Still risk off, Quad 3-4!

We have a Quad 3-4!

What is most disturbing here: My X feed is at lead 60-70% bullish. A ton of people believe the uptrend is still there and I am totally puzzled!

October, January and March bottoms: max. 10% on my X feed were bullish.

I cannot see a ton of bullish signs here. Yes, breadth is bombed out and this can lead to a rally. BUT.

Here are the bearish factors:

• Leadership: we need to see strength in higher beta cycs and / or tech, that is not the case now. I also ask myself where this strength should come from. Do we really expect it from the magnificent 7, so they double again from here? If we would see strong Quad 1 and 2 higher beta cycs (industrials, housing, auto, trucking etc.), I would say, o.k. here is the positive rotation, that leads us higher. But THAT is not the case here at all, higher beta cycs (and tech) are weak. We see the difference to the pullback in March:

  https://twitter.com/GfI_Himmelreich/status/1717869667220344980

  

• Reaction to earnings is terrible, o.k. and good earnings get sold (and there is a lack of stellar earnings!)

• COT Positioning gets worse and worse, specs buying this dip hand over fist. Bullish would be if they would get shorter here.

• Seasonals: I backtested the last 25 Years: in every case were we got a rally after a September, October and sometimes into November drawdown: there was a positive Quad change (from 3 to 1-2 or at least from 4 to 3) with a big breadth thrust.
  So yes, that happens often around October. But I did not find one rally with legs without a positive Quad Change!!! So seasonals tell you that a positive Quad change is likely, but that does not mean that you buy without a positive Quad change happening!

• Yes, there are pockets of strength in some smaller to mid cap names with stellar earnings, but that has been the case since the beginning of 2022!. Hedged small cap value momentum with a growth tilt is doing fine:

  

• But the unhedged version, is not so hot! (it needs to make a new high when the SPY has neutralized 50% of the drawdown, so wait and see time!). The system book does not find a ton of small caps right now with positive earnings, e.g., it sits at 100% investment (in good times this is at 150%!!!) —>

  

• Here is the difference to October last year (it found a ton of small caps with stellar earnings and was therefore levered up to 150% net long exposure) —> That signals strength under the hood, I mean small cap value momentum with a growth tilt is doing o.k. now, but sheer strength looks different.

  

The ETF Portfolio stays 100% in BIL 0.00%↑ !

A ton of things have to change:

• Leadership in the Quad 1-2 space, or at least in the Quad 3 space after a Quad 4 —> not the case now

• Breadth Thrust —> not the case now

• Strong value momentum with a growth tilt —> not the case now, at least not very pronounced

• Cot Positioning positive —> not the case now (not a must)

• Positive reaction to good earnings —> not the case now

Can we get a bounce here, that will let me look stupid? Yes! But that is not important. Important is a higher low on the SPY. If we then have a tape change (e.g., Quad 1-2 exposures get us there!), I am bullish again. Until then, the tape is what it is.

The call for next week is: We have a Quad 3-4 tape and therefore we have RISK OFF!

All the best and best regards.

Andreas

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