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Measuring the bottom in the S&P500 (1 or 2 wks?). FED dovish. SM happy. DM not. Pressure release.

Hi friends,

3 days ago, while YouTube gurus were bearish and even technical analysts from large platforms were also showing bearish charts... I am a CMT too and follow many popular chartists.

I was warning my insiders that a short term bottom was forming, and momentum was waning. And, the way the bottom will occur will be based on how the FED handles things.

Here's my post on Jan 26.

My blogpost on 26th Jan 2022, the day of the bottom start.

After which, I felt there could be a sharp pullback, but it might not last long because I do have a market outlook for 2022 given at the beginning of the year that says that 1H22 will be "weak and whippy" and things will look better 2H22.

January started off with almost artifically high selling ... just a complete drop.

To get a high probability play on this potential short-term bottom, I went totally contrarian to Meet Kevin and other "learned" folks who went short on the market and suggested a list of potential oversold growth stocks that might have recover. Although I am not long-term bullish on these names because I want to be defensive value this year, I recognize when they get hammered so quickly that a retracement could be significant.

Just 2 days ago, the day before those names popped, I gave my insiders the trade ideas.

Again, I am fortunate, and essentially caught the meat of the recent upmove, making some of my insiders grab a quick 10%-12%.

Now, I didn't want to talk about what happens AFTER that quick 10%-12% move higher because that is a different science and art, however, I want to say that based on what I have heard from the FED, I think this upmove might last for a week or two before deciding what to do... there is not-so-short term strength because I think more weak hands are going to close their shorts.

Again, famous YouTube stock picker Tom Nash (that I like alot actually), just flipped from thinking the market could go lower to the markets could have a strong move higher.

As i build my mental model of who is who in the trading universe out there, I rank Tom Nash as semi-smart-dumb money and most of his listeners are more dumb money than smart money. Note that dumb money doesn't mean they are dumb. it means that it's people that receive the relevant information that moves the market late. Tom reads alot and is faster to react than most, but most of his views are popular views that are already known to many.

My point is that retail investors have been extremely pessimistic, and people Tom and Learn Kevin are sometimes like bell weathers for these retail investors. Imagine, if these popular YouTubers that many folks are listening too learn that 1) like Meet Kevin, sold all of his holdings and went short, and 2) Tom thought the markets could go lower, they would be contributing to retail investors raising so much cash as though we are entering a bear market.

Anyway, I hate calling bottoms. I don't like to be in the prediction business. I like to talk probabilities, and I knew the probability of a short term bottom was too high. As a world-class market timer that got the 2020 COVID crash bottom to the day and the 2009 GFC bottom to the week, I have a great track record.

But I recognize that to be useful, sometimes I have to strongly hint of a bottom.

However, I hate to predict how long a bottom can last. But, I realize that sometimes I have to give an indication based on what evidence I see. The market is highly stocastic and probabilitistic and I can be wrong in many ways. However, based on my experience and what I see, I can see some strength in this bottom... and it may not last days which is what short-term day traders was trading on (get the money and run) but could be a week or two. Maybe a good February! Here is why:

1) The FED basically said they might kick the can forward!

  • Federal Reserve officials said they want to avoiding unnecessarily disrupting the U.S. economy as they prepare to start raising interest rates, showing little stomach for an aggressive 50 basis-point move in March.

  • “You always want to go gradually, in the economy. It is in no one’s interest to try to upset the economy with unexpected adjustments,” Kansas City Fed President Esther George told the Economic Club of Indiana.

  • San Francisco Fed chief Mary Daly, who has been one of the more dovish officials at the central bank, said “When you’re trying to get an economy from extraordinary support to one that’s going to just gradually put it on to a self-sustaining path, you have to be data-dependent,” she told Reuters in a live-streamed interview. “But you also have to be gradual and not disruptive.”

"Not disruptive". "... gradually."

The FED's language was cautioning towards gradually and not disruptive.

Alone, the FED's tonal shift doen't mean markets will go up, but I feel this eleviates alot of stress on the financial market sentiment. And if so, than this means that there is no downward pressure for a certain situation to unwind, and that is the excessive bearishness of the retail investors.

1) Smart Money is very optimistic and Dumb money is very pessimistic.

The last time Dumb Money was this pessimistic was during the COVID crash of March 2020.

Smart money is measured essentially by looking at trading volumes of certain instruments that institutions tend to trade, Dumb money is measured by the opposite, by trading volumes of instruments that retail investors tend to trade.

Think of Smart Money as being on-average more strong hands, and Dumb Money are weaker hands. Institutions tend to make big changes when something structural in the markets happens. Retailers tend to trade on sentiment.

If Strong hands have bought the markets, and the downside pressure of the FED is alleviated, then the weaker hands will eventually come back in.

This picture is corroborated by how retail investors raised cash at a suddenly high rate as though we are in a bear market. Now, only in rare occasions do retail investors react correctly and before the institutions do. Are they correct this time? If I had to roll a dice, the odds are not in their favor.

For some quantitative numbers, when we look at the amount of money small traders spent on put optins relative to calls, it's now the highest sine April 2020. It's relatively rare to see small traders spend nearly 80% as much on puts as they did on calls. Sentimentrader calculates that such high levels of relative hedging preceded consistent gains over the past decade.

So either this is a good time (sentiment wise) to have some long exposure, OR, the small traders are correct and we have maybe one more move down. Either way, having some exposure when there are no obvious immediate threats to the economy seem like a good idea than not.

Combine this with the FED

Now that the FED has softened their tone, it gives more reasons for bullishness to return to the markets.

Hence, I think the SM and DM levels should get back to more normal levels even before algo and quant funds try to short the market again (if this is in the cards).

Today, I will put on my market analyst hat again and do advanced Technical Analysis. I want to say that technical analysis without being able to corroborate the story with some fundamental or quantitative idea is very limited. But based on the story that I just shared, if I am right, then I note down some possible outcomes.

1H22 is going to be whippy and tricky, so there might be a little consolidation, but a very convenient upside target is that 50 DMA that got broken down early January. The target looks like it's around 4600.

What will confirm this move is when that MACD crossed upward.

The Slow Sto which is more reactive (but prone to more false positives) has already signaled a cross.

In terms of upside targets, the target can be more than the moving average.

The RSI also has a target, it's around 55-60.

Pro-tip: During a downtrend, the RSI doesn't range between 30 and 70, it ranges more like 20 to 60. This means that if indeed we are going to have a sort of double bottom, or retracement, there are are algo and quant funds ready to start shorting again, then BOTH the 50 DMA and 60 on the RSI are the obvious trigger points. Of course, maybe we won't have another major selling program, it's all about the probabilities. Either way, I will relook what is going on when we hit the next significant price level.

Why do I talk about algos etc?

Well, in a way the markets dropped so dramatically, even more than what the fundamentals were saying. I can understand if markets are selling off because of COVID fears, business closings etc. But this is not the case, more companies than not were reporting good earnings. The COVID fears are also diminishing, it's hardly in the news. I can expect retracement, but a 12% correction in the S&P500 in a month? It just sounds like more than normal selling.

Anyway, remember that there is alot of news that is not in the headlines now just waiting to appear.

I won't be surprised if when the market hits those trigger points like the 50 DMA or the RSI level, that "bad" news suddenly goes on the headlines, and the YouTubers start getting afraid again.

But that's all for me today.

I just wanted to say that now the FED has started to be "nicer" to the market, there are less reasons why the SM and DM levels could remain so extreme, there will be pressure now for the levels to normalize.

Also, in my experience as a proficient market timer, when retail gurus like Tom Nash start telling people that the markets could be great again, it's usually at the HALF way point of a move. Conveniently, if the markets moves the same amount higher from the bottoming point to now, that will take the markets to those levels that I mentioned. So very convenient.

The markets might not get there in a straight line.

But in any case, the longer term bull market is still on.

Even if the markets start declining and get to a lower bottom or a double bottom, that should get us ready for a good 2H22.

So my advice is to go some risk management.

Stay in highly convicted names that will do well in a rising interest rate environment or are too cheap to ignore, and keep some powder to play the dips.

Despite thinking 1H22 was going to be weak and whippy, I personally held some ET and VST. This is because I felt they were still just too cheap and had the ability to unlock their own value. Both were trading at <7x cash flows, both had the ability (or soon to have) to raise dividends or share buyback. Also, SU, because at oil prices at $55, they are going to have great cash flow and was cheap. I wonder what they will report this quarter because oil prices have been >$55.

I kept some powder to play the recent big dip.

This pattern of dips and rises may continue this year, it's not going to be smooth sailing.

Remember to do your research and not listen to any one person, including me. These posts are the ramblings of a madman.

Cheers, everyone stay safe!

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