“Get too complacent and market will find a way to punish you.”
Another week is behind us, and finally we have some action. One week everything looks ok, markets on all time highs and then one day everything changes. It seems that new Sars-Cov2 variant spooked the market gods. Even though Friday was a short trading day we had a pretty decent sell off. The question is what changed, what are my models telling me and what can we expect in weeks, months ahead? Can we expect another plunge like we had in March 2020? I will try to provide an answer in my analysis.
Please not that my view is mid to long term, meaning weeks or months into the future. When I am bullish markets it does not mean that next few days cannot be red. In majority of cases I adjust my portfolio on weekly bases trying to filter out the daily noise. Only rarely I adjust my positions based on daily stock market moves.
For the first time in a while, number of sectors that underperform SPX increased to around 60 %. Which sectors Outperform and which Underperform.
I am adding new section, where I address sectors which are performing well but underperforming S&P500; I consider these sectors as neutral with potential; follow this link to learn more.
Friday’s sell off shuffled the cards also in RISK ON/OFF area. How serious is it? I provide an answer here.
Longterm main models
After a long time I see some changes in my Longterm models.
Both longterm models switched to #neutral.
- Weekly Longterm model – quick spike in VIX created a potential buying opportunity (black dot), but I would wait for confirmation next week.
- Daily Longterm model – also on daily chart VIX spike created a potential buying opportunity. If this was just a shake out then this could be a perfect opportunity; couple of times (see chart) this was a pullback low. I am not sure that also in this case it will be the same. Why is that, read further.
To learn more about my models, check this link.
Midterm main models
3. Weekly midterm model – no major change here, SPX was rejected at upper BB line.
4. Daily midterm model is more telling, a rare sell signal flashed. See charts for instances since 2007 to 2021. It appeared before 2008 bear market, 2015 correction and 2020 Covid crash. Does this mean a major correction is coming? It could be. See charts 4 for more explanations.
Midterm daily model is #Bearish. Caution advised.
To learn more about Midterm model, follow this link.
3. Weekly – Midterm model – 1 month New highs-new lows line contracted further, nothing dramatic yet, but keeps alert. 
4. Daily – Midterm main model – both oscillators are in neutral territory, volume oscillator is on the border of bear territory. This model indicated a rare sell signal (PL), which preceded some other major corrections. 
PL sell signal before 2020 Market crash. 
PL sell signal before 2008 bear market and before correction in 2015.
Outperforming/underperforming sectors
New trend strength indicator:
I added a new indicator with which I track performance of sectors. Second panel from bottom up. Purple line represents trend strength of underlying symbol; while orange line represents relative strength vs. S&P 500.
If both lines are moving higher and they stay in green area this is bullish; the opposite is true if both lines are moving lower and end in red area.
Green triangle: Strong absolute trend – Bullsih
Black triangle: Strong absolute and relative trend – Very bullish
Red triangle: Weak trend strength – Bearish
No sign: Neutral
Outperforming sectors
Sectors that outperform SPX shrank to 3 – QQQ, SMH and XLK, but even they show weakness.Broader market underperformance on the horizon?
See charts for more explanations.
Underperforming sectors
Market is showing some weakness I would not rush to buy underperforming sectors. General advice; stay away.
See charts for more explanations.
ARKK – held surprisingly well on Friday 
GLD – still underperforms SPX, but could be forming a bottom. 
ILF – still not the time to rush in and catch falling knife. Bottoming is a process. 
EEM – new lows, stay away 
FXI – China – continues to disappoint, stay away. 
RSX – from market leader to big underperformer in a matter of two weeks. 
IWM – back in range 
E50 – yikes, just terrible 
XME – metals
Risk ON or OFF environment?
Some changes also in this area; although SPX still overperform TLT, GLD, XLU and XLP; we are seeing that investors like more safer treasury bonds TLT and IEF over JNK junk and HYG high yield bonds.
Traders are still in Risk ON mode, although some Risk OFF signals appeared.
See charts for more explanations.
DIX/GEX (Squeeze metrix data)
I do not post DIX analysis in my weekly commentaries. I will make an exception this week. Dark pools were buying into the sell off on Friday. They are usually pretty good BUY indicator, although sometimes they are too early. See charts for more explanation.
If I see a cluster of buy signals in next weeks I will start buying stocks again.
Not all is bad, Dark pools bought into the dip!
Conclusion
Midterm daily model issued a sell signal; other models turned from bullish to neutral stance.
Many failed breakouts in small caps as well as in mega caps (MAGA index). Majority of sectors do not looks so good anymore.
There are very few strong sectors – Nasdaq 100, Technology and Semiconductors. On the other hand defensive play treasuries TLT had a big move up.
I moved 50 % to cash as of Friday. If my other models turn bearish I will go 100 % into cash.
Be cautious, stay healthy and good luck.
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