Where Is The Bottom?

Yesterday, another selling wave hit Wall Street. The S&P 500 has now lost more than 10% in just 9 trading days. While in our semi-annually outlook published in December (www.cv-invest.ch) we were expecting a weak start into 2018, we were surprised by the magnitude and the speed of the decline. The sell-off certainly hurts but putting it into perspective, it sill looks rather shallow considering the massive gains in the months and years ahead.

Also, while we have always warned that this bull market will end in tears, we do not think that is has already ended. Forming a major top is almost always a process that takes several months. Like the transition from autumn into winter, when the leaves beginn to fall from the trees in a very gradual process. One after the other until the trees are eventually bare at the onset of winter. It is our guess that this process has started now and months of volatile trading with no clear direction might be ahead of us.

Short-term we have an increasing number of signs that we are close to a significant rebound:

  1. Sentiment indicators such as the ARMS index, volume, the VIX and McClellan have spiked massively on February 7th, a sign of panic. This is almost always a good indicator, that the worst is behind us. The fact that they haven’t reached new highs yesterday is encouraging and increases the odds of a tradeable bottom
  2. The daily RSI in most indices is in oversold territory and has formed a bullish divergence. The S&P 500 has closed between the 23.6 and 38.2% retracement of the 2016 rally (2624 and 2469). The 200day moving average as next support is at 2538, 43 points below yesterday’s close. Interestingly, the future has already tested this support in the night session on February 6th.
  3. While be believe that the main reason for the decline was the overbought, overbullish sentiment, rising rates in the U.S. certainly didn’t help. In the meantime, the consensus is that rates will continue to rise. But the charts are telling a different story. The 10yr yield, trading at 2.85, has formed a weekly divergence and also look very overbought on the daily chart. The same applies to the 5yrs. It remains our (contrarian) view that yields will not break out to the upside and and rather will fall in the months ahead (also expressed in our outlook)
  4. While being a long-term bear on the dollar, the greenback looks increasingly oversold. It has reached the 61.8% retracement and a weekly divergence calls for a technical rebound. This would certainly ease current inflation fears.
  5. U.S. high yields so far have managed to hold above key support. Being increasingly oversold, a rebound can be expected. Still, we continue to watch high yields closely as the could trigger a far bigger correction.

To summarize, we view the current correction as being close to a bottom and the odds of a significant rebound are rising. At the same time, it is likely that it is only the first leg (a wave) of a correction and that wave c will unfold following the rebound. For traders the coming sessions could offer a great opportunity while for investors, it is advisable to sell into strength.

The next few months will be key if this is only a correction within the 2009 bull market or if a major top is forming. We continue to believe in the latter…


On a different note: Attending many meetings in the past few weeks, it became clear that a lot of investors were worried about valuations and the near vertical rally. Their message: We wil get out once the tide turns. Recent sessions have shown that this will NOT be possible. You have to sell ahead of everyone else!

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