Is a Return to A Bear Phase the New Back To the Future?

October 21, 2015

Mish's Daily

By Mish Schneider

For fun, many articles reported how accurate the film “Back to The Future” was predicting how life would be on October 21, 2015.

Some accurate predictions included big-screen TVs, video phones, drones, hands-free video games, video glasses, everyday athletic apparel and a limited-edition Pepsi Perfect. The film also predicted the Chicago Cubs might actually win the World Series. At this point baseball fans, the operative word is “might”.

What about the market’s Back to The Future Prediction concerning Phases?

I am a devotee of using 6 Phases and the inevitable continuum of the cycle of each of those phases. The S&P 500, which went into a bear phase (death cross) on August 28^th, crossed back into a Recovery Phase on October 8^th.

Another measure we use to gauge the strength or weakness of the phase is the slope of the 2 key moving averages-the 50 and 200 DMAs. With SPY, the 50 DMA slope is negative. That suggests a weak Recovery Phase for now.

The key question for phase watchers is how long any instrument will remain in its current phase before either deteriorating or improving further.

For consistency’s sake, I began the week looking at NASDAQ (The Farmer) and Semiconductors (The Wife he takes) and 20+ Year Treasury Bonds (The Cheese that stands alone).

Looking at the phases in those instruments, perhaps we can elucidate the future by examining the past.

NASDAQ (QQQs) was the last of the four indices to go into a Bear Phase. Currently, QQQs are above the 200 DMA or in an Accumulation Phase. With negative slopes on both the 50 and 200 DMAs, that phase is weak.

Semiconductors (SMH), one of the first of our Modern Family to go into a bear phase, was in an Accumulation phase for most of Wednesday’s session, but closed under the 200 DMA putting it back in a Recovery Phase. Furthermore, it has a possible reversal pattern with the new 60-day high, close on the intraday lows. Slope on the 50 DMA is positive, on the 200 DMA neutral.

20+ Year Treasury Bonds (TLTs) went into a bear phase (death cross) on June 11^th. Three months later, TLTs have changed phases often going from bear to recovery to accumulation back to bear and now back to recovery. Slopes on the 50 and 200 DMAs negative to neutral.

It is easier to make the prediction that the Cubs will not win the World Series than to predict where the market is heading.

Yet, using the phases, it seems that TLTs want to continue higher. If that is the case, we assume it’s because the FED wants to keep rates low, given the shaky global economy.

SMH failed the 200 DMA. It’s a long way back down to the 50 DMA now at 50.30.

QQQs under 107, breaks the 200 DMA with also a long trip back to the 50 DMA at 105.30.

Based on the continuum of phases, our Back to the Future prediction therefore, remains longer term negative.

S&P 500 (SPY) Couldn’t clear the 100 DMA. Found some support at the 10 DMA. The negative sloping 50 DMA is way down at 198.25

Russell 2000 (IWM) Unconfirmed return to a Bearish Phase

Dow (DIA) Like SPY, failed the 100 DMA. Now, 171.10 support with 170 pivotal

Nasdaq (QQQ) The 200 DMA is a key place of support into Thursday. Otherwise, we are looking at 105.31 the 50 DMA

Volatility Index (VIX) Yesterday wrote: “On August 21st, the volatility (fear) index started climbing. 3 days later, the market cracked. Today, VXX continues to defend that August 21st low.”

XLF (Financials) Negative sloping 50 DMA which this is still above for now at 23.35

KRE (Regional Banks) Has to hold over 41.28

IYT (Transportation) Unless this closes out October over 147.50 have to think lower prices coming

IBB (Biotechnology) An October close under 296 is troubling indeed

XRT (Retail) Could not get the second close over the 50 DMA-why we look for a confirmation on phase changes

IYR (Real Estate)76 (on a closing basis) major overhead resistance with 73.20 support

ITB (US Home Construction) Held up better than the others, but would not be long if everything else drops

GLD (Gold Trust) 112.80 the 200 DMA and pivotal

GDX (Gold Miners) 15.50 support holding

USO (US Oil Fund) Broke the 50 DMA and now back looking at 14.15 support

XLE (Energy) like this the best of the energy/oil group

TLT (iShares 20+ Year Treasuries) Even better over 124.60