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I was a grumpy old man even as a child, so this post emanates from that legacy.
I’ve been puzzling over the peculiar reaction the market had on Monday to the savage attacks that took place in Paris. Never would I have dared imagine that assets across the board would excitedly zoom upward following this brutal mass killing in one of the most beloved cities in the world. It just made no sense.
On the chart below, I plotted the month-end values of the S&P 500 against the Domestic (U.S.) Long-term Equity-Only Mutual Fund Flows. Although we don’t have the data for the October month end yet, the first two weekly reporting periods (Oct 7th & Oct 14th) for Domestic Equity Funds have seen net outflows of -$1.31 & -$1.44 billion, respectively, for a total of roughly $2.8 billion in net outflows MTD (data for the week ending Oct 21st should be released in the next day or two).
Note how investors “bought the dip” in previous corrections, providing institutions with the capital to buy more stocks which fueled the next leg higher in U.S. equities whereas this most recent correction has been followed by persistent, massive withdrawals from US equity funds.
This is still a working pattern and by no means is there any guarantees behind it.
But I spend a lot of time every day going through probably a thousand charts or so, and I spend a lot of time staring at the charts of the major indices. Well, today, this pattern leaped out at me on the daily chart…..
It is a massive head and shoulders pattern that could be forming!
Granted if we just blow through the highs of the year, this pattern means nothing, but if we start to see the selling pick up again and start to make a move back towards those August lows on SPX, then this pattern becomes very, very legitimate.
Now, based on on what we are seeing today and yesterday out of the market and the whole month of October, I’m not saying that we should all go sell our long positions. I’m still 30% long/70% cash right now (from 60% long this morning). I’m just saying watch this pattern and whether it develops further.
I can’t say with any certainty that it will happen, but it is definitely worth keeping an eye on.
Here’s the SPX Head and Shoulders Pattern:
Be sure to checkout more of Ryan’s Swing-Trades at SharePlanner.com
A Brazilian Reasons To Be Bearish
In a recent post (“A Brazilian with a Sudden Rip of the Wax”), Tim noted that Brazil ETF EWZ was in free fall. For those who haven’t been keeping up on the bad news from Brazil, the headline of this AP article from Tuesday will give you a sense of what’s been happening: “Brazil’s economy plunging; no relief in sight amid political, financial chaos”.
A Hedged Bet Against Brazil
Every trading day, Portfolio Armor ranks all of the hedgeable stocks, ETFs, and other exchange-traded products in the U.S. by its estimate of their potential return over the next six months, based on an analysis of price history and option market sentiment. Then it subtracts hedging costs, and ranks them all by potential return net of hedging costs, or net potential return. On Tuesday, the highest-ranked ETF, and the 6th-ranked security overall, was BZQ, the 2x levered bet against Brazil. Portfolio Armor calculated a potential return of 15.2% for it over the next six months.
