The Panic Cycle
The TSF - Focus Stocks Will Be Sent Out Tonight
To all paid subscribers — with the best setups and opportunities going into this week, complete with methods on how to catch them.
Last Weeks Market Analysis Is Now A Free Read
So you can get an idea of what members of TSF prepare themselves with heading into every week.
A lot of capital can be saved by studying the market carefully every week, and our market analysis is in my opinion one of the most valuable parts of TSF.
Every market analysis takes me around 8 hours to finish every weekend, I leave no stone unturned, so we can be positioned correctly.
And My Message Last Week Was Clear
And On Friday We Reached The First Target
We undercut 6450 by a couple of ticks which attracted some buyers into close.
Before We Start — Lets Go Back And See How All Of This Started
So we can continue to learn the anatomy of a market rolling over.
December 14 Our Market Analysis Was Called “Time To Pay Attention”
Because back then we started noticing a change in the consolidation and a bearish bias when assessing the market conditions under the hood.
And I have noticed over the years that I always start being cautions a bit early.
And that is a feature and not a bug in my system. Noticing changes of the regime early, will help you dial it down into the deterioration, instead of being caught full gas when things are actually turning.
And I told you this.
And In January Before Energy Ran — I Showed You Something Was Up
Energy was at a multiyear inflection point in it’s relative performance compared to the market.
And Energy Ran In A Straight Line Up
For how long can energy run?
And lets digest this, when we topped during the 2022 bear market, energy outperformed the S&P 500 during a whole year.
What can energy do with this macro backdrop? Energy is always hard to trade, but when it starts to run, it can run longer than we would expect.
And In “Bulls Defend As Fragility Increases” On February 1
We noticed a sudden aggressive unwind in the positioning in IPOs, a signal I have used several times.
And I showed you this.
That was essentially the top, good signal, and trouble came soon.
And On February 14 I Showed You Why We Were At Peak Rotation Trade
Because everybody where celebrating the value trade and how it is a new regime in 2026.
Well it often isn’t, it is usually life support for the market before it tanks or growth take the lead again.
And When The Rotation Peaked — We Tanked
And In “New Regime?” On February 22
We zoomed out properly.
Because are the odds really stacked in our favor when we are at the top of channel that has been respected for two decades?
Some day this channel will change, but for now — keep watching it.
And We Have Now Fallen Into A Downtrend
And today we will go through the market carefully, and our main job is to understand if this move down was enough for us to produce a significant short term low that we can trust.
And if not, where we might be heading and how to play this environment.
And it is key to understand that simply by missing the worst days, half the job is done.
Our job is to trade heavily when trading is easy, and protect capital when odds are stacked against us. Risk management, attention to changes in the market regime and discipline is the only way to last in trading.
Buckle up, this is a long one!
Lets Start With Zooming Out — S&P 500 Weekly
First decisive close really losing the weekly EMA 21 with power. And I have showed you this before, and it’s one of the keep it simple things in the market.
If the weekly EMA 21 isn’t reclaimed within a week or two, historically we go much lower, as you can see.
No reason to become too bullish until it is reclaimed.
Too Many Trapped Longs — S&P 500 Daily
And today I simply want to highlight a dynamic, whenever structure breaks for real, like it has now — things usually take some time to mend
Because we have trapped longs for 5 months, which means whenever the market pushes up, it will be met with selling pressure until supply and demand equilibrate again, which usually takes some time
We have lost the uptrend by losing the 200 SMA, and as I showed you last week, if we stay below it for more than five days, we usually go much lower and forward returns are challenging in the time ahead
I don’t know if we will dump or bounce first, but I believe two things are very likely in the time ahead
1. This low will be breached to the downside shortly
2. We will reclaim the 200 day soon, but I don’t know if it will hold
My base case is that this will develop into a correction, and 5% more downside would take us to the February 2025 top, and I will stick my neck out and say that I have a hard time believing it won’t be tested in the time ahead.
But as always we remain flexible, and the quality of any bounce must be assessed as it unfolds. And bounces in downtrends can be viciously powerful.
Nobody can see into the future, we can have our scenarios and think about what we believe will happen — but in the end price is leading.
One thing is certain, we are approaching peak negative news flow, when the market stops declining on bad news, that will be a tell of a bottom forming.
And If We Really Dump — Don’t Forget About The Monthly EMA 50
Fortunes can be made simply by buying when the market dumps into the monthly EMA 50, two decades of quality dip buys.
We Are In A Negative Gamma Environment
Simply put, in a negative gamma environment, market makers sell into selling and buy into buying — amplifying the moves both ways.
In positive gamma environments, what we experience as the easy grind up, market makers buy dips and sell rips which makes the market more stable — which is what a favorable environment for swingtrading looks like.
(Source: www.menthorq.com)
And we closed just above put support, which gives the market a chance to turn in the short term here. If 6500 is lost, selling will accelerate down into 6400s due to market maker dealer flows.
Trend Following CTAs & Vol - Control Funds
Sold a lot last week.
(Source: www.menthorq.com)
And here is the thing, when trend changes, they continue to sell for weeks and weeks.
Latest projections from Goldman Sachs sees them continue selling in the month ahead unless trend changes:
Down or Flat tape - 48-55 bn of selling
Up tape - Buyers 42 bn
But we need a very strong move up for them to flip to buyers, according to the projections.
And realized 1 month vol remains above 3 month vol, which prevents inflows from vol-control funds.
CTAs & vol-control funds remain a natural headwind for stocks at the moment.
QQQ Followed The Path
I haven't changed the line from last week, some support seems likely to emerge here, but same situation as the S&P 500. A lot of overhead resistance and lower prices are very likely in the time ahead.
There is not much support under, and a slow chop down here would not surprise me after a quick bounce.
Small Caps Dumping — Russell 2000
Last week I told you based on the character of the decline, small caps should breach this level to find demand lower.
It seems that’s where they are headed, a bit more pain left for small caps most likely.
Regardless, what’s important is that small caps reclaim and continue to live above this big base soon.
Equal-Weighted S&P 500 Has Gone Nowhere In A Year
That is why I have nagged about this rotation and that it was temporary, bull markets are lead by growth stocks — anything else is usually temporary.
Equal-weighted S&P 500 is already back where it was during the February 2025 top.
Capital Rotating Away From Defensive Sectors And Into Tech
Clearly visualized here, and you can see that the timing fits.
This doesn’t mean it’s a risk on signal, it might simply be capital finally rotating into the prior out of favor group, when defensives finally crack.
But if it continues, it might be something.
MAGS Has Gone Nowhere In A Year
Also incredible.
A couple of weeks ago we hoped for a flush into this level, well we got it.
Should give some kind of counter reaction up. Ideally MAGS starts bidding and consolidates above this level, which would help the market to turn..
Bear Market Levels Of Breadth Soon
And today I have an important observation for you, because breadth is one of the most misinterpreted things out there.
Lets start with summarizing where we stand:
Longterm breadth has declined swiftly but is still not oversold
Intermediate term breadth has tanked, soon at levels seen at bear market lows
FOMO indicator bounced from very oversold levels, and remains oversold, but still has not come close to levels seen during the April lows
And here is the thing, if you look at intermediate term and FOMO indicator, it is likely we bounce soon. But what favors that bounce not lasting, is that longterm breadth is far from oversold.
The market likes to correct oversold conditions, and when too many stocks have dived too fast, we pause or rally. But if we look at this in the sense of a broad significant sell off, longterm breadth will usually need to get oversold for us to put in a bottom that lasts.
As you can see in the chart above, historically when we bottomed in a significant way due to oversold conditions, longterm breadth and intermediate breadth were oversold together.
This is not what we see now. Favors a dead cat, resetting the immediate oversold conditions followed by more decline in my opinion.
VIX Showing Us Risk Is Priced Higher Further Ahead
VIX is high, and I have told you before that VIX at 30 can go to 40 or 50 causing much more pain in stocks.
And on Friday we saw a good VIX spike, but it is important to assess the term structure of VIX — how VIX contracts are priced in different timeframes. Because it tells us how smart money are positioned.
And the spike we saw in VIX on Friday, did not coincide with a relaxation in VIX like we can see when we bottom with a VIX spike.
Because we can see that the spread between VIX 1 and 3 month is accelerating faster than the shorter term contracts. We are pricing sustained, persistent risk in the time ahead. Not what you see when the market relaxes after a vol spike.
What we see in pure panic and liquidation, is that spot VIX rises much higher than the three month contract, we have not seen that yet.
In summary, VIX remains unstable, and this is a setup that can sometimes be seen before a much more significant spike in VIX. Until we spike into extreme levels or VIX melts down, equities will struggle and trading will be hard.
Soon Real Levels Of Bearishness — AAII
Would be nice to tag the 1-year bearish high. But they are all lying anyway, looking at how much they held in cash a couple of weeks ago, it was the lowest levels in years.
Market usually struggles when they are all in, a sustained bearishness for weeks in AAII here would be good.
NAAIM Portfolio Managers 60% Long
Getting closer to my sub-50 level.
The MOVE Index
Which is the VIX of bonds, when it rallies it signals uncertainty in the rate path ahead. VIX might not have exploded up, but the MOVE did on Friday.
And the MOVE matters, because the S&P 500 loves a low MOVE. And you can see when MOVE started trending up, we started to roll over.
And there are two dynamics in play here. When MOVE explodes to a very high value, we like to bottom — it often signals peak uncertainty.
But when it is going up swiftly but not yet sufficiently high, like now, the market often experiences weakness.
Here we see all the times the MOVE index crosses above 100 during the last couple of years.
(Source: SentimenTrader.com)
And lets just say that it usually coincides with some wild times. Mostly we have experienced weakness in the time ahead, with one exception during the last couple of years — which was after the April lows.
And The MOVE Is Freaking Out Because Of Rate Hikes
And a rate hiking cycle might be a reality ahead, if things doesn’t change.
The 1-year inflation expectations has climbed to over 5%. That is insane.
Credit Market Finally Heading For Some Panic?
Still not that stressed, a panic move would be better so we can bottom. Just like VIX, credit spreads aren’t signaling a reliable capitulation low yet.
Big Burst In Hedging
We see significant hedging occurring in the market, and this is important to monitor. Because when the market is max hedged, we rarely continue down. Because if you are maxed hedged, you have no reason to sell or have already sold.
Which often produces upside, as hedges unwind and institutions re-position.
The equity hedging index looks at several ways for smart money to hedge and combines that into a score.
Raise cash
Buy put options
Buy an inverse exchange-traded fund
Buy an inverse mutual fund
Sell short a futures contract
Buy credit default swaps
(Source: SentimenTrader.com)
And I used this signal during the April lows, extreme hedging is a quality signal to pay attention to.
We see aggressive increase in hedging, but we are not quite there yet.
Same Story Looking At McClellan Summation
One of the most important things to monitor going forward, and this also reflects the observation I showed you regarding breadth.
And what we can say is that the pace of deterioration in McClellan Summation is incredible, it shows us how aggressive the selling has been.
(Source: SentimenTrader.com)
But it also shows us that we are not close to longterm oversold levels that can produce massive longterm buying opportunities.
These buying opportunities are rare events, and don’t happen often — so it is key to be ready.
But at the moment, we have no buy signal from McClellan summation, much more pain needed. We can always turn anyway, but for a reliable turn or a real capitulation we usually need washout levels of oversold.
Still No Panic In Net New Lows
And we can look at it in another way as well. Real capitulation moves and bottoms in significant declines are usually accompanied with a massive expansion of stocks making new lows.
Because when a lot of stocks make new lows, that is clear forced selling, and what follows is usually a turn.
Most new lows are made in the growth heavy Nasdaq. But as you can see, so far selling has been soft compared to prior significant bottoms.
My bet is that we might bounce around in the time ahead, but until we see some real selling, we will have a hard time to make a turn that lasts.
So far selling is softer than what we saw in November.
But Does A Pullback Have To End In A Correction?
Of course not, and most don't. Looking at all the 5% pullbacks in the market since 1942, only 25% resulted in a deeper correction.
And only 12% developed into a bear market.
Never forget that the market has a bullish bias by design. The problem is that this macro backdrop might have severe consequences for the rate policy, and a rate hiking cycle is in my opinion not priced in.
And is enough fuel by itself to force the market into a normal correction. Because don’t forget that every year the S&P 500 corrects 10-15% one time on average — that is a normal year.
The Ingredients For A Real Low Is Panic
Panic is the best, understanding when panic hits can unlock outsized returns.
What everybody should do is buy the dip, what everyone does wrong is buying it too soon — and that includes me.
We have no evidence of panic, nor extreme levels of oversold when looking at the bigger picture. We might be getting there, but we still have significant room to freak out.
And a way to measure this is to look at the sentiment cycle again.
The panic sentiment cycle has compared every market cycle since 1928, and comparing that to the current price action — so we can understand when we have reached an extreme.
And extremes in panic will make us turn.
(Source: SentimenTrader.com)
Two observations, when we get this scared, the scary part hasn’t ended until we freak out.
And when we freak out — the low is in.
Not there yet, but lets watch this one. History doesn’t have to repeat, but the setup for freaking out is certainly there.
I am also monitoring several washout capitulation models for a signal, none has triggered yet.
This Has Been The Nowhere To Hide Sell Off
Everything have dived. Gold, bonds and stocks. The dollar is one of the only asset that has remained resilient.
And that is a problem by itself.
Because the market usually likes a dollar that is trending down. And when the dollar strengthens, the market tend to weaken.
And the dollar looks like it is breaking out soon.
And We See A Change Of Character On The Bullish Bets On The Dollar
Traders starting to turn bullish, and we can also see that hedge funds have started to buy the dollar as well.
Which Takes Us To Gold
Gold has tanked, that is what happens in cross-asset de-leveraging when significant stress hits the market. Smart money sells everything to raise cash, or sell liquid assets like gold to cover margin calls elsewhere.
There are also some other theories that we don’t have to go into in detail.
But lets look at what gold does every time hedge funds buys a lot of gold, like they are doing now.
(Source: SentimenTrader.com)
They usually time a short term rally pretty well. If gold declined due a temporary liquidation event, it should be time for a gold rally soon.
While We Are Talking About Gold — The Pawn Shop/Financials Signal
Yeah this one is strange, but I like it. In short when pawn shops rip, it can be an early sign that the consumer might be under pressure.
And looking at when pawn shops outperform financials, like they are right now — those have usually been some interesting times in the market.
Price Action Of Individual Stocks — Carnage
Not much to say, mostly carnage again. There are still setups and the standout leaders holding up.
And some select themes that might be setting up, but price action is volatile filled with shakeouts and ugly reversals. Boom and bust moves that are hard to capture mostly.
And an easy way to assess the environment is if setups are proliferating or contracting — and they are contracting becoming fewer and fewer.
Which is evidence of deep risk off.
TSF - Market Regime Model
The model did it’s job, it warned us with caution before we started to decline and has stayed in deep risk off and defensive.
It still has not declined to zero like it usually does in a capitulation low.
Still Following The Historical War Roadmap
Things might feel scary, but so far we are following what usually happens. Average historical decline pushes us little more down before turning.
What Didn’t Fit To Show
Commercial hedgers are still selling all indices except for small caps, they are buying small caps and steadily increasing exposure there.
OPEX distorts equity put/call, no reliable signal to interpret there
By several short term momentum indicators we are oversold and due for a bounce soon
Some Important Charts
Tech At Support — XLK
Nothing dramatic here, continued slow bleed down. Seems like a good spot for a bounce soon?
Semis Are Important For The Market — SMH
And they have been holding things together, a swift decline in semis will drag us down quick.
So far rejected on the reclaim attempt.
Software Behaving Like They Should — IGV
I haven’t changed the lines for weeks, and to no surprise they are retracing back to the lows for the secondary test — like almost every asset does when it tries to bottom.
Relentless Trend In Energy — XLE
Hard to get in on a move like this, but the standout sector in the market.
ARKK Breaking Down From The Quality Bear Flag
That we saw last week.
Nothing bullish to be seen here.
Worst Case Bitcoin Is A Bear Flag
And if it breaks down from here 48-50k is doable easy. But so far bitcoin is still showing RS.
And the case for bitcoin is that large speculators are the most bullish bitcoin in a year.
Gold Tanking
And I haven’t found an ugly candle like this in gold in years. Moves like these usually get followthrough to the downside to some degree. First stop is testing the top of this small base.
No reason to dive in here, let things settle and buyers defend. But I still like the longterm outlook for gold.
What Happens To The Market When Real Estate Tanks?
Last week I showed you the incredible decline in homebuilders, they are very rate sensitive so that was not much of a surprise.
But lets look at how the market behaves when real estate really dumps.
We will see if we get followthrough down, but it’s usually not the best.
The Bottomline
We are in a downtrend, bears are in full control, every bounce should be assumed to be sold until price confirms higher and defends a prior low
Everybody are waiting for a capitulation move down, I personally don’t think we will get that soon, it seems much too early.
What is more common is downward chop with a strong bounce here and there, and a real capitulation move later ahead
We can look at seasonality, oversold readings or the fact that the market likes to bottom after March OPEX — but that really doesnt matter at the moment.
We are in the middle of a decline until that decline stops. The environment is in deep risk off and highly unfavorable at the moment. That is what matters
Things can change quick, news can change the narrative, but for now this is a time to sit tight and focus on downside protection. There is a setup for this to spiral out of control
And If the tariff story last year taught us anything, it is that things can decline very hard and very quick when things align for that — respect a downtrend, don’t fight it
If we get to a moment where aggressive rhetoric, horrible news and continued escalation is met by no negative reaction by the market — a turn is likely near and we should pay attention
The deeper we go, the bigger the recovery — zoom out and focus on the bigger picture.
This is the time to pay attention to the leaders and to a bottom forming in them, prior to the market.
Because the market can stay poor, but the leaders turn much earlier than the rest of the market.
But it goes without saying — be very careful here, things can escalate significantly.
There is a setup for waterfalls down.
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Charts courtesy ofwww.menthorq.com
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