Out of Gas

Last week I compared the market to an attempt to climb a mountain peak into the death zone. Using supplemental oxygen, climbers can go beyond their normal limits and keep climbing. If you run out of that precious commodity, you must climb back down or risk death.

Apple admitted the obvious this morning. They are running out of gas.

China related companies have mostly dismissed the effect of 2019-vCoV virus as transitory and "V" shaped. They made the excuse that the effects of the virus are unknown and therefore they haven't changed guidance. Until now.

We should see the market correct somewhat, given the straight-up overbought position of the market. Narrow leadership, huge imbalance in the put-call ratio and declining breadth. I say 'should' ... not 'will'. This market has more money than brains and that could keep it going at some point.

Recent data have shown the Eurozone was weakening even before the virus. Now any positive impacts from a trade truce have been short-circuited by the supply shock from the China hard stop. Talk of a rate cut to soften the blow has weakened the Euro but done little to give confidence that the economy is going to rebound.

In my Feb 4 message I did say that stocks are mostly a monetary phenomenon, but I did not see this rally coming so soon. The soothing comments from the monetary authorities was translated into a 'go' for the summit push to new highs. Now that we are at the top, there is only one way to go.

But confidence that the economy will quickly spring back and provide a more durable rotation from growth to value - thus extending the rally - is fading fast. As Bill Clinton once famously said to HGW Bush - "it's the economy stupid". And the economy is bad.

Those few market climbers still bravely heading up the summit are in danger of running out of gas.

Risk Model: 2/5 - Risk Off

The RSI, Copper/Gold Ratio and the VIX are all in sell mode. An overbought market is now vulnerable to a second sober thought about the economic effects of the supply shock emanating from China.

Only the 200 dma test of +10% and the lagged readings from the AAII Bull/Bear Ratio are positive. Although the 200 dma test is notionally positive for the XIU it is in dangerous territory when measured by the S&P 500- full 12% above the 200 day line. Nose bleed overbought. AAII should tick down this week also.

Take a few weeks off here or trade from the short side.