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Is the S&P500 consolidation over? Intermarket, Relative Rotation Graphs, Insider Trading says no

You must be wondering why you haven't seen me writing for months, and all of a sudden there is not one but TWO posts in a week. Have you seen the Walking Dead? That's because Zombies tend to come out at night. So here we are at a point of uncertainty and fear, we zombies can smell that, so here we are.

In my last post, I warned of further weakness.

A deeper look under the hood of the S&P500 engine will show:

1. Bull market on, but correction might only be halfway.

a) Treasuries look to rotate upward, this historically signals temporary bearishness to the stock indices. b) The true experts are betting money in this direction.

2) Hence, it's in good risk / reward to be more defensive. Keep more cash until where is more clarity. Keep an eye on utilities, telecoms, gld and slv. Both gld and slv are consolidating.


Sentiment Analysis ripe for more correction.

Someone shared my last post to a major trading house broker (one of the big ones), for his thoughts. That guy dismissed my entire report, parroted the great economic numbers talking points and remained bullish.


FYI. When insiders are bearish, and broker-dealers are bullish with old talking points, it means that the stock index have more room to decline. This is part of sentiment analysis, because broker-dealers feedback their advice to retail investors, and retail investors are usually the last to react. The broker-dealer's automatic dismissal of deeper questioning is emblematic of this chart here.

Red lines are when there are more than 3x the bullishness from broker-dealers compared to bearish ones. When the red lines get too excessive, it may signal a long consolidation. Which was my concern. Notice the 2015 to 2016 consolidation, it lasted more than a year.

Stock market tops occur at peak employment.

By the way, we have great unemployment numbers for sure. But the start of bear markets occur when those numbers are at historic values. I'm saying this means a bear market will start, but I am saying that improving unemployment usually fuels a bull market, when employment numbers peaks out, that's when bear markets can start. You'll see that by looking at the cycles starting from 2000 onward.

The same peak-like behavior exists on the famous "Buffet Indicator".

Recent market action - things that make you go 'hmmm'.

Since the last post 2 days ago, where I warned of weakness, the S&P 500 had a short 1 day up-candle followed by downward pressure. It is now creeping on major support... the longer the creep after a sharp move down, usually is the higher the probability of breaking downward. Breadth, intermarket and investor intelligence analysis is used to confirm which way as time goes. I'll write about that if the consolidation lasts long.

The question is this: which way will the consolidation go? Either it breaks downward, or it recovers.

Here at Quantzombie, we know that the markets are about probability. We can't say with 100% certainty what the markets will do, but we can say which way is more probable. At the moment, it's downward. Also note that we also do think we are still in Bull Market mode, but that doesn't mean we can't have a longer correction or consolidation than we've had in recent year.

Why the Consolidation may not be over:

The 10 year treasury yield is only starting to turn over.

This means money is starting to go into bonds. A portion of that money will come from the stock market, because investors don't have a lot of cash lying around. They are already at historic levels of margin debt.

In the last 2016 consolidation cycle, the consolidation is ready for an up move when bond yields bottom out, as seen here. This chart shows the last 10 weeks of relative strength of treasury yields vs the S&P500 during the end 2015, start of 2016 correction.

The Utilities Insiders seem to agree with this view.

Record insider buying of utility companies by CFOs, seem to corroborate this. Utilities stocks tend to go up when bond yields go down.

People are starting to get into defensive stocks. The Consumer Staples is only starting to turn up, but Utilities improving for a bit.

Bonus add-on (29 Match 2018)

The daily RSIs look oversold, but there is still more room to go down based on "strong-weak" money distribution.


1. RRG, Intermarket, behavior of bonds to the likelihood of more consolidation.

2. The longer there is no sharp recovery of the "double bottom" of the recent consolidation, the higher the probability of a further breakdown in price.

3. A breakdown in price doesn't mean the bull market is over, a look at longer term averages show that you could drop another 5% to 2490 on the S&P 500 and still be considered by most technical analysts to remain a bull market. (this may be a great time to re-enter the market, but we'll do more analysis then)

Hence, keep a little more cash in the bank. Consider utilities and telecom. Keep an eye on gold and silver which are consolidating.

It may turn out that the market starts to cover at this point, but the probability of a longer consolidation seems higher. See our last post for which sector is undervalued. AT&T is up today, while the index is down.

Stay safe everyone!

The QuantZombie Team

Disclaimer: This site has been designed for informational and educational purposes only and does not constitute an offer to sell nor a solicitation of an offer to buy any security which may be referenced upon the site. Please consult your own financial adviser to determine what trade is appropriate for you. See our full disclaimer here.

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