Thinking Out Loud Heading Into Q4

I'm glad that Summer is over. Fall is without a doubt my favorite time of the year. It's football season, the weather isn't too hot, it isn't too cold, it's college football season, everyone is back to work after being lazy for the summer so it's easier to conduct business, global stock markets enter their most volatile period of the year and Baseball playoffs start soon. These are all good things as far as I'm concerned.

Let's start with stocks. I like how U.S. stocks finally started to sell-off at the end of the summer to follow along with what emerging markets and some of the other developed nations like Europe had been telling us since the Spring. The U.S. was literally the last man standing. OK and maybe Japan as the Yen got destroyed, but that's about it. Emerging markets had been getting crushed for a long time and many that I heard/read chose to ignore it describing the U.S. strength as T.I.N.A (There Is No Alternative), which is the dumbest thing I've ever heard.

I've been really vocal since March that there has been no reason to long the U.S. Stock Market Averages as there was literally no trend and the prudent thing to do was to wait for a resolution out of the consolidation. I'm on the Benzinga Morning Radio on Thursday mornings saying the same thing every week. If you've been listening, you know. More recently on the blog, I've been really vocal about how this resolution out of the sideways range was to the downside and therefore all of that former support since earlier this year now becomes overhead supply. It should not be a surprise to anyone that stocks rolled over last week near that supply.

The negative correlation right now between U.S. Stocks and Japanese Yen is off the charts. You want to know where S&Ps are headed? I think you watch the Yen. This has been by far and away the biggest tell of them all. I don't hear anyone else talking about this except for maybe my buddy Jonathan Krinsky over at MKM Partners. I'm not surprised at all that he also picked up on this because over many years him and I have seen eye to eye more often than not. Well done my man. But again, not shocked at all that you caught that.

In the Bond market, shocker they didn't raise rates last week. Understand something, the media is in the business of making money by selling ads and increasing page views. Members of the media are not in the business of making money in the market. What they claim is a big deal does not necessarily mean it's a big deal if you're in the business of making money in the market. These are two completely different business models. "Markets in crisis" are headlines we're seeing while the S&P500 is single digit percentage points from all-time highs. Really? Crisis?

If S&Ps correct 25% from their highs this Summer, it would be perfectly normal. After a 220% rally in 6 years, you give back 25%? Does that seem so crazy? I don't think that constitutes a crisis at all. Seems pretty normal, if you ask me.

Getting back to currencies, how about that U.S. Dollar Index? Has this sentiment unwind since March not been one of the coolest thing you ever seen? I love it so much. We were at bullish sentiment extremes that we had never seen before. Ever. Commercial Hedgers, who we consider the smart money, were hedging so many U.S. Dollars it was like they thought it was going to zero. The U.S. Dollar Index ran up to exactly the 161.8% Fibonacci extension of the so important 2009-2011 decline, which looking shorter-term also happened to be 261.8% Fibonacci extension of the January/February Consolidation. And then miraculously just reversed and got destroyed when everyone (even my grandmother) thought U.S. Dollars would keep going higher.

Speaking of obnoxiously bullish sentiment.....how nice was it to see Healthcare get crushed the last couple of months. It's hard, if not impossible, to find a time where there were so many bulls in one sector. That failed breakout was text book. It sucked in the last bears that just threw in the towel, and down we went. It was perfect (see here).

But enough about the past....

Funny, technical analysis gets hated on by some people out there because it only looks at information from the past. This one gets me every time. I could only dream of having information from the future. Could you imagine that? It would be great! Sign me up for that one. If you have someone out there selling data from the future, please refer them to me so I can get me some of that. For us earthlings, unfortunately, we're stuck with only information that is from the past. Fundamental analysts, economists, quant guys, we're all forced to look at information from the past. It's all we got.

I hate to be a broken record, but I'm a 'sell strength' guy in stocks, particularly U.S. Stocks. There is just way too much over head supply out there for me to want to be aggressive. I would rather be taking advantage of strength to look for shorts, than looking for sell-offs to get long. This is the case in all of the major averages and I'd say 85% of sectors, maybe more.

Globally, I have to say the same. A mean reversion can certainly be more powerful than here in the states simply because the sell-offs have been that much more dramatic, but the strategy is the same. Sell strength, not buy dips. Emerging markets are a disaster. Look at South Africa, this one looks to be one of the more vulnerable markets out there.

Time horizons guys. This is something that HAS to be defined. We're all different. Are you a day trader? Are you a long-term investor? How far out are you looking? Me personally, I look out weeks and months, not hours and days. So when I say sell strength, I don't mean like Tuesday morning and cover in the afternoon. I mean in general looking out weeks and month. But we're all different and this needs to be defined before entering the first trade.

What can change my mind?

First of all, time. I think some consolidation sideways near the upper end of the range since late August would be healthy. Another month or so up here without giving back the gains and making new lows would be a positive in my book. Also the USD/JPY getting above 122 and staying up there. The correlations, as I've mentioned are through the roof. If Yen starts to roll over, I think that would help put a bid in stocks. Other than that, I'm not seeing much out there to get me enthusiastic about getting aggressively long stocks, at least for not more than a few days.

Bonds are a tough trade. Looking at the infamous $TLT, prices are just above a flat 200 week moving average and just below a flat 200 day moving average. This has "headache" written all over it. You can trade the small range if you want, but bigger picture, I think the dominant trend is a lack of trend.

What do I like?

I like Yen. Look at Yen Futures $6J_F. We have bullish momentum divergences on multiple timeframes, both daily and weekly charts. Prices have been consolidating in what appears to be a continuation pattern, kind of like a bullish pennant if you want to give it a name. More importantly, it's the implications of this consolidation over the past month that I'm most interested in. If the resolution of this pattern is to the upside, we want to be buying that aggressively.

I like cash. I think we're going to have incredible opportunities over the next few months. Holding on to stuff you're "stuck" in and hoping for the best is not a strategy. I've received a lot of phone calls and emails from people in this situation: They never sold, let's say $XOM for example, at the highs and now are underwater hoping for it to come back. My answer to this dilemma is very simple: Ask yourself, "If you had all of this money sitting in cash, is this what you would do with it, buy $XOM?" - are you trying to make your money back? Or are you trying to make your money back with $XOM?. I've actually heard the phrase, "Well these are just paper losses, I haven't taken the loss yet". No actually, yes these are losses. That money is gone. It's what you do going forward that matters.

Closing Prices! You want to talk about Dow Theory? Whenever we hear Dow Theory, it usually revolves around the tenet about the Dow Industrials and the Dow Transports confirming or not confirming one another. This is a Dow Theory tenet, but I'd argue not even one of the most important ones. I think the tenet about how closing prices are what matter most is arguably the Dow Theory tenet we should always remember. Charlie Dow was writing about this 130 years ago and is still right today. Remember all the S&P cheerleaders last Thursday? They were quiet at the close of the day, which is what matters most. Closing prices guys.

Anyway, these are some of the things on my mind. I think it's therapeutic to put it down on paper. I hope you guys find some value in it and helps spark some conversations.

What are you thinking about these days as we enter the 4th quarter?

***

Click Here for more information on our weekly research reports. If you are interested in U.S. Sectors, Commodities, Currencies, Global Markets, etc. find the right package for you. Also feel free to email info@allstarcharts.com if you have any questions.

Tags: $XOM $USDJPY $6J_F $FXY $SPY $TLT $ZB_F $TNX