Conflicting indicators in the market

It is the same drama playing out again and again. Recently in the past few weeks, the drama is called Rangebound. Basically, S&P was fluctuating roughly between  3300 and 3400 with a few points below or above depending on its mood. Right now, the market wants to expand this band and it is at its upper end of that range around 3480ish. In the next week or two, I think it will march back toward 3300ish to repeat this drama again. Basically the market is directionless for now and this may likely continue till and through the elevation day on Nov 3. As I said before, I highly doubt we will see the election result on Nov 3 but rather it may drag on for weeks, if not months. This will create a huge uncertainty to crash the market if this indeed materializes! Be prepared for this scenario that is becoming more and more likely based on what I'm seeing. 😵 By the way, the fear index VIX is sending a big warning sign for the next 3 weeks. As I said before, the VIX call/put ratio tells us a lot about what it is heading. For next week, the VIX call is priced in 8 times more than its put, 12 times more in the week after and then 15 times more in the last week of Oct. If you love to chase the market, be aware of this as this indicator is pretty accurate in its prediction. As we all know, a high VIX is usually associated with a lower market. We have seen times and times again that VIX can jump 50% with a blink of eyes. 🤕

For those friends who would like to learn more about the technical details about the current market status, see the analysis below that I think provides some quite good insights. Don't be confused about the conflicting information in the market, which is actually quite normal and often seen in general. Hardly you will see crystal clear and straightforward information telling you what the market is going to do next. Not at all! As I said many times before, the market has the habit to confuse as many people as possible and then punish most people the most!!    😎

Conflicting Information by Lance Roberts 

If we break down the commentary and charts into critical points, we can gain some clarity.

1. The market broke above resistance (bullish)
2. MACD has crossed positively, issuing a "buy signal." (bullish)
3. The market broke above the 50-dma. (bullish)
4. The overall trend from the September highs is negative (bearish)
5. MACD is back to overbought (neutral to bearish)
6. Intermediate-term "sell-signals" still firm (bearish)

Notably, while the recent correction did reduce our fear-greed index somewhat, it remains elevated. Again, like volatility, overall investment positioning doesn't show "fear" of a deeper correction. While the indicator is currently in more "neutral" territory, it suggests gains are likely limited short-term.

The same goes for positioning by professional investors. With positioning back to more neutral territory, any rally in the market is likely limited.

The current psychological conditions suggest the short-term bottom in the market remains intact. However, given that much of the more "bullish" exuberance was not displaced, the upside may get confined to previous highs.

As noted, much of the impetus for the rally was "hope" of more stimulus. However, currently, there is little evidence of another CARES Act occurring before the election, particularly with the Senate in recess. Such could wind up disappointing investors in the short-term, particularly as economic growth continues to wane.

Technical Concerns

From a purely technical perspective, the market remains in a long-term deviation from historical trends. The problem with long-term trend analysis, much like valuations, is that markets can "remain irrational longer than logic would predict." It is during these periods of "irrationality" where investors begin to believe "this time is different," or "such and such" doesn't matter any longer due to Central Bank interventions.

Those beliefs have, without exception, wound up costing investors more than they ever thought possible.

As noted above, on a short-term basis, if the market can clear the 50-dma, a subsequent rally back to all-time highs is certainly not out of the question.

However, when viewing longer-term time frames, the risks become more evident. As shown in the "weekly" chart below, the deviation from long-term means remains at extreme levels. Historically, these deviations correct themselves. Such a "mean-reverting" event can occur over a drawn-out period, as seen in 2015-2016. Or, it occurs rapidly, as seen in both 2018 and 2020.

What is essential to understand is that while the short-term bullish "meme" is hard to resist, these "mean-reverting" events occur regularly. They also tend to happen when the media least expects them too.

If we take a long-term view, the "monthly" chart confirms the same. Relative-strength continues to diverge negatively, participation remains weak, and markets remain well deviated from long-term means.

The Rules

Instead, we will use rallies to:

• Re-evaluate overall portfolio exposures. Are equity exposures aligned with current market dynamics and related risks?
• Raise cash as needed. (Cash is a risk-free portfolio hedge when clear opportunities are not available.)
• Review all positions (Sell losers/trim winners)
• Look for opportunities in other markets and assets. (There is no rule you can only buy stocks. Bonds, commodities, currencies, alternative investments, annuities, etc. can all have places.)
• Add hedges to portfolios. 
• Trade opportunistically. (There are always rotations which can be taken advantage of)
• Drastically tighten up stop losses. (Tighter stop-losses reduce unexpected downside exposures.)

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