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The Future of the Stock Market


A near- and long-term view of what's to come.

Editor's Note: Todd posts his vibes in real time each day on our Buzz & Banter.

All good things must come to an end; for the bulls, their attempt to run their streak of positive consecutive Tuesdays to 21 straight was busted yesterday after the bears stepped in-right where they had to on a technical basis-and ran the table for the rest of the session.

Of course, the bear's drought in the Dow Jones Industrial Average (INDEXDJX:.DJI)-the longest streak since at least 1900 without three consecutive losses-remains alive and well, thanks to Monday's upside reversal. The Dow would need to close lower both today and tomorrow to break that streak, and what a streak it's been.

As discussed yesterday-and updated every session in real time-I pared some of the overage in my S&P (INDEXSP:.INX) September SPY (NYSEARCA:SPY) puts, including an intraday round-trip from the morning (rally) to the afternoon (dip), and I continue to operate with an S&P 1650 upside stop on my downside risk.

I do not plan to buy back September paper on my next foray into downside exposure; I will buy out-month paper on blips, and sell my September paper on dips, rotating my risk as a function of time and price. While it's only June, September paper is starting to get a little "tight" for my liking, hence my plan to roll "out and up" (to a higher strike).

To revisit our dueling trend channels, we have the uptrend from November in place, as well as an emerging downtrend, as a function of the five lower highs since the May 22 Pop & Drop.

The lower end of the uptrend channel comes into play around S&P 1625-up a point from yesterday, because it's a sloping channel-and a breach of that zone, through a pure technical lens, works to roughly S&P 1600.

From there, only time will tell if the Morgan Stanley (NYSE:MS) z-score will prove prophetic, with a move to S&P 1500.

Random Thoughts:
  • There are two sides to the current ride; the bulls will argue that the government can effectively swallow hard and write off the toxic debt they've ingested, with or without Michael Clarke Duncan, while the bears will lay claim to the business cycle, knowing in their deepest innards that what goes around, comes around regardless of what the market has been brainwashed to believe.
  • Banks, breadth, leadership, and commodities remain viable tells, and levels include S&P 1635, 1640, and 1650 on the upside and S&P 1625, before 1595-1600 on the downside.
  • Of course, we've got a monster economic report due on tap Friday-a summer Friday, no less-which will start tongues wagging on whether the Fed will taper, and when. For what it's worth and so it's said, I continue to feel that a "free" market would be a much lower market.
  • The bulls will offer that bad data on Friday will equal more QE; the bears will argue that QE, or the hopes thereof, is the only thing holding up the tape-and follow with, "Hope isn't a viable investment vehicle."
  • Goldman (NYSE:GS), JPMorgan (NYSE:JPM) and Deutsche Bank (NYSE:DB) remain my go-to proxies in the financial realm; as go the piggies so goes the poke.
Minyanville Mailbag

Minyanville reader Paul writes:

Greetings Toddo,

I'm really glad to hear you're improving. It's very nice that Hoofy and Boo are back, so thank you for that as well. Please let Minyans know how your felines are doing, if you have not lately; "Crash" has a solid feel for the tape.

Here are my naive questions after reading your June 4 Random Thoughts: Bulls and Bears Square Off in a Technical Tug-of-War.

1: (Gold): "There's no such thing as a triple bottom."

Each time a support or resistance is tested, a layer of demand (supply) is removed (if you think about it, it makes intuitive sense). It's an old saw on Wall Street by the time the third test arrives, it will give way; hence, "there are no such things as triple bottoms."

2: The STOCKCHARTS for S&P from 1994 to 2021 (amazing chart by the way) shows a third major bottom sometime around 2015-2016. Is this 2016 bottom a triple bottom?

Insofar as 2013 is a triple top, yes-but, one could argue that these are more cycles than patterns.

It's interesting to me that a number of years back, when asked the question of when the real bottom might arrive, I suggested 2016-2018, long before this chart took shape. And while I didn't think we would see new all-time highs first, my stair-step risk management process allowed me to pick my spots and participate with a hit-it-to-quit-it stylistic approach, consistent with our oft-stated vibe to never let an opinion get in the way of making money.

3: If so, would it then bounce back up to S&P 1600 in the year 2020, as indicated by the projected grey wave-line?

There are too many variables between here and there, but presumably, the markets will eventually be allowed to trade on their own volition-if free market capitalism is to survive-which could be the catalyst for the next wave lower (among other things, obviously). From there, a free market should find a level for inventory to naturally "clear," thereby building a stable foundation for future growth.

Of course, I could be completely wrong; the government is used to pushing the market around; I can't imagine that habit will die by its own volition.

4: If it were to behave "normally" (no 3rd bottom), would it not continue much lower? (Perhaps in spite of major intervention)

Don't know-this is an "asterisk stock market" in that the DNA is drastically different than anything we've seen in the history of financial markets.

Between the government hand and HFT, we haven't had an honest temperature reading in a very long time, to the point where most folks now accept this as a new paradigm.

It's always a new paradigm until it isn't, but to your point, the same structural imbalances that caused the first phase of the financial crisis (debt, derivatives) remain in place; the only major shift was that corporate America rolled out their debt and transferred much of the risk from the public arena to private hands.

IF the government swallows hard and writes off the debt-which is the bull case-all of the above may be the incessant ramblings of Chicken Little.

5: Or is this some kind of giant version of the period 1966 to 1982, and the market oscillates horizontally as indicated by STOCKCHARTS?

Not sure; from 1966-1969, I was a martini, and I spent 1969-1982 preparing for my Bar Mitzvah. I wasn't much focused on markets unless they sold Twinkies and Yodels.

6: Caveat: The new normal means there is no normal. The markets have gone totally Neils Bohr: "Everything we call real is made of things that cannot be regarded as real," or: Stock Market = Quantum Mechanics.

It is what it is; I tried to talk about the progression from the financial to the social in Why Kim Kardashian Matters to the Stock Market, but I recorded that the day before my hip replacement and wasn't particularly lucid at the time.

Still, it maps how this Grand Experiment is and will manifest if calmer and cooler heads don't prevail. And as a father, I sure hope we wrap our arms around this thing before it engulfs us more than it already has.

My warmest wishes to you and your family, and all at MVHQ.

And to you, kind sir.


Twitter: @todd_harrison

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