(T2108 measures the percentage of stocks trading above their respective 40-day moving averages [DMAs]. It helps to identify extremes in market sentiment that are likely to reverse. To learn more about it, see my T2108 Resource Page. You can follow real-time T2108 commentary on twitter using the #T2108 hashtag. T2108-related trades and other trades are occasionally posted on twitter using the #120trade hashtag. T2107 measures the percentage of stocks trading above their respective 200DMAs)
T2108 Status: 36.6%
T2107 Status: 68.8%
VIX Status: 17.5 (a 40% 1-day gain!)
General (Short-term) Trading Call: cautiously bearish
Active T2108 periods: Day #143 over 20%, Day #49 over 30%, Day #1 under 40% (new underperiod ending 47 days over 40%, 46 days over 50%, and 2 days over 60%), Day #25 under 70%
Commentary
It took a whole NINE trading days, but the entire scenario I laid out in the wake of Jackson Hole on August 26, 2016 FINALLY came to pass on September 9th.
Sellers abandoned the building with reckless abandon (as represented by the Seinfeld character George Costanza).
After Jackson Hole, I flipped my short-term trading bias from neutral to cautiously bearish as I braced for an increase in volatility in September. While the extended delay surprised me, I am even MORE surprised that all the calamity happened in just one trading day with almost no additional build up. I start with four charts that tell the entire story (with captions).
The S&P 500 (SPY) finished what it started nine trading days ago. This time the index gapped down, lost 2.5%, closed at its lows, broke the recent trading range, and, for good measure, broke down below support at its 50-day moving average (DMA).
The Nasdaq (QQQ) also lost 2.5% but it just barely cracked 50DMA support.
T2108 loses a whopping 24 percentage points on its way to a plunge quite similar to the first day of post-Brexit trading.
As the old adage goes, low volatility begets high volatility. A near 2-month trading range that scraped at rock-bottom levels resolves to the upside in a massive 40% one-day gain.
The alarm was caused by a barrage of Fedspeak and the feared Fedspeak to come ahead of the September 21st pronouncement from the U.S. Federal Reserve on monetary policy. After the dust settled, financial markets still expressed disbelief in the September rate hike scenario. The odds for a hike in December surged from 51.4% to 59.2%. September has been a wild month already with rate hike expectations going from December on to December off/March on and now December on again as economic news and Fedspeak have crossed up markets. My best guess is that the Fed scheduled the current barrage of chatter to begin convincing markets that a rate hike is coming in December no matter what. The Fed will NOT hike rates in September against the market’s expectations. The renewal of excited media speculation over a September hike serves the Fed purpose to set up a long runway to a December hike. Imagine the (temporary) relief that will come after the Fed fails to hike rates in September while at the same time signals a near certain December hike: “yay – only one rate hike this year instead of two!â€. That meeting will likely be yet another great opportunity to fade volatility.
Less than a month ago, the market did not expect the next rate hike until March. In September expectations have already cycled from December to March and back to December again.
Source:Â CME FedWatch Tool
So once again T2108, the percentage of stocks trading above their respective 40DMAs, proved its enduring value. T2108’s on-going bearish divergence with the S&P 500 preceded this (so far) mini sell-off. I ALMOST got fooled by a brief flash of bullish divergence two days before the sell-off. However, I stayed committed by observing that T2108 had yet to return to overbought status. Of course, my main regret, with hindsight, is that my bearishness was cautious. As usual, this kind of panic selling presents a difficult dilemma for bears: the rubber band is stretched pretty far and can snap back at any time…and violently. So, I am not downgrading from cautiously bearish to bearish for several reasons:
