Summer Rally Is Here
The bubble just seems to want to get bigger through the Summer
We ought to be in the early stages of a very strong Summer rally, carrying us into September and perhaps up to - and past, the election. The bottom we were looking for appears to be in, and this was confirmed by our “Drop Terminus” signal:
And with a bit longer history:
It’s just not a signal to argue with.
John Bollinger has a proprietary signal he shared with me, which uses altegether different inputs than Drop Terminus, and it, too, is showing a strong buy in here (sells for this indicator are in red, buys in green):
The selloff since the highs in Q4 has happened, essentially, in slow motion - my worst-case scenario, where deep out-the-money puts, with short times to expiration, just kept burning out. I thought we would get a 1987-type selloff, and it never happened. Then, much to my surprise, in the past month or so, things have been setting up for a buy. Now it appears things are set to rock n roll for a bit, and I wouldn’t be at all surprised to see the major equity indexes touch new all-time highs this Summer, further exacerbating the bubble, before finally blowing up later this year in Q3 or 4.
In the last letter, I advised not going long, not acting on this current situation, until daily new lows were less than 4% of all issues traded. This happened on Wednesday of this week, setting the table to be buyers on Thursday. Bear in mind, new lows were greater than 4% each day and the Dow plunged 2,679.50 points. New lows are a major indicator in selloffs and not to be ignored. I’ll have a lot more to say on this, going in-depth on it, on the new Market Systems, Indicators, and Filters as this year wears on.
Further, the OECD leading indicators are up from the previous month, and have been since February, and this is a very positive sign. AAII sentiment “All bulls,” again reported in at < 20%, which has historically marked ideal buying times in the past, and we had a Demark Sequential buy in the indexes as of the close on Monday, May 9.
Most importantly, however, in addition to the Drop Terminus signal and the new lows receding here, is what has transpired with respect to the credit markets and with inflation in recent weeks - this is very important.
Adam Robinson, whose LQD/IEF ETF ratio, which I dub “Adam’s Apple,” and has been very negative, has found support at the Russian Invasion lows, and has since bounced off of that level - a bullish sign:
And junk bonds, as expressed in the HYG ETF, has had it;s biggest few up days in a very long time, and is now bouncing hard:
All of this is very bullish, but I believe the real driver in this is that inflation, as measured by the NY Fed’s “Underlying Inflation Gauge “(UIG) , has topped and now rounded over. UIG tends to give the real trend of inflation, is less noisy than CPUI or CPI Core, and has demarcated the major inflation moves. As you can see, UIG is now saying inflation should be subsiding, with its latest reading at 4.86 vs 4.91 the previous month:
Lastly, Insider Buying paints a bullish picture as well:
Opinion: Strong insider buying suggests a 15% rally in the S&P 500 from here
In sum, I think we’re into a very brisk, persistent runup that will surprise most this Summer, causing everyone to amend their now-bearish forecasts. Consider that a run to new highs in, say, the SP500 would be a move of roughly 25% to the upside from here.
Ultimately, I think the bubble gets puffed up bigger, and any current bears give up from exhaustion in the coming months before the real selloff, the real bubble pop that I am expecting to be of historic proportions occurs.
Check out Market Systems, Indicators, Filters for an in-depth, monthly analysis of the tools used here.
More as conditions warrant.