The Five Stages of Herd Disbelief

May 4, 2017

Mish's Daily

By Mish Schneider

blankWhy do some cows choose to bask in the sun while others choose to hang in the shade?

Turns out, cows may tolerate heat well, but add humidity to the mix and their comfort and performance declines.

Furthermore, the quality of the shade matters too. Cattle (or the herd) squeezed together for shelter create even more heat and humidity.

Why are some aspects of the market tolerating the heat and humidity while others find more comfort in the shade?

A copy of Market Overview: The Five Stages of Disbelief crossed my desk.

The report states that, “it helps to start at the top with the macro to get an idea of what your background timing is.” Macro Intelligent Report May 3, 2017

In the spirit of the cows who instinctively decide whether or not to use natural shade to escape heat, how do we know when to stay in the sun or run for shade?

The first of the two stages in Five Stages of Disbelief, the market is currently beyond. Seller exhaustion and those who may have initially bought but are essentially now aside. Both stages are driven by bleak social moods of the “herd.”

In Stage Three the cows divide between the sun worshipers and the shade dwellers. Social mood balances out. Bears buy. Optimism emerges. The cows in the sun lay down.

In Stage Four, the social mood increases. The Bears in the sun begin to call a “top” because this strange mood shift to the hotter shade appears delusional to them.

Logical stats may not support the rally. But just like more cows scrunched together in the shade do not support the heat logic, no matter for the Bulls or the cows.

The final Stage, the Bears throw in the towel and buy. Retail investors pile in. The economy begins to run hot. The market becomes crowded.

Like cows huddled together in the shade, buyers may be hotter but could care less because they feel safe inside the closeness of the herd.

What the report suggests rings true. Until you have euphoria strike the herd where all cows believe they will be happier in the shade, the run to it continues.

That makes the remaining cows in the sun the contrarians and the ones in the shade part of the herd mentality.

How can we know when the euphoria abates?

For one, the Modern Family helps a lot. Still divided, if they all decline in unison, watch out. Also watch the unemployment numbers and other leading indicators. Presently, most are still in a strong uptrend.

Secondly, watch investor appetite for junk debt. If smart money runs from high yield junk, warning.

Finally, watch Europe. The French vote this weekend is key. If La Pen wins, Populism has a history of negatively impacting markets.

At some point, the cows in the shade will lose faith. That’s when those in the sun will find themselves the new leaders of the herd.

S&P 500 (SPY) Sideways 239-240 resistance 236.35 key support

Russell 2000 (IWM) 140 pivotal. 141.50 to clear and 137.10 to hold

Dow (DIA) Resistance at 210-212. 207.40 support

Nasdaq (QQQ) 136 support

KRE (Regional Banks) If clears 55.40 better.

SMH (Semiconductors) 80.00 super pivotal

IYT (Transportation) 161.50 support and through 166 much better

IBB (Biotechnology) Needs to hold 292.25 and clear 300

XRT (Retail) 43.83 the 200 DMA and 42.40 key support

GLD (Gold Trust) 115.55-116 in focus

XME (S&P Metals and Mining) 28.00 interesting support level-if holds will watch for a reversal

TAN (Solar Energy) Nope-could not hold gains

TLT (iShares 20+ Year Treasuries) 120.77 to 120.17 support held. Then, 118 next. Resistance 122.50

UUP (Dollar Bull) 25.50 area support on multiple timeframes. Over 25.66 could see more

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