Lee AdlerI believe that the behavior of the list in the last couple of weeks indicates a market undergoing major transition, where cyclical factors appear conducive to supporting external shock. …
I have chosen 4 short sales this week ….
The Treasury market faces growing fragility as Primary Dealers are forced to absorb a relentless supply of government debt. To manage this “deal with the devil,” dealers have turned to extreme financial engineering, ballooning their leverage through repo markets and complex hedging to keep prices stable. However, this mountain of offsetting long and short positions has created a precarious equilibrium; any sudden widening of the narrow gap between cash and futures markets could trigger a rapid, uncontrolled unraveling of hedges.
Cycles are in gear to the downside, except for the 4 week cycle, which has extended beyond its ideal bottom window. The 6-7 week cycle projection of xxxx is an outlier for now, but if projected channel support around xxxx breaks, this could turn into a steep, fast decline to much lower levels. The next support area is around xxxx.
The market is at a critical inflection point as the S&P 500 completed a top by closing below 6700 last week. A morning rally has rebounded to trend channel lines. While some short-term indicators suggest a potential low forming by xxxx xxxx, the broader cycle data—including a strong sell signal on the Cycle Wave Composite—points toward an increasingly bearish long-term outlook.
I believe that the behavior of the list in the last couple of weeks indicates a market undergoing major transition, where cyclical factors appear conducive to supporting external shock. But so far, this view has not manifest in the stock screens of most listed, actively traded stocks.
The cycle structures have become clouded, as the price of gold is whipped about on rapid-fire geopolitical developments. The structures now argue for a trading range until there are clear indications that the 9-12 month cycle has entered a down phase, due to begin in April.
I set numerous sell orders for last Monday’s open, with most of those taking sharp losses. Small consolation that it would have been worse had I not done that. And the picks I left in place—energy longs and a short, did ok while 2 new picks on the short side treaded water.
The market is positioned to open below a significant top pattern, with technical indicators and cycle analysis suggesting an increasingly likely down phase and major trend weakness.
The federal budget deficit continues to expand as government outlays outpace revenue gains. Withholding tax collections grew strongly, belying the BLS nonfarm payrolls data for February. The tax data indicates a stable employment trend.
The Fed is doing just enough. Repo growth has flattened, leverage may be unwinding, and long term liquidity/sentiment measures remain historically extended. Yet nothing has broken. The bull is on life support, and the next 60 days will tell us whether the seasonal liquidity tailwind buys it another leg or the exits start getting crowded.
Cycle based screening methodology struggles with rangebound markets where wave frequencies go hyper, amplitudes are large, and/or the market is whipped around by news. The idea is to survive those periods, and then be well positioned for the next sustained trend. We’re in survival mode now. The list has been mostly minimally positive during this rangebound period, but the meatgrinder effect finally appeared last week. The market chewed us up and spit us out.
The S&P 500 is currently testing key support levels within a short-term downtrend channel following the US attack on Iran over the weekend. While short-term cycles suggest a possible bottom, long-term momentum is weakening, placing the market in a high-risk window. We need wait and see for one or two sessions, to estimate whether this action deflects the market to a lower trajectory, or merely creates temporary distortion.