Market Thoughts: AAPL Falls and 4 Reasons Market Can Bounce

by | Jan 2, 2019 | Daily Weather Report, Market Thoughts, Newsletter

After posting my latest newsletter Monday (12/31), I entered the New Year with a short-term bias for higher into NFP Friday – continued Santa Rally which started day after Christmas ironically enough – but weaker into earnings season. Here was my tweet – with sentiment/price targets detailed in client newsletter: USDJPY $108 to start with SPX $2277.

Flash forward and AAPL just pre-announced BY ONE MONTH with negative guidance and fell 7% afterhours tonight. Suddenly, currencies were in some pain and USDJPY collapsed from $108.90 to $104.87 in a flash crash – and during a low-liquidity day when Japan’s markets aren’t even open until Friday. Unless by some rationale I do not yet understand, I suspect the ‘pile on’ effect by other cos that follow AAPL – assumed or actual lowering of guidance – will likely negate The January Effect and cause Tech to continue selling down into their reports, at which time I would be more inclined to nibble long. By that time, the earnings bar should have corrected with price and potentially set up a potential for a beat. But I’ll worry about this thesis as we approach individual company reports.

For now, I am trying to spy potential bullish triggers that could accompany/spur on a relief rally once this bad AAPL is done selling off and dragging ChinaTech with it.

Hedge Fund Armageddon. This could be bullish!

I read today 580 Hedge Funds shuttered their funds Monday. That’s the largest going-out-of-business-sale in this space since 2008. For some, that means opportunity: 

“If you look at Q4, despite only a small drop in the S&P, it has been one of the most painful that my friends or I can remember. There are lots of guys down 20% to 30% this quarter and suddenly forced to de-lever further, to get their risk ratios in order. This sort of pain and indiscriminate selling creates lots of opportunities….
Many of the companies that I am buying are down more than half this year—some are down a whole lot more. It’s the most exciting opportunity I’ve seen since 2016…
I suspect that even if the overall market is down dramatically during 2019, the bargains of late 2018 will shine given their current valuations—especially as many institute buybacks to soak up the newly freed up shares hitting the market.
Christmas has come early once again—at least in the stock market—I might as well take advantage of hedge fund Armageddon.” @AdvInCap

Equity risk premium reaches historic extremes. This could be bullish!

According to Sentimentrader.com, the S&P’s earnings yield has jumped to nearly 6%. The comparison between bond yields and stock yields is often referred to as an Equity Risk Premium (ERP), the amount that investors are willing to pay for earnings above/below the yield on bonds.
When the ERP Z-score reaches extremes of 2 or above like we saw one year ago, the average annual S+P return is -4%.
When the Z-score reaches extremes of -2 or below, the average annual S+P return is 40%.

Dumb Money Bullishness reaches historic extremes. This could be bullish!

One year ago, dumb money bullishness reached extremes of 77% during much of December and January.
At the February bottom, dumb money bullishness hit a low of 27%.
As of yesterday’s close, dumb money bullishness spiked down to an all-time low of just 12% while smart money bullishness stands at 75%, just shy of a year high. According to Sentimentrader.com, “When Ma & Pa have gotten this despondent, tech stocks rallied an average of 29% over the next year.”

Two-Bar Reversals Today Were Negated. This could be bullish!

Back on December 4th, I spied and posted a very rare and bearish pattern in the indices. All three indices traded lower for days at this turning point.
Back on December 14th, the exact same thing happened again and it proved prescient. All noted indices traded lower for days at this turning point.
Today it happened again and I was watching intently to see if the pattern would confirm so as to enter a LRE (low risk entry) short, but it didn’t. In fact, the SPY made a 2.2% reversal within 45 minutes over lunch and the Two-Bar Reversal was negated. So no confirmation = no trade.
But when a bearish technical event does not confirm, that’s potentially bullish.

What Worked Well

For giggles, here is the 2-bar reversal that triggered on Dec 4th at 10:30AM. For example, DIA (although SPY + QQQ were also affected) was $258.73 and proceeded to trade down into a low print thus far of $216.97 Dec 26th before reversing for Santa/Seasonality. SPY was $279 with $234 low and QQQ was $172 when I sent my alert, hitting low of $143.46 Christmas Eve.
That’s how powerful this indicator can be in your swing trading toolbox.

Week Ahead

The AAPL surprise will really test the market now. It will certainly test my Santa Rally thesis!

Wednesday  – Global Manufacturing PMIs. The 1st day of a new year is Traditionally an up day as institutions start buying for the new reporting year. In theory, it is the start of earnings season, and 69 companies report, although the first reports on consequence are JPM. WFC and UNH on Jan 15.
Thursday – The ISM PMI and Prices Paid prints are important (expected to decline). The ADP jobs report is due in and an indication of Friday’s NFP. The API oil report is two days late due to the holidays and Japan is closed.
Friday – Nonfarm Payrolls are due in with estimates a little lower than usual. Given recent mood of market, the market may sell off on a good print and rally on a bad one – all based on the irrational hope that the Fed will modify their rate path based on it. Silly. Markets will more likely try and glean sentiment from Powell as he joins a panel in Atlanta with previous Fed Chairs Yellen and Bernanke. Japan’s markets open for 2019.

 

Wishing you a Very Happy New Year with less volatility!

Samantha

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At LaDucTrading, Samantha LaDuc leads the analysis, education and trading services. She analyzes price patterns and inter-market relationships across stocks, commodities, currencies and interest rates; develops macro investment themes to identify tactical trading opportunities; and employs strategic technical analysis to deliver high conviction stock, sector and market calls. Through LIVE portfolio-tracking, across multiple time-frames, we offer real-time Trade Alerts via SMS/email that frame the Thesis, Triggers, Time Frames, Trade Set-ups and Option Tactics. Samantha excels in chart pattern recognition, volatility insight with some big-picture macro perspective thrown in.

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