“Hedge Fund Liquidation Theory & Sideline $ Sending Bears Back To Cave?”

“Hedge Fund Liquidation Theory & Sideline $ Sending Bears Back To Cave?”

[vc_row][vc_column][vc_column_text]The 650 Dow point lump of coal stocks left under the tree Christmas eve is now the marker for most technicians. This majority, as well as many nontechnical types, are confident equities cannot produce an advance towards new highs without a retest of the Yuletide low. For good reason too, as most constructive bottoms historically do involve some form of a retest and double bottom look.

 The subject line of my recommendation to buy TNA (3x Smallcaps) Friday AM was “Mr. Market Makes Most Mad.” The Bear’s disappointment  (thought Apple announcement was answered prayer) could continue if stocks choose not to revisit Xmas eve low forcing those with cash hoard to chase market higher? Also severity of December sell off probably convinces most a constructive bottom is absolutely needed to repair carnage.  

 I wrote several times in the fall how buy signals kept failing regularly for the first time in a decade. The selling felt  overwhelmingly distributional and somewhat reminiscent of the 2008 financial crisis.  I thought it unusual for an economy that appears in decent shape and no glaring current or imminent crisis?  

There might be an explanation for the crushing selling with no apparent capitulation (usually occurs at bottoms)? The number of Hedge Fund closures/redemptions reached significant levels in the back half of 2018 due to disappointing performance. This dynamic could be the exogenous event that was responsible for the persistent selling. Assuming so a V bottom could unfold leaving many with too much cash on hand?

If this analysis is accurate, the late Nov early Dec low may have been the true bottom sans the hedge fund liquidations? Which leads to the next step of the sequence, we should have been rallying for the last 3-5 weeks. If so the triple top at 2800 would have been the significant resistance level? If all these assumptions are in the ballpark we could have a quick 10% rally to that level, maybe in a similar vacuum we went down in?[/vc_column_text][vc_single_image image=”860″ alignment=”center”][vc_column_text]I imagine you may be tired of hearing about divergences, especially when they do not work, but the one below has been dependable. I’ve written about the Bullish Percent before and as the NASDAQ Composite sold off in December the # of P&F patterns sank with it. The RSI did not drop as much making a notable higher low. I went back to the mid nineties when they first starting keeping BP data and the only time I could find this divergence not working was after the dotcom bubble burst.

 [/vc_column_text][vc_single_image image=”863″ alignment=”center”][vc_column_text]President Donald meets with President Xi Monday and Tuesday this week. A positive and DEFINITIVE announcement could be a key catalyst for continuing the right side of the V? An end to the gov’t shutdown and the start of 4Q earnings reports could add fuel as well. On a related note Gary Shilling provides an interesting take on why the US has the upper hand in the trade war, worth the few minutes to listen to.

Final Thought –
“Everyone wants progress, no one likes change” – Gary Shilling (it’s in the clip) 

More later,
Max Power                                             

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Disclaimer: Remember everything I said could be wrong, the market always has the last word.

 

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