Against my better judgement -- and every logical cell in my DNA that would advise me to avoid this course of action -- I feel it is time to take a leap of faith regarding the markets. At times, one needs to listen just to their gut. It is, in fact, a trait that we are told we need to possess if we are to become a trader or an investor. Science and logic aside, failure to follow one's instinct (that nagging little voice in our head), being led by fear or greed coupled with stubbornness, can lead to the demise of even the most successful hedge fund managers.
One does not need to be a religious person to take a spiritual "leap of faith." The markets have been in a brutal range, violently whipsawing between 2600-2800. Mind you, these types of moves are usually witnessed over quarters, not days! We have had six of them in just two months... I am surprised the grocery stores haven't run out of antacids recently.
What do the trading gods have in store for us this December?
At the risk of sounding like Trump, the markets are on the cusp of some "very very" big meaningful technical levels. We are back to highs in bonds -- with the iShares 20+ Year Treasury Bond ETF TLT at $118.5 -- lows in the S&P 500 (SPY) (2600) and a host of other key U.S. indices. If we fail here, make no mistake, we can move down past April 2018 lows, even as machines and algorithms take over. Conversely, if we manage to hold and break above 2800, happy days! This is where spirituality can come in handy, as the "bigger" picture suggests it is in no one's interest (Trump, China, Fed etc.) to see the markets collapse. Call me naive, but the Fed has been trying to send dovish signals and President Trump benchmarking the success of his presidency to his precious stock market make one "believe" that they will not let this market get out of hand?
After a trifecta of macro events last week, we still have the central bank meetings of the ECB and the Fed FOMC to watch for next week, before we can officially wind down (with respect to liquidity) for the Christmas holidays. From experience, bear markets do not move in just one direction. Markets usually fluctuate violently at key inflection points in the cycle. We are closer now to a recession or chances of an economic slowdown unless we see signs of stimulus, earnings expansion and trade settlement to give investors confidence and evidence that numbers can move higher sustainably.
The Nasdaq remains inside its wedge. It has room to move lower, but still remain inside the trend, so to speak. But looking at the Moving Average Convergence Divergence, Relative Strength Index and high-to-low ratio, these lows that hit last Friday came on a positive divergence. In layman's terms, even though we tested back down to the lows of December, the momentum underneath the surface indicates a positive build-up here.
This week is do-or-die for the market. The tug of war continues, as sellers and buyers pull the market on either side. If bears are to win, monthly trend lines need to be broken. We have had all sorts of boulders thrown at this market in the past few weeks -- but a collection of bad news and bears have not managed to break it, yet. Mind you if we have the slightest bit of positive news on U.S./China relations or Fed policy and the U.S. dollar outlook, we can have a nasty squeeze into year end.
Fundamentals aside, we have all become chartists, as that is the liquidity that is dominating markets currently. We need to see a weekly close back above the weekly 50-day moving average, which currently sits at the 2750 level for the S&P 500. If we manage that, then one can hope for a Santa rally.
Get your lucky charms, garlic bands and rabbit feet ready; it is time to believe in the divine.