Was That It? Or Eye Of The Storm?

I can still hear the radio saying, "Whatever you do, don't go outside", because the worst part of the storm is the area around the eye. So once the eye is passed, you will get hit by the heaviest winds, in this case 175 mph. My dad briefly opened the door and we peaked outside together. I'll never forget it.

So here we are. A similar feeling of the unknown. Is the worst over? In the case of Hurricane Andrew in 1992, we did know. The radio told us that we're just half way through and no matter what don't step outside. It was about to get much worse!

In this case, we only have our ability to analyze supply and demand to know whether we need to be using this opportunity to buy stocks, or if we should remain as cautions as we were throughout February?

We've been in the camp that we want to spend our time looking for stocks to buy, not looking for stocks to sell. We killed it in the bond trade, holy shit. Talk about one for the good guys. Geez. But we did hit some really historic levels of volume and price behavior as our upside targets got hit. This is the sort of thing we see only at extremes and we want to fade these rare extremes.

Here is a chart from a favorite follow of mine @MacroCharts showing how these spikes in bond activity have been some of the best buying opportunities in stocks throughout history:

Make sure to follow @MacroCharts on Twitter. Excellent content.

I'm going to try to do a better job of featuring some of the other great work being done by friends and colleagues of mine. I don't do that as much as I once did. But for a more consistent look at what the best are saying, The Chart Report is my easily my favorite read every day. If you care at all about your portfolio, make sure you get this Free Report.

I'm an investor and those guys are doing a fantastic job of curating the best technical analysis being done all over the world. It really is amazing.

Anyway, Bonds are at extremes seldom seen, so what does that mean for stocks?

Here are two looks at the Dow Jones Industrial Average. These Fibonacci extension levels have been incredibly helpful in helping us set targets and manage risk over the years. As many of you long time readers know, all of these extensions have been drawn there for years, and the markets later reacted to them. Don't think for a second that these were drawn after the fact.

The questions remains, which one is it?

Outcome #1? This was a massive failed break out and the crash down to 19,000 has just begun?

Or was this a healthy sentiment shakeout and just a retest of the prior breakout level, and now off to the races we go?

People are like, "Well JC, you're supposed to have the answers. Why do you ask so many questions?"

I hate to break it to you, but I have absolutely no idea what will happen tomorrow or next week or next month and I have even less information about next year. All I can do is analyze the behavior of the market that we have in front of us.

To me, there is a very very high likelihood that we get a face ripper in stocks. Bonds get crushed, rates go up.

I think the relative strength coming out of china and emerging markets and the fact that Copper is NOT making new lows, is evidence that no, this is not the end of the world, after all. Because if this was the end of the world, wouldn't these things be leading us lower, rather than outperforming?

Yea, I just don't see it, yet anyway.

I think these Fibonacci levels mentioned above in the Dow are important 26,700 is a big one and we need to get above there quickly. Or things will really start to get bad.

This chart of the Dow Transports is another good one. This would be a perfectly logical area for these stocks to start to rally. This week we got exactly down to where they began to rally at the end of 2018:

I think this support hold for now. And IF it does, then I think we're ok and the higher probability outcome is that bonds come off, that was the blowoff top, and stocks proceed with the ongoing bull market.

From a risk management standpoint, I lay out the roadmap for whether we want to be long or not and what stocks we're buying and how. If you haven't read it, make sure to go through it and note the levels for "Worst Case Scenarios". I take this very seriously because I've seen people wiped out for not preparing for worst case.

I'm not saying that another hurricane is coming. But it's hurricane season. In other words, this is the type of environment where hurricanes can come. So we're watching storms moving west from Africa. Transports breaking and markets not reacting to these bond extremes would be evidence that we're just in the eye.

Here is the report in full (Premium)

Expect volatility to continue. These moves will come in both directions. Implied Volatility Friday was pricing in 800 Dow points PER DAY.

This isn't over. But historically speaking, the bond market is suggesting this is one of the best times to buy in history, especially for long-term investors.

Are you buying stocks? Or are you buying Volatility? Let me know.

JC

List of Stocks We're Buying