Henri Émile Benoît Matisse
…was a French artist known for both his use of color and his fluid and original draughtsmanship. He was a draughtsman, printmaker, and sculptor but is known primarily as a painter. Matisse is commonly regarded, along with Picasso, as one of the artists who best helped define the revolutionary developments in the visual arts throughout the opening decades of the twentieth century, responsible for significant developments in painting and sculpture.
The intense colorism of the works he painted between 1900 and 1905 brought him notoriety as one of the Fauves (wild beasts). Matisse created many of his finest works in the decade or so after 1906, when he developed a rigorous style that emphasized flattened forms and decorative patterns. In 1917, he relocated to a suburb of Nice on the French Riviera, and the more relaxed style of his work during the 1920s gained him critical acclaim as an upholder of the classical tradition in French painting. After 1930, he adopted a bolder simplification of form. When ill health in his final years prevented him from painting, he created an important body of work in the medium of cut paper collage.
His mastery of the expressive language of color and drawing, displayed in a body of work spanning over a half-century, won him recognition as a leading figure in modern art.
Woman with a Hat- 1905 (click on image for the full painting)
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“Rather than love, than money, than fame, give me the truth.” Henry David Thoreau
“If you can keep your head when all about you are losing theirs…Yours is the Earth and everything that’s in it” Rudyard Kipling.
“Veritas Nunquam Perit”- “The Truth Never Perishes” Seneca (the younger)
“There is nothing new in Wall Street. What happens today has happened before and will happen again.” Livermore
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Primary Trend: Up
Intermediate-Term: ~ Seven Sentinels Uptrend/Topping
LOLR Trend: ~Uptrend
Trading Position: 24% SLV, Cash 76%
Stops: SLV 22.92,
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ALL TIMES EASTERN
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SPX Today 4248, Tracking: 1,555,085
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Friday: 4:00
SS LOLR STS
Up Up Up
7/0 5/2 6/1
Breadth: 1053/1113
McO: +27.18
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…yet we haven’t even reached the halfway mark for 2021.
As we begin this article in June 2021, let us zoom back 106 years and examine where markets are today from a multi-decade, even multi-century perspective.
As we view SPX quarterly for the last 100 years, we see only one other period that even comes close to the exceptional nature of the last 12 years. That period was for those years leading up to 1929:
The above chart is arithmetic, and on such a scale, we can’t even see the volatility of the 1920’s – so let’s view it now on a logarithmic scale for perspective:
Unfortunately, Stockcharts.com has no SPX data before 1915 to put it into full perspective, but you get the idea.
The following chart displays a closer view of this once in a century behavior of SPX since 2009:
As does this weekly chart displaying the run-up since March 2020:
But to emphasize how extraordinary this last year has been, the following shows the parabolic advance in the DJ Transportations since March of 2020. And we all know by now how parabolic moves end. It won’t be pretty for those positioned long, but ultimately it will offer a once-in-a-lifetime opportunity for those positioned correctly.
And looking more closely, we observe the beginning of the decline developing.
And finally, let’s view the Double Top of May-June 2021 daily:
From contemporaneous writings of 1929, we know that the nation had gone “speculation-crazy” by 1929 and had come to believe this “new age of runaway markets” had become the “new normal.” Fortunes were to be accumulated by jumping on the hot stocks of the day.
Sound familiar?
No one who has actually looked at this data could argue in good faith that this stock market period is anything but unusual.
2009 to 2021 has produced the most extraordinary period of our lives.
We’ve now experienced the upside of this cycle.
But what we need to be asking is only this: “Where will the market go from here?” We’ll discuss the answer below.
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Let us begin by viewing the daily chart of SPX, the Dow Jones Industrial Average, the NASDAQ Composite, the Dow Jones Transportations, and the Rusell 2000 over the prior four months. We note that the DJIA, COMPQ, TRANS, Russell 2000 all failed to confirm Friday’s high close.
Readers know that we’ve been showing examples of the steep loss of momentum and failing internals leading into this SPX double top, especially the last two weeks.
We won’t repeat those warnings today. But what we will do is to introduce new compelling evidence that markets are near the turn- and that this next turn will be one for the record books.
Friday, June 11, 2021, produced an amazing statistic: the highest SKEW reading in recorded history. That close was at 159.28:
Today we’ll define and explain the CBOE $SKEW Index and examine carefully the history of extremely high readings versus SPX.
We will print out from the CBOE website the precise definition and formula for $SKEW.
However, all one really needs to understand is that $SKEW is a measurement of precisely what the market assesses the “Tail-Risk” to be for the market on any given day.
Tail-Risk is the probability that markets will produce a 2-sigma or 3-sigma or larger drop in the 30 days to follow.
From the CBOE website:
Chart 3. Frequency Distribution of S&P 500 Log-Return. The occurrences in that oval represent the “Tail:”
For the mathematicians among us, here is the precise formula for skew:
And finally- and this is very import- here is $SKEW translated to PROBABILITY of a 2-sigma or a 3-sigma decline in the next 30-days:
From the CBOE’s array above, when $SKEW reaches 145 (the highest they’d seen when CBOE produced this White Paper), there is a 14.45% probability of a 2-sigma decline and a 2.81% probability of a 3-sigma decline (a crash) in the next 30 days.
We extrapolate from their chart that the rate of expansion for 2-sigma events is as follows: every 5 points increases the probability by 10.2% versus the prior number. Therefore at 159.28, this translates to a 20 percent probability or a 2-sigma drop.
Using the same math (the expansion is 11.2% for 3-sigma), the probability of a 3-sigma event is 3.95%.
That’s purely the market’s assessment right now based on the relative premiums for out-of-money puts versus OTM calls.
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This final section today shows the application of this $SKEW data for market timing.
For starts, though, here’s a chart showing the relationship between the 13-day moving average for $SKEW versus Weekly SPX over the last four years:
The following image shows the entire history of $SKEW versus SPX- and puts this peak Friday into a 32-year perspective:
Finally, today, let’s get up close and personal with $SKEW and see what Friday’s reading suggests right now.
This chart covers the relationship between the 5-week MA of $SKEW versus the SPX for the last three years:
While the SKEW versus SPX relationship is not perfect as a direct timing tool, it certainly provides a powerful perspective on where we are at any time, and especially NOW versus a developing breakdown of this parabolic advance.
We made the following observation Thursday:
“3:35 PM… It is fair to say that we DO have in place now the minimum condition necessary for a final top to this rally in the form of:
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A new ATH SPX close- above the prior record of 4232.60
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LOLR remains 3/4 with NYMO, NAMO, NYSI, NASI all in downtrends, and all are weakening (first four below)
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Breadth has decidedly underperformed an SPX +20/COMPQ +100 day at just 300/-100 and still dropping
But the weakness is not as pronounced as at many highly significant tops.”
We will need to see one more internally weak day at new highs -or- follow through in the next two trading days with very negative relative breadth- or both in the next two sessions.
We continue to wait for the necessary confirmations.
We stand by those comments, as all of the data we’ve studied this weekend backs up these observations. But we await final confirmation.
We continue to believe that 2021 will prove to be “The Most Extraordinary Year Of Our Lives.”
Even more importantly, though, once the Bear Market gets underway for good, 2021-2023 has the potential to provide the most profitable period of our lives for trend traders.
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