The equity market is perched upon another potential inflection point with the arrival of the usually challenging month of Feb. I have been writing about December since it unfolded and how the message it sent is up in the air IMO. The accuracy of assessing Dec’s message could determine the direction of stocks for several months?

First the popular conclusion (initially mine as well)  is the carnage wrought is an indication of a possible crisis ala 2008 and/or a recession on the horizon. You probably know most economists are not seeing seeds of a recession in most current economic data. Since October the rhythm of the sell off had me scratching my head as the feel was more distributional than normal. That feel stayed all the way until the Xmas eve massacre. Combined with no true capitulatory type day, I thought something was amiss. This was evidence that something else was in the market message?

Late in December I came across more and more info about how many Hedge Funds were closing due to lack of performance. This led me to believe all these money managers might be unfolding would be more evidence HFT had some traction? The last trading week of 2019 the right side of the V began to form.

Apple saved their nasty preannouncement till the 2nd day of the New Year, apparently so that money managers would not have an even worse 4th qtr. The next day I wrote if stocks ignored the mea culpa, it was more evidence of the Hedge Fund Theory. Stocks rallied over 6% the next 5 trading days and the S&P 500 has lifted about 15% from the Xmas eve close…that’s a lot!

If HFT is legitimate the true low should have occurred around Thanksgiving when the index was near 2630. In my work a picture perfect double bottom positive MACD divergence formed there. Here’s the proof, you can see SPX rallied 5% in a week off that signal.

Only to fail and cascade into Xmas. It tried to find another bottom in the same area on Dec 10th with a hammer bar, but the selling was too pervasive.

If HFT holds sway then the SPX is only 3% above the should of been Nov bottom. The message I take away is less about massive upside (which could be there) and more about limited downside. It was a disappointment that Friday did not provide follow through with strong employment # and it being the first trading day of the month.

With all that said IMO the key level is the 2800 level. I showed this chart a few weeks ago where a right shoulder could form there filling out a classic Head & Shoulder pattern. A blast through that level would indicate the Bull market is clearly alive and well. At which point Fed Head Powell will become a hero, leaving leaving the BS goat status he received behind.

My Hedge Fund Theory does not preclude a crisis or recession 12-18 months out, but puts odds the market will go further faster than most think. So far so good. My guess is Feb brings a more extensive consolidation period, hopefully with volatility to provide some decent swing trades. Still a little concerned that Friday’s should of been blow off was a dud. Hope it was not a bigger tell?

Final Thought –

“Instead of getting married again, I’m just going to give a house to a woman I don’t like”  – Rod Stewart

More later,
Max Power

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Disclaimer: Remember everything I said could be wrong, the market always has the last word.

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