I had made a mistake. But where? I was bearish in a bear market. That was wise. I had sold stock short. That was proper. I had sold them too soon. That was costly. My position was right but my play was wrong.
— Jesse Livermore

As I write this, the markets have swung from 201 to 197.5ish back to 199 in the SPY. The swings have been wild and back and forth. Bulls will argue that the economy isn't as bad as people are making it out to be and central bankers are on your side (Super Mario). Bears will argue that we've come too far too fast and we're setting up for a violent failure, market breadth is dampened, and leaders/momentum is rolling over. 


Well, and I mean this without it being a cop out, both parties are correct in their assessments. We're in a position now in the markets where our accustomed leadership is waining (think #FANG)  and the bears have seemingly lost control in the last several weeks. This sets up for one of two possible scenarios; 

  1. The bulls have regained control as we've tested the last trend and are back to resume an upward thrust
  2. This is the last stage grand hoorah before we obliterate everything in a cataclysmic ending

Well, technically there are three scenarios. But the third scenario is one that will yield back to the first two;

  • We chop around in a range until the bulls or bears reclaim complete control and we continue in a directional path. 

For people like us, this means we're left with limited options. The times of buy and hold are likely over -- at least until further notice. We've got a flat 100MA, 50WK MA 100Wk MA and 200DMA overhead. A literal tug of war between the bear and bull camps. Positions that have been on for years are starting to unwind (#FANG distributed and short covering in depressed energy assets). The moves are subsequently violent as those who look to get out are getting out and those who are finding "value" are getting in for "the next leg" whatever that means. 


First of all, ignore all the bullshit you read/hear. It doesn't fucking matter. Having an opinion doesn't fucking matter. The only thing that matters is price. 


As we see above, the SPY longer term monthly trend remained in tact with its most recent test of 1800. This case emboldens the bulls to make the argument that we are still in trend and we have corrected. Furthermore if you look below, you'll see a chart of previous bull market bursts and their respective PE ratios at the peak. In this market we have been trading between 16-18x for quite some time now and the overwhelming euphoric conditions have simply not been there. 

SPY PE Expansion in Bull Markets

Markets like this are designed for those who are "professional" in demeanor and nature. Point your attention to the figure below to understand how markets like these (when/if healthy) will and do work. 

As you can see from the figure above markets suck in both buyers and sellers at max pain points 

Though the above illustrates a bullish outcome, the reverse is also very true. In many cases issues resolve to the downside. When that happens, market declines typically precipitate and escalate more violently than the upswings. With the bull market top currently closer than the recent lows, it's difficult from a risk reward perspective to buy the top expecting higher. Thus is the bear case. In addition, economic outlooks don't give an optimistic view. 

In addition, we've seen earnings decelerate for more than a year now. Earnings beats are coming more and more from operational efficiency than revenue growth. That means businesses are getting leaner to beat expectations and not growing as fast. This deceleration in growth is troublesome because at some point companies need to continue to grow as there is only so much businesses can do to "trim the fat."

Again if you refer to the above charts, we have lots of overhead supply, MA's rolling over on larger time frames, and overall markets decelerating. Lack of breadth and leadership continues to be the theme and the previous outperformers are not participating. 

In the end, we're at an inflection point. Either we see new market leadership and this will push us out of our most recent swoon. Or we will fail as economic conditions catch up with the deteriorating breadth/trend.