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Mr. Market's Nasty Habit

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Some of those professionals who have been around for more than a few cycles pared back their stock holdings on the ‘sell in May and go away premise’ just in time for Mr. Market to do his best to make them look like fools on a hill.
But not for long.
The Sell In May Vigilantes caught up with Mr. Market soon enough, putting a nail in the market on May 22, and they and not letting up with every rally attempt since, failing to gain traction.
Lennar (NYSE:LEN) was a good example on Tuesday with super earnings leading to a 2-point upside gap only to see the stock close up a puny $0.25.

The mere whiff of a normalization in rates has sent housing stocks skidding, with Lennar now trading convincingly below its 200 DMA.
As you know, I always go on about how the markets like to play out in threes. Note the three drives to a high in Lennar in 2013 and then the recent waterfall decline below triple-spread bottoms in February, April, and early June.

It’s not just the normalization of rates; it’s the rate at which they're normalizing.

The 10-year Treasury yield (INDEXCBOE:TNX) showed a bearish three drives to a high in early June and promptly retreated to 1.60%. However, the T-Rex in the ointment played out when the prior swing high, the third peak in the pattern, was offset -- a bullish indication for yields.
Note that during the current advance, the first weekly turn down on the week of 6/7 defined a low, setting up a weekly ‘T-D’ or Touchdown pattern. This is where the first turn down on whatever time frame in a strongly trending market defines a pivot for a potentially big run in the underlying direction of the trend.
Remember when a week or so ago we offered that the yield on the 10-year would cross the Rubicon on a rise over 2.20%? Rates have exploded on trade above 2.20%, and in so doing, their Yearly Swing Chart has turned up. This occurred on trade above the 2012 peak.
The conspicuous continuation of higher yields on the turn up of the yearly (rather than the ‘normal’ reflex reaction following the turn) suggests a bear market in bonds.
Despite Tuesday’s nice rally in stocks, there has been nowhere to run and nowhere to hide with the summertime blues beating up the street in front of quarter-end. Since the bear has come out of hibernation, he’s clawed bonds, stocks, and gold alike.
If I didn’t know better, I’d think Ben was running his own offshore hedge fund with the new Chinese Premier just in time to destroy the next guy's performance.
Pre-emptive? ”We don’t need no stinkin’ ‘pre-emptive,’” sneers Hoofy.
You know what they say, "Chase by the sword, bleed by the sword."
Yesterday, the SPDR S&P 500 ETF (NYSEARCA:SPY) opened up near our 159 resistance and spent the entire day trying to get above that morning high. It finally did so, but it came right back to the opening high on the runoff showing that there are a lot of natural sellers above the market looking to fade breakouts.

Note how the late breakout in the SPDR S&P 500 ETF satisfied the Gapfill and looks like a bearish backtest of a Live Angle.
The futes look poised to attack this resistance again this morning. After trading down to 1573 overnight, they are up 7 as I write. However, while the cycles suggest a decent rally Wednesday and possibly Thursday, it is worth keeping in mind that the SPDR S&P 500 ETF/S&P 500 (INDEXSP:.INX) will go into the Minus-One/Plus-Two sell setup on the dailies on a trade above yesterday’s high today. This is because the 3-Day Chart is pointing down, and a higher high today will trace out 2 consecutive higher highs.

While the market could drift higher on Thursday as well, another higher high on Thursday will turn the important 3-Day Chart back up. The last time this occurred was on 6/17, which defined the last pivot high before going off a 90-point S&P 500 cliff.
If the market is still bearish, another 2 to 3-day rally phase from Monday’s low sets up as a short with the market going right back off the cliff to the 200-day moving average on a measured move drop from the last pivot high (at 1,650 and the 165 SPDR S&P 500 ETF strike).
Monday’s low roughly ties to a 270 degree decline off the May 22 high and came following a turn down of the Monthly Swing Chart, which often times is followed by a reflex rally.
Of course, Monday’s big opening plunge clearly looked like bearish behavior on the break of the monthlies and a failure for a reflex rally to arrive, but it has. The market has a nasty habit of faking left and going right. The opening plunge for the week may have sprung a Bear Trap for quarter-end, flushing out the indices for a queeze higher -- the same as how an opening plunge on any given day can put the hook in for a first-hour low and a reversal if the opening range is recaptured.
Monday’s opening range has been recaptured, but not the ‘true’ opening range yet -- the gap. So, the SPDR S&P 500 ETF/S&P 500 are at critical levels here.
Even if 159 is recaptured, there is massive resistance for this week at 161 (1610 cash).
This week is quarter-end and anything could happen, especially as a lot of damage has been done to charts ahead of quarter-end.

Normally, the expectation would be for a window-dressing markup, but there has been so much window-breaking, with charts being shattered, that the market may not be able to walk a wall of shards.

Conclusion: The market doesn’t look the same as it approaches our key turning point for a possible acceleration at the beginning of the new quarter, which is the third anniversary of the major higher low on July 1, 2010. Tomorrow’s report will walk through some historical analogues and patterns for that possible acceleration. Remember that the first trading day of the year saw acceleration, and July 1/2 will be 180 degrees opposite that thrust in time.
Is it possible a backtest of broken support around 1,600 could lead to a plunge?
Yesterday a friend sent me the following note by Jon Rubino, which is worth reading:
It’s safe to say that as this is written at noon EST on Monday the 24, every economic policymaker in this hemisphere (and a lot of sleepless folks elsewhere) are staring at screens and wondering if this is it. They’ve been playing with fire for such a long time, trying to balance incompatible goals of low interest rates, stable currencies, and accelerating growth that for a while they almost believed that they would get away with it. That the laws of  economics could be bent to their will forever. Now, they see that this was hubris. That their sense of control was just an illusion bought with credit on a scale so large that the numbers had become meaningless.
This is the nightmare scenario that keeps central bankers and institutional investors up at night because, based on Japan’s experience with hyper-aggressive monetary ease, there might not be a fix. If even easier money is met with dramatically higher bond yields, as in Japan, then there’s nothing left to do but to let the system unravel. Not that they won’t try one more role of the dice. It’s just that this time their odds of getting snake eyes have gone way up, and they know it.
As the Beatles sang:

“I’m looking though you
Where did you go?
I thought I knew you
What did I know.”

Things that make sense in the abstract and in times of calm can seem ridiculous in the blink of an eye. Yes, the history of the market is the history of emotion and as the song goes, “love has a nasty habit of disappearing overnight.”
And just like a love affair ending, whether you saw it coming or not, reams of thought are spilt trying to connect the dots. But in your heart, you knew it wasn’t real. You knew it couldn’t last. As much as they told you it was the new normal, a voice inside told you otherwise.
POSITION:  No positions in stocks mentioned.