half year.

djt tech

Since bottoming in mid-January, the rise of the Trannies has been measured and secure, with Tuesday’s leap higher revealing several important technical developments –

 

  • First, price has disengaged and broken higher from the short term moving average, which itself has begun to turn higher. The ‘scoop’ has thus begun, whereby the short term MA underpins the action of the stock as it climbs (red circle). Technically, the next stop is the declining 137 day moving average, currently at DJTA 7770.
  • That level is also where the last retracement high sits, so we’ll expect an all-out, crash-up derby at that stage to determine whether the transports have any real horsepower behind them (in blue).
  • RSI has now crossed above its tell-tale midway waterline, and MACD is poised to reach that level by early next week – if the current momentum carries. In the event it does, we’ll have a full bore technical buy signal for the sector.
  • Indeed, if all goes pep and cheery for the transports, expect a second, more significant war to ensue at DJTA 8340, where the long term moving averages reside and overhead selling pressure has emerged consistently.

 

NASDAQ Turnaround

 

A look at the NASDAQ offers additional cause for hope.

nasdaq tech

The index as a whole, as well as some significant components, including Microsoft (MSFT), Facebook (FB), Apple (AAPL) and Alphabet (GOOG), among others, have all been surging. The Composite Index is up over 7% in four days and is still rising as we write. The short term moving average here, too, has begun the ‘scoop’ on price (red box).

 

At times like this we also take a keen interest in the financials, and they haven’t disappointed. Goldman Sachs (NYSE:GS) is up 8.5% from its bottom last week, Bank of America (NYSE:BAC) is up 13.6% and Citigroup (NYSE:C) 13.3%.

 

China too, has gapped higher. As of the open on Wednesday morning, the Shanghai Large Cap ETF (NYSE:FXI) is up 7% from its lows of last week.

 

Who’s paying the price?

 

On the other hand, look at last weeks’ biggest winners, all those securities that had ‘safe haven’ appeal, including Treasuries, gold, silver, the utilities, who this week have found themselves on the receiving end of a sweaty back’o’the hand.

oh my cartoon

TLT is down 4.5% from its peak last week,

GLD is down 5%,

GDX is down 8%,

SLV is down 5%, and

The Utilities are lower by 3.5%.

 

The Setup’s Like This…

 

Given the foregoing, we want to offer a trade based on where we believe we’re currently situated in the great bull market’s advance.

 

One of our mentors in this business, the late, great Richard Russell, used to regularly remind his readers that there are three psychological phases to a bull market.

 

The first, in his words, is “the early accumulation phase,” where the smart money loads up on cheap goods while everyone else is in a selling panic. The second phase is longer and, in his words, “more deceptive, containing many secondary reactions.” This is when the retail public begins to climb aboard, albeit skeptically. The third phase he termed the “speculative” phase, in which the retail public jumps in with abandon and the atmosphere is one of hype and greed.

 

We’ve little doubt that it’s the last phase in which we’re currently situated, and, as such, we want to reiterate that final phase blowoffs are also characterized buy the biggest names dominating the leader list at the expense of the small caps. The hype machine dictates that investors buy only the hottest names and the sexiest brands and follow the lead of the financial media to whom they must pay obeisance.

 

And the retail set eats it up completely.

 

With that in mind, we ran the following match-up: the Dow 30 vs. the small cap iShares Russell 2000 ETF (NYSE:IWM) from the highs of last spring. And this is what we got –

djia iwm tech

Our instincts tell us that this is not a separation that will be reconciled. Look for the big names to remain big, while the small caps wither their way toward the micro.

 

Big words! How about a big payoff!?

 

You got it.

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Options Trader lite recommends you consider buying the IWM June 100 PUT for $6.07 and selling the DIA June 158 PUT for $6.00. Total debit on the trade is $0.07.

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Many happy returns,

 

Matt McAbby

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