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Bulls Lack Confirmation After Good Cyclical Rotation - Morning Market Squeeze

Key Tactical Takeaways:


> Although key risk areas like technology and cyclicals have shown signs that a change in short-term sentiment is "hammering" tactical trading lows in these areas, we have yet to witness an official reversal of their bearish short-term trends.


> With the dollar confirming a tactical bottom in recent days, commodities and commodity currencies are being forced into deeper, more complex corrective patterns to digest their stellar Q2 through Q3 gains.


> There still isn't enough fear to force the VIX to close above the first downside stop at .... For > ... sigma daily ranges to become the norm, we need to see the VIX close above this stop.  

Some Quick Thoughts:

Monitoring how markets absorb news cycles is a critical part of identifying key turning points in price action. Throughout the entire September decline it has remained our view that the cycle low would develop somewhere within healthy limits (i.e. not much > ...). Now that key technology proxies are showing signs of "hammering" out tactical lows in the area of a 10% decline (so far, QQQ has witnessed a -11.9% correction based on closing levels), after satisfying the minimum requirements for a 3-wave decline from the 09/02 top, it's possible that a tactical low is now in place. For this to be confirmed, however, QQQ must close above ..., which is where the highs fell just shy of on Tuesday.


To be clear, the seasonal window that we are currently in does not bode well for any tactical trading low turning into an immediate rally to new highs in the major indexes. Also detracting from this idea is the fact that not one of the 11 S&P 500 sectors has rotated back into a short-term uptrend this week. However, as the debate rages as to whether the recent death of Justice Ruth Bader Ginsburg means that attention will be diverted from passing the next round of stimulus to filling this vacant seat, we find it interesting that numerous retail and restaurant names are showing good bullish rotation of late. Yes, many names in this space suffered outsized one-day declines in the wake of this weekend's troublesome virus-related headlines. But, the names that would stand to benefit from a new round of stimulus and do not depend on large crowds (like casino and cruise stocks) do seem to be acting pretty well. Simply put, this is not the kind of action we would expect to see if the major indices were immediately vulnerable to probing the lower depths of a ... correction.


Make no mistake, we have yet to confirm that this second wave of September selling has officially concluded. For this to occur, SPX needs to close above .... However, recent price action does suggest that participants are starting to reduce bearish exposure/add bullish exposure as intra-day sell-offs take key risk proxies to the low-end of healthy drawdown windows. To reiterate, our base case at this time is that when the short-term trend is officially reversed, it will simply lead to range-like activity, since European and Asian markets look too weak and domestic seasonals still lean too bearishly for anything more bullish than a range to develop prior to mid October.


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