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Ep 91: Evaluating Macroeconomic Conditions – Bulls vs Bears

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 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 standpoint, 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.

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.

If we look more into the immediate action of what’s going on with all this Brexit ordeal, I’m sick and tired of hearing all this stuff. Because the market is doing some weird things and some things I haven’t seen before, at least not directly. There’s a lot of interest in things that are happening, and when you start looking at things at a bigger picture, you begin 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.

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 make some gains and you flip and go into the long side.

You usually don’t see a full whip action like this, snap down and snap back so quickly, and it makes me 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 now 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.

The market as it works is more like a rubber band, so as we get too far extended, let’s 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 pullback 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 exceeded it to the downside, the sell orders, because of a fear in panic.

And this is what markets do. And, now, then we popped, and we continued, when you look from 2000 to 2011, it’s a sideways market when you think about it, if you look at the moving average, it’s just a sideways market.

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 still, we’re further away. And when you get this far away from something, it makes you wonder, what is behind the move?

And as I look at the bigger picture, as I look at the macro sense, macro meaning the big economic standpoint. You have the fed that prints more money. You have the European Union here with the Brexit vote happening, and you have interest rates that are negative in certain parts of the world, our interest rates are low. Job growth is weak. Company profits are somewhere profitable, but the way that they’re getting their profits is not through more sales technically. It’s not through indeed 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 more before, 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 halfway 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 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.

But I’m also looking at the more significant volume spikes. So as we go closer, what are the more significant spikes? And you can see we’re looking at the monthly chart, and it doesn’t take a rocket scientist to see the more substantial volume spikes are 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. 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 quickly, 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. Tn you get those crashes, or you get a massive pullback, 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 always fighting this battle, and you’re looking at where are prices a little overinflated, hyperinflated? 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.


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 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 say 100 on the S&P? Probably very slim.

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.

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 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 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 vast buying influx of volume. When people are sitting on the sidelines, and they think the market is overpriced, they’re just waiting, they’re expecting, 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.

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 levels, rather than on pullbacks, or you have people that missed out on the opportunity, so when you miss out on a chance, 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, 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 makes more power for a stock to jump 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 months, 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.

It took three days to make up for those two 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 more full red bars. But you get more green bars, so typically on a day to day basis, it pays off to be a bull, but it all comes down to managing your risk, managing your positions because you get a more extensive price spread on bearish days.

Take, for example, let’s 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.

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. Three days, it took 2.3 months to make that up.

How much of those gains did we wipe out? So here are three 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 months of gains wiped out in 3 days.

Be cautious about 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 essential for you to really be cautious about the market, more so on the downside than for the upside.

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 significant market move.

However, if you’re long, and you get a dangerous move to the downside, it can wipe you out for almost a whole year, because you have 6-8 months of gains that get wiped out, and maybe sometimes even goes beyond that. For me, I’d instead 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 bit counter-intuitive. So looking at the current market, as it is, as I see 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, overwhelming 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 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, so let’s say 140, but it’s nowhere near 333 million.

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 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, entering 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 a dangerous place because you get window dressing that starts to happen. Right now, there are 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 teaching 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 show 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 Facebook.

Question the market

When I look at Facebook, on a day like today. On a significant up day, we have the S&P, and you can see we are about 21 points or so on the S&P, so on a major up day, why is Facebook not reacting to the upside?

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.

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.

Look at maybe another favorable company, Tesla, only 68 cents, for a stock that moves 5-10 dollars in a move without a problem, why on a day like today is it moving like this?

Then another one you might want to look at is let’s 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.

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 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 have a bearish volume that’s starting to come in.

These things don’t develop overnight, 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 think 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 pushing it higher? What’s going to continue to operate it higher?

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 just up that much? Why is Facebook only up one cent? Almost going negative right here. Why are they doing that? So think about that for a moment.

As you come into a holiday, as you come into Fridays, you go into the 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 if we trade a lot on emotional. So here on this down move, people get scared, and they purchase 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 pullback, when really the more normalized level is probably somewhere around 2062 or so, or maybe 2070, rather than all the way up here.

So you overshoot it in both directions. If we look more at the weekly, we’re exceeding it, as far as the moving average is concerned. We’re overdoing it already by about 60-70 points. So right here would be more of a normalized level. So again, the market overshoots in 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 more significant. 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 raise 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 ultimately, eventually, you have to have a pullback, 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.

It’s going to create a healthier market in the sense where we’re not printing money. Where now you have to have money to buy something rather than purchasing thins on credit or just merely 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 essential for you to look at it from a broader 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 perhaps overinflated at 3000.

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 two 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 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 long holiday 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 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 position long? Or do you want to be more one to one a little balanced? Have a few shorts, have a few long positions.

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 overextended in both directions, to the upside, and the downside, but the normalized level, where it should be, that’s really what you’re always looking for.

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