Statistical Resistance around 2920 coming in SPX. Ready some dry powder.

April 25, 2020

Hi guys,


For weeks, I've seen many fundamental pundits say we are going into terrible earnings (I have no problem with this) and have been predicting a "double bottom" even on a reasonably popular YouTube channel. Yet, I wonder how come he didn't try to quantify the effects of almost unlimited QE. He showed charts of how retail activity and mall activity dived off a cliff in a manner similar to the Great Depression. Yet, I was thinking why he didn't factor in that we got this was because of a handbrake event, and there is a possibility that a depression can be avoided if we start back up again fast enough.

 

For weeks, I've seen technical analysts who couldn't believe the rally could last this long, make a case that "you are going into resistance" and a sell off will start soon. They use anecdotal clumps of past supports and resistances to make their case. 

 

I don't blame them. That's what you do when you are trading, especially short term trading. Many technical traders use the same strategies trading every type of chart. I know, I used to be a day trader. I didn't pay too much mind to those, because I know those are subjective.

 

HOWEVER, this blog is called "QuantZombie". In this blog, I try not to stay in the realm of the subjective as much as possible (but of course, sometimes you have to, especially when you're dealing with the financial markets which can be a giant ball of uncertainty). 

 

I do know a statistically proven resistance that is optimized only for the S&P 500 (the BLUE line). It is actually coming soon. That is the only one of two that I pay special attention to when it comes to the bigger movements in the S&P 500. For some reason, over the last 20 years, price always get attracted to, and repulsed by this line. It's almost like the market participants, the traders, the funds, the retail guys, the robots ... seem to come together to behave around this moving average. It's a statistical behavior. Just like how Michael Jordan used to shoot an average free throw percentage of 80%. Some days he shoots better, or worse; but all of his mechanics and court variables always regress him to the mean.

 

The robots "know" this, and many systematic or algo traders do trade this line ... increasing the self-fulfilling prophecy to an extent. Robots can't quite trade subjectively like drawing broken trend lines, or "clumps" of price patterns easily. But a mathematically optimized moving average to either do a trend following or mean reversion strategy? Yup.

 

So what's the point? This is a statistically proven resistance and should be taken seriously.

 

I have studied many of the times the market hits those lines, and in general, history has shown that you need significantly good fundamental news to break above from below, or significantly bad fundamental news to go below from above. The same goes with the RED line, except more so.

 

 

I try to fit a narrative that can support why the price is where it is now (between the blue and the red) and though I cannot guarantee I am right, this is what makes sense to me. I always suspected this but couldn't quite articulate it until now.

 

First, we are in a high variance market right now meaning that the risk and rewards going forward is a big function with time. The global economy was going at full steam and we pulled a handbrake. It wasn't in a structural or prolonged bear market before the forced shutdown of activity.

 

The faster people can get back to the way they used to do things, the greater the chance that for most companies, the virus will only result in lower earnings for the next 1-3 years. The slower we don't go back to normal, the greater the chance that we have a series of bankruptcies and a financial crisis.

 

When the VIX was almost at the 20 year high and the SPX trading at -35% in March, and many at-risk companies trading at bankruptcy prices ... Planet Fitness down 75%, mREITS down 75%. Great companies like Valuetronics trading close to net CASH value... that's what people were expecting ... some sort of global financial crisis. Phrases like "this is like the GREAT DEPRESSION, not just a financial crisis!" were thrown about. Personally, I can kind of understand the financial crisis, but I thought the Great Depression was a stretch. There is too much liquidity and speed of supply chain today than before. It's even easier to retrain yourself by learning something online. You can even do some work online. Schools give online classes, tuition teachers also taught online.

 

This was the reason the markets plummeted under the RED line convincingly. Historically this happens when the market is convinced we are going into a bear market. I can understand this. At the time, COVID models were quoted left, right and center. It all looked bad. Oil price was getting lower and lower.

 

Today, many of the "worsts" are... not as bad as people thought.

 

COVID 19 infection rates and death rates seem manageable (for now). Hospitals are not totally overrun. You got a couple of drugs in the making to help control symptoms.

 

The two biggest stress points in the stock market was oil price and the mortgage industry.

 

The FED's QE money has been pouring into the market. We see the affects here.

 

 

Anyone realize that the MBS ETF is back to it's original levels again? This might not help all the companies in the mortgage sector equally, but it definitely is a great starting point for stabilizing the sector.

 

Crude oil prices have early signs of stabilization thought price is still low. The low price concerns me, but as I argued in last week's market update, that at least we have the strange divergence of the oil sector ETF and record insider buying in the oil sector. It's the smartest of the lot suggesting that they don't expect oil price to stay at these levels for too long, or that the damage to 3 months of low oil price can be contained within the sector... the big boys eat up the small boys assets. This is a probability that the oil price and sector can be stablized, but not a guarentee.

 

These are good starting points of stability, and if there are signs of stability, then it decreases the likelihood of a financial crisis. If we aren't hit with a big string of bankruptcies, we might not go into a long drawn bear market. This is especially so as the FED is pumping great amounts of QE into the system. 

 

That's the reason why the SPX price can convincing break upward from below the RED line. People were thinking more clearly and realized that at the present moment, maybe Ben Bernake is correct, and that after a dismal Q2, there would be 10% GDP growth in Q3 and Q4. If the FED QE can break the cycle of contraction by giving out cheap loans, putting money in people's pockets (at least for a couple weeks until it's clear to open the US for business), and buying up assets; then we get a slowdown, and not a prolonged recession.

 

OKAY.

 

This week is going start a blitz of major tech companies reporting, and giving some guidance. Our first big signs of "on the ground" fundamental reporting is finally here. 

 

When we get close to the BLUE line, short sellers or fund managers that need a reason (any reason) to sell will want to sell. So, unless we get some better than expected guidance (especially from the bombed out sectors from mortgage and oil), it's unlikely we power through from below the BLUE line.

 

Yet, if we do get a retracement, a sell off; I am hesitant to say that we get "a double bottom" based on terrible earnings alone. We only get to a double bottom, or lower than double bottom, if there worst than expected guidance that might make us suspect that certain companies will go bankrupt and cause a financial crisis. Until that happens, I suspect the RED line is going to hold (for how long, I don't know).

 

CONCLUSIONS

 

1. Close to a statistical long term resistance. A convenient place for sellers to find reasons to sell. Don't be too surprised of the price can't get above this level for now.

 

2. If there is a retracement, I expect support at 2650. If you have dry powder and haven't boarded the train yet, that's a convenient place to consider getting in.

 

3. Until there is more clarity that the QE is getting to the right places at the right time, and the economic damage due to the shutdown is more obvious to the upside or downside, it's likely price will stay within the RED and BLUE lines.

 

4. Note that some tech stocks like MSFT are leading and already close to their 2020 highs.

 

4a. The last bottom might have been the bottom, or it might not. I recommended 2 weeks ago that a strategy for long term investors to allocate some investment then just in case that was the bottom, but keep some cash (like 20% - 50%) in case we make a lower low.

 

5. Oh. Once the COVID issue gets better and if the economy is not broken, markets will go swimmingly for awhile, until political tensions - the World vs the CCP (notice I didn't say China) gets traction. Lots of leftist media and globalists are downplaying this, painting "China" as a victim that is trying to help the world by giving facemasks and advice. But as I parse just some of the facts among the the many voices ... 1) that the CCP knew about the virus a least a few weeks earlier (pretty much undisputed), 2) that they silenced the whistleblowers (undisputed), that they even told the world (undisputed), and had the WHO agree with them (undisputed), that there was no human-to-human transmission even though Taiwan (that was pushed out of the WHO by China) was trying to tell the WHO that there was weeks earlier. 

 

How is it possible the "little" Taiwan, who had no access to WHO resources, could know how dangerous the virus was and warned the WHO, and not the CCP that had weeks of a head-start, millions of dollars more worth of bio-research, and has the foremost expert in the world on Coronaviruses on staff in Wuhan?

 

There are many other circumstance evidences, but I only mention the undisputed ones here. It is enough for raise big questions.

 

Because of these reasons, there are rumblings that some people (especially in the West) consider China's reckless behavior an act of war at worse, and at best, a reckless, careless Darwinistic neighbour with no regard for any life outside of China. The virus outbreak might have been accidental, but many believe the CCP wanted to take down the rest of the world so that they won't be left behind.

 

Up to now, the CCP has prevented all free press to go into Wuhan; and have not been transparent about the origins of the virus. Australia, US, France and Germany has called for the CCP to be transparent to various degrees and open Wuhan for investigation. This has already caused tensions.

 

Whatever your personal stand is about what narrative you believe, I'm just sharing the primary facts I mentioned above are the reasons why there is pushback on China, actually, the CCP. Chinese civilians are victims in this, almost like hostages.

 

I'm not trying to convince you personally about what to believe, but for you to be aware of what some nations are starting to believe.

 

So what this means is, that even if the market starts to recover, expect tensions to mount the closer we get to the end of the year... that's when the China US phase 2 trade discussions were supposed to start; and it's likely a convenient timeframe to hash out "reparations talks" should the world believe the CCP responsible for reckless endangerment, or worse, deliberate endangerment.

 

Stay safe everyone!

The QuantZombie.

 

 

 

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