NEW: Live classes are posted - Click here to see the calendar!

Ep 91: Evaluating Macroeconomic Conditions – Bulls vs Bears

June 30th, 2016

Listen to the Podcast


Hey this is Sasha Evdakov, and welcome to another episode of let’s talk stocks, episode number 91, and in this episode I’d like to go into evaluating market macroeconomics as well as looking at bulls vs. bears.

And before we get into that, it’s June 29th 2016th, I had some critical charts that I posted, as for today, let’s just take a look at the market and see how things are moving.

The market

If you look at the market overall and we go into the weekly stand point, you can see that we’ve made all-time highs at this price level, so the SPY all-time highs here is right around the 2113 level, give or take.

2016-06-30-ep-91-evaluating-market-macroecon-bulls-vs-bears-2.0007

If you look at the SPX, you’re looking right around the 2140 level, really it’s the all-time highs here is 2132 and then if we go into this bar here, 2134, so call it 2135.
2016-06-30-ep-91-evaluating-market-macroecon-bulls-vs-bears-2.0009
If we look more into the immediate action of what’s going on with all this Brexit or deal, I’m sick and tired of hearing all this stuff, because the market is doing some weird things, and some things I haven’t really seen before in the past, at least not directly, so there’s a lot of interest in things that are happening and when you start looking at things at a bigger picture, you start to question and wonder really what is the market doing.

And this is where some doubt sometimes starts to creep in, so looking at the market, we had this Brexit happen over here, first everybody was positioning to the upside, meaning they were expecting that they would remain, so they were positioning it this way.

For me, most of you know I was going short, and then before that I was balancing out my position to have a little more balance, depending on which way the vote would go.
2016-06-30-ep-91-evaluating-market-macroecon-bulls-vs-bears-2.0019
Anyways, what happens in these scenarios is, when you have a combination of shorts and longs, you’re able to take your positions off the table, and take your profits and allow the others to catch up. And then you get out of those shorts, you take some profits and you flip and go into the long side.

Normally you don’t see a full whip action like this, snap down and snap back so quickly, and it makes me really question the move that’s happening.

The moving average

And here’s why I kind of question it. When I look at a longer term picture, and if we get rid of all these drawings right here, if I look at the overall, let’s just take a look at the monthly chart, and I look at market extensions, how far they’ve gone, how far they’re going, the pace of the market, you can really see this moving average is laying, so to me, if I’m just looking at this moving average, let’s just make it a little bit brighter here, you can really see that moving average line.
2016-06-30-ep-91-evaluating-market-macroecon-bulls-vs-bears-2.0031
The market as it works is more like a rubber band so as we get too far extended, let’s just take a look at the year 2000, we pull back to about the moving average, because the moving average here is right around the 1000 level, so we got into 1500, and we pull back to about 1200 and then we sell off, and go beyond it.

We go way further beyond the moving average, and then we whip back, so that’s why we technically had a sideways action here from 2000 to 2009. Then again, it overshot it on the upside, in 2008. And then 2009, we overshot it to the downside, the sell orders, because a fear in panic.

And this is what markets do. And really, now, then we popped, and we continued really, when you look from 2000 to 2011, it’s kind of a sideways market when you think about it, if you look at the moving average, it’s really just a sideways market.
2016-06-30-ep-91-evaluating-market-macroecon-bulls-vs-bears-2.0039
And now what’s going on and what’s happening is we power through that. You can see we got a little bit further away from that moving average, again we’re at 2124, we’re near those highs and now again, we’re further away. And when you get this far away from something, it makes you wonder, what is behind the move?
2016-06-30-ep-91-evaluating-market-macroecon-bulls-vs-bears-2.0045
And as I look at the bigger picture, as I look at the macro sense, macro meaning the big economic stand point. You have the fed that prints more money. You have the European union here with the Brexit vote happening, you have interest rates that are negative in certain parts of the world, our interest rates are low. Job growth is low. Company profits are somewhere profitable, but the way that they’re getting their profits is not through more sales technically. It’s not through really company growth, it’s more through job cutting, it’s more through expense cutting, or the other thing that they do is they presell earlier in batches.

What they’ll do is they’ll go ahead, like for example certain companies, they’ll go ahead and sell to another company earlier and then they’ll deliver it a little bit later or they’ll sell it earlier, ship out those goods, but that means it’s going to reduce your sales in the future in the second half of the year, which right now we’re coming into that kind of second half of the year. We’re half way there between the 12 months.

What will drive the market?

As we look now into the market, the market is at these super high prices and I start to question, ok, what is going to drive this market higher? What is behind this move? What is really going to make it sustainable?

The next thing I also look at is I’m looking at this wave pattern of volume, we had massive volume coming in from 1995, coming in and then we have this bell curve effect, we have a slope down, and then again, a pick up in volume.
2016-06-30-ep-91-evaluating-market-macroecon-bulls-vs-bears-2.0064
But I’m also looking at the bigger volume spikes. So as we go more closer, what are the bigger spikes? And you can see we’re looking at the monthly chart, and it doesn’t take a rocket scientist to see the bigger volume spikes are actually the bearish side. The volume is really on the bearish side here.

Can the market keep going higher? Can we continue to inflate prices? Absolutely. Absolutely, it can keep going on air.

And the way that it does that is, well, the fed comes out, says, well, we’re not going to raise interest rates, what we’ll do is, we’ll go ahead and pump more money, we’re watching, things are cautious, don’t worry, we’re not going to act too quick, and they’ll support these things.

And then the mom and pop, the retailers, the person that’s new to stock trading, they’ll go ahead and they’ll put their money into the market and then eventually, within a couple of months, within a couple of years, things eventually unfold and say those things aren’t working out, and then you get those crashes or you get a massive pull back, which is what happened really in these time frames in 2000 and 2009, got a little bit of that in 2011 that also happened.

But in general, when you look at bulls vs. Bears, you’re constantly fighting this battle, and you’re looking at where are prices a little overinflated, hyper inflated? Where are they too far to one side or the other?

And when I look at it this way, I don’t see what’s driving this market higher, that doesn’t mean the market can’t go higher.

Probabilities

The way I look at it is, I start bringing things in from the outside edge, so i look at it, is it possible or realistic, what is the chance? If you’ve studied statistics, or you just know about probabilities or the chance, just basic chance statistics, you can kind of do some rough estimations.

What is the chance of the stock market going back down to, let’s just say 100 on the S&P? Probably very slim.
2016-06-30-ep-91-evaluating-market-macroecon-bulls-vs-bears-2.0087
What about if I say, 11000 on the SP, what is the chance of that? Again, probably very slim. So what I do then is I slowly start tightening these things up, so I’ll go to, well, what about 6000? 6000 is nearly three times where it’s currently at. Is it likely for the market to get to those levels in the shorter term? Probably not.

You continue doing this, so what about 700? What about 800? And then, what about 4000? Is it likely that the market is going to get to 4000 in the next year? Probably not.
2016-06-30-ep-91-evaluating-market-macroecon-bulls-vs-bears-2.0095
How about 3000? So you slowly start tightening this curve, and then you start getting more of a realistic picture, what about 2500? Is it really likely that you’ll get the market over here? Because if you get it all the way up here, this moving average will be kind of over in this level, so it will continue to stretch that moving average.

You’re looking at probabilities of what is it that’s going to happen, and you slowly start tightening things up.

The reason that I say that the market can still continue to move higher is simply because of, you keep getting this influx support from the fed, support from other areas, so where do you go with your money?

Is it doing it on volume? That’s the question. And when you look at the volume, I don’t see the huge buying influx of volume, and when people are sitting on the sidelines and they think the market is overpriced, they’re just waiting, they’re waiting, but then you get little people nibbling, then it continues to push it higher, you get a few more people nibbling, it continues to push it higher.
2016-06-30-ep-91-evaluating-market-macroecon-bulls-vs-bears-2.0104
And then eventually that’s where you get the rug ripped out from under you, when you keep pushing it, and then the regular retail investors, the one that’s buying it there at the 3000 or 4000 level, rather than on pullbacks, or you have people that missed out on the opportunity, so when you miss out on an opportunity, let’s say you get something like this Brexit thing coming in, then you get more money stepping in.

Markets do not crash up

Often times, when you look at a bullish vs. bearish scenario you’ll notice that you’ll get more bullish days than you get bearish days. And that is just simply because it takes more energy for the stock to move higher. It takes more energy for a stock to move higher and markets, as I always like to say, markets do not crash up, they will crash down, but they don’t crash up, sometimes it feels like they crash up, but most of the times they don’t.

They’ll move higher, like we did the last few days, but then they’ll come back to more normalized levels, but when you have a crash, you really take out and whip out a lot of gains within a few month, so when you look at this pullback here on a down day, on this Brexit vote, we had a 90 point or so drop and it took out about 3 to 4 months worth of gains.
2016-06-30-ep-91-evaluating-market-macroecon-bulls-vs-bears-2.0116
It took three days to make up for those 2 days. And if you look at any big red bar, and compare it to previous bullish bars, you’ll often find that you’ll get wider red bars, but you get more green bars, so typically on a day to day basis, it pays of to be a bull, but it all comes down to managing your risk, managing your positions, because you get a wider price spread on bearish days.

Take for example, let’s just take a look here, if we go into these three days on the S&P on 2015, right around august, august 19th, august 20th, august 21st, so here we sold off on the S&P about 230 points to the downside.
2016-06-30-ep-91-evaluating-market-macroecon-bulls-vs-bears-2.0126
We got a few days of pop here, and then again, we sold off, pop, sold off, but from those three days of sell off, to make that up, how long did it take? It took 2.3 months to make that up. 3 days, it took 2.3 months to make that up.

How much of those gains did we really wipe out? So here are 3 days, the gains were all the way from, let’s see, 2014, October 17th 2014, so it took, let’s see, 10-11 months of gains, wiped out in 3 days. Eleven month of gains, wiped out in 3 days.
2016-06-30-ep-91-evaluating-market-macroecon-bulls-vs-bears-2.0134

Be cautious on the downside

When you’re watching this, you have to remember that number one, if you’re comparing bulls vs. Bears, typically most days are green.

If you look at this picture, most of the time, they’re green days. But, the red says, when they come, this is really where you’re always protecting yourself, because when the red days come, they wipe out, your 3-6 month worth of gains in one or two days, so that’s why it’s important for you to really be cautious about the market, more so on the downside than for the upside.
2016-06-30-ep-91-evaluating-market-macroecon-bulls-vs-bears-2.0140
For me, it’s one of the reasons why I typically like going short when things are overinflated, when things are a little bit overpriced. It’s because when you have high prices, eventually, you get a major market move.

However, if you’re long, and you get a really dangerous move to the downside, it can really wipe you out for almost a whole year, because you have 6-8 months of gains that gets wiped out, and maybe sometimes even goes beyond that. For me I’d rather take the pain on a day to day basis, rather than look to be always profitable on a day to day basis.

Look at the energy

I know it’s a little bit different, it’s a little counter intuitive, so looking at the current market, as it is, as I look at bulls vs. bears, I’m always comparing the energy, how is the energy look, remember, we still have that big macroeconomic in the back of our mind, but now I look at the energy, so I look at the energy is based on volume.

This take out day was 333.3, very interesting number, 333 million to the downside. Then we had 248.9 million to the downside. We got back up into that level at 159, and then we got back up again at 137 and now we’re at 104. So let’s just say we’ll wrap up the market, we still have about another 45 minutes to an hour here to go. We might get back up, to let’s just say 140, but it’s nowhere near 333 million.
2016-06-30-ep-91-evaluating-market-macroecon-bulls-vs-bears-2.0152

Look at the bigger picture

I understand some people have to cover their shorts and things like that, so we’re coming in, we’re filling this gap, that’s what it’s really attempting to do, we may even get to all-time highs, but to me I look at it and say, what is different this time? Are they going to print more money? That UK is in a better position? What is taking the market higher? What is underneath it?

You always want the bigger picture, what is your reward to the upside? Versus what is the potential, kind of what we did to the statistics, moving the lines, what is the probability of it continuing to power higher versus lower? What’s the likeliness of that? So you want to always look at that.

The other thing I always like to look at on these moves is when you get these moves here, like this, you have to remember, we’re coming into, number one, the end of the month, then end of the first half of the year, and with that in mind, coming into a Friday, and a long holiday weekend.

Window dressing

When you have all those things working together, you get the jobs numbers out tomorrow. You want to see what happens to this market, and that is kind of a dangerous place, because you get window dressing that starts to happen, right now there’s pension funds that have to input money into this market, because they have money sitting there, those people that are trading and managing their money, they have to show them what’s on their report, and this is what window dressing is all about, they’ll buy those positions, so that way they can send a statement out, showing them that hey, you have apple position, or Facebook position, or exxon mobil.

And that’s what window dressing is all about. It’s about showing the regular retail person, that gets a letter in the mail every month with their investments, it’s about showing them what they have, and it doesn’t show them exactly what date they got in it, so what they’ll do is they post some of these things towards the end of the month, or the end of the quarter or the end of the year, they’ll do some buying just to show them on that print out because they have to how them something, and that’s what happens with the window dressing.

So to me going into this July 4th weekend, becomes a little more cautious, in the sense that now I start looking at, ok, what are the individual bigger names doing? Like the Facebook.

Question the market

When I look at Facebook, on a day like today. On a major up day, we have the S&P, you can see we are about 21 point or so on the S&P, so on a major up day, why is Facebook not reacting to the upside?
2016-06-30-ep-91-evaluating-market-macroecon-bulls-vs-bears-2.0183
I question that. Then I look at, what’s another powerful company? Amazon. Why is amazon, when we look at the weekly, came into this support level, we bounce here, but, on a day like today, we’re only up 8 cents, makes me, again, question the move.
2016-06-30-ep-91-evaluating-market-macroecon-bulls-vs-bears-2.0188
I take a look at Netflix, another popular company. Again, on a day like today, I understand Netflix has had some problems with earnings and so forth, but on a major day like today, why is this stock only up 11 cents.
2016-06-30-ep-91-evaluating-market-macroecon-bulls-vs-bears-2.0191
Look at maybe another favorable company, Tesla, only 68 cent, for a stock that moves 5-10 dollars in a move without a problem, why on a day like today is it kind of moving like this?
2016-06-30-ep-91-evaluating-market-macroecon-bulls-vs-bears-2.0193
Then another one you might want to look at is let’s just say apple. So again, this one’s got a little bit of a bounce, but where is the volume? That’s another thing I’m watching.
2016-06-30-ep-91-evaluating-market-macroecon-bulls-vs-bears-2.0196
Look at these bigger boys, bigger players, what’s going on with them? And how are they trading, how are they acting in these kinds of markets, in these kinds of environments?

And then you start to wonder, why are those big players, not moving as much when you compare it to the overall market? Even a stock like home depot, which has been doing really well when you look at it on a monthly basis, it’s been moving well. You can see the bearish volume starting to pick up right now. The month to month, we’re having bearish volume that’s starting to come in.
2016-06-30-ep-91-evaluating-market-macroecon-bulls-vs-bears-2.0200
These things don’t develop over night, but you can see that this month is starting to pick up. The train is starting to go in the other direction, now would I short this stock? No, I wouldn’t. But you can see that the bearish volume is picking up, they’re selling, which means there’s distribution, the big boys are starting to get out, and the retail traders are thinking it’s a good time to buy.

Could that stock go higher? Yes, it may, if it gets a little more sideways action, but you start to wonder, what is driving the market? What is driving it higher? What’s going to continue to drive it higher?
2016-06-30-ep-91-evaluating-market-macroecon-bulls-vs-bears-2.0209
Again, on a day like today, why is this stock only up 8 cents? On a Dow market of about 190 points, why is a home depot only up that much? Why is Facebook only up one cent? In fact almost going negative right here. Why are they doing that? So think about that for a moment.
2016-06-30-ep-91-evaluating-market-macroecon-bulls-vs-bears-2.0211
As you come into a holiday, as you come into Fridays, a you come into end of the month, when you have all these things working together, end of the month, you have Friday, you have end of the half, six months of trading, you also have pension rebalancing, and all those things working together, what is going on?

If you’re unsure. Let things digest

And sometimes you have to step aside and let things digest, give it one or two days even after the holiday, and then you also have the short and holiday week with July 4th for the US markets. So again, some things to think about and to consider, and if you’re unsure of the direction, then step aside, step aside and wait until things digest.

Because when prices are a little too inflated, what happens is we trade a lot on emotionals. So here on this down move, people get scared, and they trade emotionally to the downside, then again, you get the action to the upside, it overshoots it to the upside, and we get emotional buying, saying it’s going to the moon, look at that rocket ship to the moon, and then again you get a pull back, when really the more normalized level is probably somewhere around 2062 or so, or maybe 2070, rather than all the way up here.
2016-06-30-ep-91-evaluating-market-macroecon-bulls-vs-bears-2.0221
So you overshoot it in both directions. If we look more at the weekly, we’re kind of overshooting it, as far as the moving average is concerned. We’re overshooting it already by about 60-70 points. So right here would be more of a normalized level. So again, the market overshoots at one way or the other.

When you look at these candles, you see the majority of them, most of the time will be green bars. However, the red bars will typically be much larger. So the red bars will wipe out more of the gains on a shorter timeframe basis. So those are some other things to consider, and then again, of course the macroeconomic news as well.

What is driving the market? They can continue to print money, they can continue to say we’re not going to rise rates, but what else can they do? They can do the stimulus package, where they send you $200 or however much dollars they send you to go ahead and spend it and use it for the economy. For me I just saved it or put it in the investing account.

You want the market to move realistically

But do those things work? They try things, but really ultimately, eventually, you have to have a pull back, you have to have a little bit of pain to be able to go higher for a trader, for an investor, you want things to always move in the markets and come back to more realistic levels.

Because when a stock pulls back, maybe it’s a little un-American, but when stocks pull back to let’s say 1500 S&P level, that’s going to create phenomenal charts, great opportunities, yes it’s going to wipe out a lot of people. It’s going to hurt a lot of other people. But that’s going to create more opportunities for the trader, for the active investor.
2016-06-30-ep-91-evaluating-market-macroecon-bulls-vs-bears-2.0242
It’s going to create a healthier market in the sense where we’re not printing money, where now you actually have to have money to buy something rather than purchasing thins on credit or just simply printing out a sheet of paper to be able to get a mortgage in your house, you need to have a higher down payment. Just like they used to do.

But now for the money sense, there’s just a lot of that credit, that keeps getting pumped into the economy, and all that just continues to drive these things, and it’s important for you to look at it from a wider perspective, and as you look at the market this way, start to look at it more on a realistic sense.

What’s real? Is it real for the market to be maybe at 200? Probably not. What about 5000?Again, probably not. So you start tightening these levels and start contracting it. What about 3000? It’s probably over inflated at 3000.
2016-06-30-ep-91-evaluating-market-macroecon-bulls-vs-bears-2.0252
Could it get to maybe 2300? Yeah, that’s possible, but is it probable to happen in the next month? Probably not. How about in the next 2 years? Maybe. That’s a little more possible.

Start tightening those things up and looking at a little bit more of a bigger picture, and you have to look and realize that these companies, these earnings, the way that they’re happening, a lot of it is just due to job cuts, a lot of it is due to preselling earlier orders, which is going to hurt their earnings sometimes in the second half, and they do that, because they know they sell more later in the second half anyway with black Friday, with Christmases, all those kind of thing.

All those things are things to consider and think about, as you trade more in an environment like this, and as we come into the second half, those are all things to consider between Friday, end of the month, short and holiday, or short trading week with the holiday longer weekend. Pension rebalancing, again, earnings, we got the Brexit, the fed printing money, think about it, what’s driving profits?

And stocks may go higher, they may go lower, no one really knows, but it comes down to what is the risk? What is the reward? What side of the trade do you want to be? Do you want to be more, let’s say 2 to 1 positions long? Or do you want to be more one to one a little balanced? Have a few shorts, have a few long positions.

It really it just comes down to your risk tolerance and the environment that you’re in, so always be mindful of these things, as we approach levels like this with the end of the month, the end of the quarters, holiday breaks, all these things.

Because they’ll whip around and over extent in both directions, to the upside and to the downside. But the normalized level, where it should be, that’s really what you’re always looking for.

Author: Sasha Evdakov

Sasha is the creator of the Tradersfly and Rise2Learn. He focuses on high-level education speaking at events, writing books, and publishing video courses on business development, internet marketing, finance, and personal growth.

I'm Sasha, an educational entrepreneur and a stock trader. In addition to running my own online businesses, I also enjoy trading stocks and helping the individual investor understand the stock market. Let me share with you some techniques & concepts that I used over the last 10+ years to give you that edge in the market. Learn More

Join over 31,258 regular people who are bettering themselves in the stock market.

Click Here to Sign Up

This is a community that is motivated to learn & improve their skills.
Join us and get free training lessons, freebies, and exclusive promotions.

want some helpful advice?

pay per minute coaching

I am scheduling helpful coaching sessions for people who are interested in real-world advice & guidance where you only pay per session. No long term commitment required.

Learn more
This website and content is for information purposes only as Rise2Learn, TradersFly, and Sasha Evdakov are NOT registered as a securities broker-dealer nor an investment adviser. No information herein is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund. Rise2Learn, TradersFly, and Sasha Evdakov cannot and does not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. The reader bears responsibility for his/her own investment research and decisions, should seek the advice of a qualified securities professional before making any investment, and investigate and fully understand any and all risks before investing. Rise2Learn, TradersFly, and Sasha Evdakov in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites. In addition, Rise2Learn, TradersFly, and Sasha Evdakov accepts no liability whatsoever for any direct or consequential loss arising from any use of this information. This information is not intended to be used as the sole basis of any investment decision, nor should it be construed as advice designed to meet the investment needs of any particular investor. Past performance is not necessarily indicative of future returns.