Quad 2, but: not a bull market, not a bear market...
This is not a bull market, this is not a bear market, this is a mixed market.
And mixed market are the most difficult.
Have a look at the ratio of bullish and bearish chart patterns:
https://trendedge.app/indicators (by the way a great site, very nice stock scans with a stellar trend definition by @FlynancialA on X!):
In an o.k. Bull market like 2019 bullish chart patterns hover above 25%. In a bull market after the crash in 2020 the same happened until the very, very end of 2020. Not the case now, besides two blibs in January and August of this year.
Now we look at highs and lows, the same picture:
In a bull market new highs / new lows hover above 0 with short dips below 0.
In the market we have now, new highs / new lows rally above on just to flip back and dive deeply into negative territory.
IWC (and the Russel 2000) went down 3 days, while the QQQs went up 3 days:
That is quite a divergence and stuff like that does not happen in bull markets.
It means institutions have one foot out the door, they know they cannot be in and out small caps fast, so they avoid them right now.
Yes, there are pockets of strength (blue line = relative strength, white line 4 week moving average of relative strength):
Now, small and micro caps ;-), geee…
Quad 3 looks heavy too (bullish trends are gone!):
Also, in a bull market breadth (T2108 on TC2000) dips into the 30s while the Quad stays in the 1-2 territory (right now we dip to 10-20 on breadth and the Quads flip within the drawdown!):
So, my best guess is, this is not a bull market, this is not a bear market, it is a mixed market with huge, huge dispersion.
Interestingly enough, the same dispersion happens within the small cap space. The relative strength of small cap value momentum with an earnings tilt is huge (though earnings need to be stellar, otherwise they get sold into hard!):
Chart Patterns for breakouts in a mixed market:
Above: High tight flags are very seldom in a mixed market, in this market stocks pull back to the breakout level of last earnings. Key is to wait until breadth is bombed out (e.g. below 20) in this environment and then use the weekly pocket pivot.
METC is another very good example (look left to see the original breakout level):
Compare to a healthy market:
Above: breadth does not pull back below the 30s and bases are much cleaner.
AAPL, same situation in a healthy bull market:
So, what is the argument here for the state of the market?
Small caps will catch up soon or this is late stage and big caps will follow small caps?
The answer is, I do not know! There are examples for both outcomes.
In 2016 for example the Russel had a drawdown of about 25% while the SPY was down 15% (so heavy, but there was no super crash in the aftermath!) and from there we had quite a good environment until the end of 2018. The tanking Oil prices do hint to a soft landing.
On the other hand macro data looks bad throughout now and the first quarter (and then getting better).
Also, I am seeing pure beta and no alpha in Quad 1 exposures since the top of August:
Above: this is beta right now, not alpha!
So what is the call for next week?
Quad 1-2 is the call! But: The ETF Portfolio stays in cash until we get a better breadth reading.
I stay risk on for now with my unhedged (might change fast!) small cap value momentum book.
I think it is important to have all the above in the back of our head: This is not a bull market, right now it has pockets of strength and pockets of weakness!
Soft landing or hard landing, we will see, but to call it a bull we need breadth to improve and stay in bull market levels (with some dips but fast recoveries of breath).
All right, have a great weekend!
All the best and best Regards
Andreas
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