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Correction or Reversal? The Jury Isn't Out!

September 9, 2020, 9:05 AM Monica Kingsley

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The bears retook initiative yesterday, twisting the hands of weak longs. Where is the usual buy the dip mentality, and all the complacency that is part and parcel of bull markets? It's not just stocks that are at autumn crossroads, and attract extensive comments and discussions (thank you all the commenters!).

These comments are so important that they can't go into the From the Readers' Mailbag section. Instead, I'm featuring them (marked as C) before the technical part of today's analysis.

Here are a few quotes in response to yesterday's "Correction Or Reversal? Cast Your Votes" article.

Market-Related Comments

C: Correction, reversal comes closer to elections. It just feels like a 3 day bleed!

A: I'm still of the opinion that it's a sharp short-term correction, that the bull remains intact, that this is not a reversal. It's a sharp correction to scare the bulls out, and will bring in fresh blood to the bull run before October uncertainties strike in earnest. Media are talking prospects of a contested election, possibility of a Trump landslide before, you know, all those mail-in ballots come in trickling... Given what we have seen as regards rioting so far, having a clear winner right away would be the best present for the country and its stock market.

C: 3307 sp cash will be the target zone. but if cash gets below 3280 then probably 3206-3050 may be seen.

A: I agree with your assessment, but see those figures as applying not to cash, but to futures. And indeed, we saw the daily chart's 50-day moving average (3305) hold in the overnight trading.

C: AU showed the same institutional buying pattern as well on Friday. Considering the extent of this correction, I will say this is our last up before heading into the real correction starting early October. We have also not seen the Institutional liquidity swap usually seen on a trend reversal either. Further strengthening a last bull run. Patience is definitely a virtue to get the most profit out of this great opportunity.

A: Exactly, the advance-decline line behavior on Friday revealed accumulation. This was a sharp selloff as tech momentarily collapsed under its own weight. I agree that the table is set for stocks to recover.

C: The bottom of the Bollinger Bands is 330. A break below that would bring 320 into play; and in the most extreme case, 300. While 300 would arguably invalidate Monica's thesis, I think a bounce off 320 could still leave the bull intact if there is follow-through. Support is strong there and even stronger at 300, though if we reach the latter I might suggest reevaluating where things could head in the coming months.

A: These SPY values are quite in tune with where I have drawn the line for the new stock upleg hypothesis. Look at yesterday's SPY volume drying up - I think we have seen the local low. The most probable scenario remains a renewed upswing before the real October storms arrive.

C: You were mistaken Monica however. You said such a sharp correction will not come before October. And here we are. From the way it looks, this could be a reversal.

A: I called for a rather shallow correction in September, and this is what we got right at the start of the month instead. Higher volatility is here, and earlier than I thought judging by the 2016 precedent. That doesn't take away from the very real possibility of seeing a similarly sharp (or sharper) downside move in October.

The point is to be adaptive in adjusting one's views, to account for new realities. The great strategist, Helmuth von Moltke the Elder said that "No plan survives contact with the enemy." Very true, and applicable to trading as well.

The key takeaways are that thus far, the bull run is alive and well, that we have seen a correction and not a reversal, and that the worst of the downside is in all likelihood in the rear view mirror.

Corona-Related Comments

Yes, they belong to the stock market analysis given the tremendous importance of keeping the economy open for business, job market, consumer confidence, retail sales, you name it. The economy doesn't exist in a vacuum and needs a healthy society, not one cowering in fear while Rome burns.

C: I am a Professor of Medical Genetics. Professor Lipsitch a Harvard epidemiologist documented that with in the coming year, some 40 to 70 percent of people around the world will be infected with the virus The emerging consensus among epidemiologists is that the most likely outcome of this outbreak is a new seasonal disease. The problem is that compared to the FLU mortality 0.1% COVID has 3-20% mortality dependent on age. It is rapidly mutating and each year ,like with the flu, a new vaccine will be needed. It is a new disease that ultimately result in the evolutionary outcome of survival of the fittest, and combined with the Flu mortality rates are still to be grasped The world and world economy will never be the same any time soon. Hedge fund CEO and short term speculators Just don't understand the writing on the wall-this is a health crisis not a monetary one as before.

A: I've been extensively writing on corona. People, check my articles such as July 20 - S&P 500 Is Knocking on the Doors of Early June Highs , Aug 20 - S&P 500 Downswing Staring Us in the Face? , and July 09 - The Renewed S&P 500 Upswing Is Coming . That's just a few. I am no fan of Neil Fergusson style fearmongering.

Those mortality figures are laughably inflated. Even the CDC said there were more suicides than corona deaths. The CDC's own report says less than 10,000 people have died exclusively from the coronavirus.

I don't buy professor's scaremongering of 60 million already infected as measured by very false positive prone PCR tests. Who measures viral load actually? That's (capability to infect) what should be considered instead. I expect powerful fear from the media over weeks and months to come - after all, they've been hinting at a Dark Winter for a long time. The impact on weakened immunity systems will be keenly felt, deaths will rise, but I still look at it to be adequate to a really bad flu season. Hint: if we were in a plague, there would not be that much debate around that. See how powerful actors are reshaping the narrative into a climate change agenda societal reset and away from liberty and capitalism.

Reason is what matters the most. Hospitals aren't overflowing, ventilators are in oversupply etc. Talking doctors, I suggest you search for America's Frontline Doctors - they have the solutions! Turn for real, pioneering medical inspiration to Dr. Didier Raoult, Dr. Stella Immanuel, Dr. Cameron Kyle-Sidell, or Dr. Alex Hakim. Even the CDC director has said there have been more suicides than death by corona.

C: Let's not forget CDC quietly updated their mortality figures and only 6% of total "Covid" deaths are from Covid alone. 9210 people. Hate the fear mongering that took over our country

A: I absolutely agree with you. You are rightly pointing at the same CDC methodical revamp as I were in the above post. I have been also pounding the same message: United States can't succumb to blind fear, the most primitive of emotions!

S&P 500 in the Short-Run

I'll start with the daily chart perspective (charts courtesy of http://stockcharts.com ):

A perfectly bearish chart at first glance, and the caption just asks what else could the bears wish for? The 50-day moving average is near, and I doubt that the sellers would be able to take prices there right now. In October, that would be another story for another day.

My Friday's thoughts on the upswing attempt are still valid today:

(...) the bulls will have to prove that it wouldn't turn out as a dead cat bounce.

The Credit Markets' Point of View

Yes, high yield corporate bonds (HYG ETF) declined, but not before putting up a fight first. And I think the upper knot highlights the very real possibility that a local bottom has been reached yesterday. Sign of accumulation.

The caption says it all. Relative to the high yield corporate bonds to short-term Treasuries (HYG:SHY) ratio's daily performance, stocks are at short-term rock bottom comparative valuations. They don't seem to have much more room to decline vis-a-vis the key credit market ratio (unless the latter takes a dive, that is - but I don't see that as probable).

Treasuries, Gold and the Dollar

Long-dated Treasuries (TLT ETF) are not on an upswing. Quite to the contrary, they've been going rather sideways recently, which mirrors the economic recovery story (rising yields are in favor of it), and the increased inflation expectations also help drive yields down.

The key point is that there is no stampede into these debt safe haven instruments.

The liquidity squeeze indicator, the king of metals, is holding up pretty well. No, gold is not facing a margin call, and I view its latest candle as a sign of accumulation during the still bullish shape of the consolidation that I talked yesterday:

(...) it's my opinion that (gold) would attempt to extend the early summer gains once the floor in the U.S. dollar probes lower values again. This might take time though, as I look for USDX to spike higher first - quite a few bullish divergences have formed there, and will likely play out over the coming weeks.

And indeed, these divergences are getting resolved with greenback's upswing. Just as it has helped take oil ($WTIC) to the cleaners, other risk-on assets are suffering too. But if the dollar were serious about its rebound (i.e. it would have serious legs), Treasuries and various yield spreads would be rising alongside, which I don't see happening right now.

The dollar putting up an appearance of a fight, is the Occam's razor style, simplest logical conclusion for the coming weeks. Unless the Democrats raise up a notch their existing calls for Biden not to concede defeat under any circumstances, unless rioting ramps up, unless the Fed takes away the punch bowl, and finally unless Americans happily march into another lockdown that who knows when it would really end and on what terms (Cuomo's conditions serve as a great, sorry, terrible example), the stock bull run can go on in September before meeting the October headwinds.

Summary

Summing up, today's article is well worth the read in its entirety, but suffice to say that the bulls have the opportunity to retake initiative, and prove that this correction is over in terms of prices at least. With rejuvenated spirits, they can recover from the setback suffered, and push somewhat higher before elections start to bite.

Thank you for reading today's free analysis. If you would like to receive daily premium follow-ups, I encourage you to sign up for my Stock Trading Alerts to also benefit from the trading action described - the moment it happens. The full analysis includes more details about current positions and levels to watch before deciding to open any new ones or where to close existing ones.

Thank you.

Monica Kingsley
Stock Trading Strategist
Sunshine Profits: Analysis. Care. Profits.

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