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Friday, August 29, 2014

A look at Q2 profit data

Today's GDP update also contained a look at corporate profits.  Here is a look at the change.

It is now showing Q1's drop was 16% (that was revised lower from the May report).  The rebound in Q2 was reported at 8.3%.  That sounds pretty good until we look at it on a year over year basis.

The year over year change was -9%.  Not a very pretty number.  The BEA numbers include public and private companies so it is a very broad measure of profits.  In theory it should tell us more about the underlying U.S. economy then just the numbers from public companies.  I believe many public companies massage earnings a lot.  This less massaged data probably gives us good reason for why we have seen so much M&A activity this year.  It is the usual response when organic revenue and profit growth declines.  It probably also explains the big surge in stock buybacks in Q1. Will the profit picture pick up over the next few quarters?  1998 is the only time we had a decline in profits like this that was not associated with a recession.  However, we had much stronger economic growth at that time then we have now.  Here is a GDP chart that shows how much stronger the economy was then.

The weakest quarter we had in 1998 was Q2 at 3.9%. Q3 and Q4 were 5.3 and 6.7% respectively.  I don't know the reason for the big drop in  profits that year.  It does not appear to have been economic weakness.  However, we can't say that this time.  Q1 was definitely weak.  While the current data shows a strong rebound in Q2 we don't have all the revisions yet.  One factor I am sure affected Q2 was a the Windows XP upgrade cycle as support was discontinued in April.  That upgrade was big enough to cause memory, hard drive and processor company stocks to surge (the so called old tech stocks that were all the rage early this year).  That cycle was probably largely completed in that quarter.  Certainly by Q3 so I don't think we can count on that being much of a positive factor going forward.

While the retail ETF RTH recently broke out to new highs there are a lot of retailers doing poorly on their earnings.  Even high end retailers M, JWN, and DDS were knocked down hard on earnings.  JWN and M came roaring back after the smackdown, but the fact remains their earnings were not particularly good.  That would not seem to make sense if the economy is truly as strong as the pundits would have us believe.  It would make sense if the consumer truly is weak and the strength was largely the XP computer upgrade.  The economic picture seems cloudy to me and is not being helped by weakness in Europe, Japan, and China.  It will be interesting to see how the revisions play out.


Daily update 8/29

SPX makes a new all time high close by a whopping 2 points.  I saw the USA Today had an article on the front page of the money section proclaiming we were on track for the biggest Aug. gain since 2000.  I am sure that sounds very good to most people.  However, those familiar with market history know that was the final high before the bear market that took the NDX down 80% and SPX nearly 50%.  That was an example of why the saying that past performance is not necessarily indicative of future results was invented.  We all know we had a stock market bubble then, but what about today.  From what I can determine we have more bubbles then ever before.  Interest rates are at the lowest levels in all of history in some places in Europe.  While we are currently not at historical lows in the U.S. we are at levels lower then all of history before the last few years.  There is literally no asset class to invest in that is valued in a way to generate good long term returns.  Warren Buffett was holding $50 billion in cash at the end of June.  Back in 2000 he was complaining about having $18 billion in cash because he could not find good opportunities.  He must be beside himself now.  Why do you think one of the best investors on the planet has the biggest cash hoard by far he has ever had?

SPX is really struggling with the 2000 level.  Here is the daily chart.

This still looks pretty toppy to me.  The volume remains at unbelievably low levels along with the intraday range.  There were only 33 new SPX highs today despite the new high close.  That is really pitiful.  The monthly chart is rather interesting.

This month was a bullish engulfing bar touching both trend lines of a rising wedge pattern.  Notice the volume.  May, June and August all had rising prices on noticeably light volume.  In any kind of triangle pattern including wedges the volume is supposed to fall as price nears the apex.  That is clearly happening here.  As SPX broke out to new highs in May the volume dropped 20% from April.  The Aug. volume was down 33% from April.  If the volume does not pick up soon there will be more layoffs on Wall Street for sure.  There isn't much room left between the lines.  Breaking the lower line is likely to increase volatility considerably.   Lets take a look at the futures chart.

Last night I said the price bar turning green might mean the consolidation phase was over but needed follow through.  While the futures traded above the high of that bar they never closed above it.  In fact they actually ended the day below that close despite SPX being higher (remember the futures popped after the 4 PM close yesterday).  So we have no sign the consolidation phase has ended.  We actually reinforced the phase with more red and white bars.  The 18 SMA has gotten up here to the point the futures will either break out to the upside or fall below it soon.  Which will it be?  Lets have a look at the IWM chart.

IWM had a thrust bar the other day which stopped right at the .618 retrace level.  It has not been able to conquer that line yet.  Will it or won't it?

What will the big boys do next week when they get back from vacation?  Will they pile in above 2000 or take some money off the table?  They were really crowing today about  how great Aug. was.  However, SPX ended up 12 points (a whopping .6%) above the July high.  That certainly sounds like something to crow about, LOL.  Neither the Dow nor the transports closed above their July highs.  We never had even one day above 200 new highs.  Technically this looks very much like an important top forming.  I will be watching that key 1991 and 1886 levels going forward.  I think the market needs a clear thrust above 2000 with signs people are piling in to change the technical picture.

The market and sector status pages have been updated.  Have a great weekend all.


Thursday, August 28, 2014

Daily update 8/28

A couple of weeks back some headlines came out about Ukraine attacking Russian military inside Ukraine territory that caused a sell off in the market.  Today NATO came out with a report and sat photos showing Russian military inside Ukraine and the market did not even notice.  I wonder if volume is so light they turned off the headline scanning computers. Wall Street truly is on vacation.  Here is the daily SPX chart.

The market gapped down a bit this morning on weakness in Europe and SPX tested the key 1991 level.  Buyers stepped in and pushed the market up a bit.  However, we still closed down a few points.  Volume was even lighter today then yesterday.  This action validates 1991 as an important level.  Do we test it again or make new highs now?  Lets see what the futures chart looks like.

The futures tested the 18 SMA today and bounced.  There was a bit of strength late in the day that carried on after the 4 PM close.  That turned the price bar green.  That could mean the consolidation phase is over, but not necessarily.  We really need to see a thrust bar and strong close at new highs to indicate rally chasers are alive and well.  The 2000 level could be stiff enough resistance to end up causing another pullback.  So far we have seen very little buying interest up there.  The power is up for grabs here.  Which side reaches out and takes it?

The night before the last trading day in July I said "Tomorrow being month end is sometimes a muted day, but who knows."  The who knows part was correct as we ended up with a rather large down day.  I have no idea what happens tomorrow.  Maybe nothing.  The Russian thing may heat up or cool down overnight.  Europe was down today right from the start and I don't really know why.  The NATO announcement I saw came out after Europe closed.  Those markets might have a negative reaction tomorrow which could influence our open.  We have a three day weekend coming up also.  If people get nervous over Russia there could be some extra selling.  However, of late nothing seems to bother the market so maybe this is just another instance of who cares.  Too complicated to guess at.

Along with 1991 there may be another key level at 1986.  Check out the latest NAAIM survey.

There was a big surge in bullishness from 56 to 78 in the last week.  The survey is based on the Wed. close.  Last Wed. SPX closed at 1986 so the buying spree started around that level.  SPX only moved up 14 points and the volume was low so I am guessing that most of the buying was in index and ETF positions and not so much in individual stocks.  That tends to happen when the money managers are afraid of being left behind, but confidence is too low to pile into individual stocks.  If SPX drops below 1986 it is likely to put a lot of those new positions underwater which could increase selling pressure.


Wednesday, August 27, 2014

Valuation and investing

I have been seeing a few articles lately trying to make a case the market is not over valued.  Here is one that uses a valuation method I have never seen before.  By This Measure, Stocks Are Not Overvalued

The modern era starts in 1990.  Does this chart tell us anything meaningful?  Beats me.  Without some time scale or comparison with the Dow or SPX how can you tell.

Here is the final conclusion:

The Takeaway
While Professor Shiller contends that the stock market is currently in "rarefied air" based on analysis of data going back to 1900, our view is that one can't use valuation metrics in a vacuum.  In short, since participation in the stock market has become more mainstream and the market moves have become more extreme over the last 25 years, one needs to make some adjustments to valuation measures in order for them to be useful.
This is NOT to say that Shiller's point is invalid.  There ARE other measures that suggest stocks are overvalued to some degree. However, based on adjusted, median P/E's, stocks do NOT appear to be in the "danger zone" at this time.

It is obvious to anybody that studies long term valuation charts that valuation is not useful for short term market timing.  However, over longer periods of time (7 years or more) valuation absolutely affects the returns.  Here is another attempt to say valuation does not matter.  Even Warren Buffett Can Be Wrong: Ritholtz Chart 

 This chart is in this article.

The article tries to make the argument that this is not a very important indicator anymore despite the fact that Warren Buffett likes it.  Here is a snippet.

So what does market cap as a percentage of GDP tell us? The answer is: Much less than it used to.
Valuation relative to U.S. GDP assumes that the U.S. economy is the driver of capitalization. It really isn’t. Numerous studies have found very little correlation between current economic activity and the stock market.
Then there is globalization. The percentage of income that the S&P 500 derives from overseas activity is now about 50 percent, up significantly from where it was about 20 years ago -- in the 30 percent range. Given that half of SPX earnings are coming from overseas, comparing market cap to U.S. economic activity paints only a partial picture.

The presented chart does not show a market index.  At least it has the dates.  However, it takes considerable effort to determine whether the valuation metric actually works.   While the argument may sound good lets look at the data in a different manner.  This chart is a model John Hussman uses to estimate future returns.  You can read more about it here.  Yes, This Is An Equity Bubble

This chart shows the market cap to GDP ratio overlaid with the actual 10 year return of SPX.  Note the ratio is presented with the scale inverted.  This is inverse from the chart above so that low values on the blue line represent higher valuation.  While actual returns overshoot or undershoot the predicted value at times they generally track very well.  I think I can make the argument that the higher the starting valuation when money is invested the lower the 10 year return will be.  This method still seems to be handling the current era of highly valued markets just fine.  Do you see any reason why it will be different going forward?  I don't.  Note it is currently predicting negative returns for the next 10 year period.  The only other time it did that was in 2000 and it was correct.  We are not quite as extreme as then so I guess the pundits can celebrate that.  Of course there is no guarantee it will get that extreme again is there.

All valuation methods when looked at over the long term show periods of high valuation and periods of low valuation.  These periods last for many years.  However, each period is followed by a period the other way.  I don't think that has fundamentally changed.  The current super high valuation period is likely to be followed by a period of lower valuations then we are seeing now.  That period may be higher then the low periods in the past, but it is still likely to happen.  The question is how much longer will the current period last.

Don Worden of the Worden Brothers (maker of Telechart software) often said it was important to think for yourself.  That comes natural to me as I question everything.  I have come to learn through the years that most people are not that way.  In this internet era thinking is very important.  There are truly lots of fluff opinion pieces out there with little or no basis in fact.  You have a brain.  I hope you use it when reading the Wall Street gobbledy gook they try to pass off as research.  If you are a long term investor then valuation matters.  Period.  This is a very lousy time to put money to work long term.  It looks like it is the second worst time in the last 60 years.  It would seem to me to be a much better time to rebalance the portfolio to reduce equity exposure.


Daily update 8/27

SPX managed to tack on another .1 today.  I heard them say on TV that SPX traded in a .01 range for a record breaking 18 minutes today.  If volatility gets any lower they might as well close the market.  Let see what the daily SPX chart looks like.

Another no volume day.  Is it just me or does this market look very tired?  I know I am getting tired of watching it go nowhere.  There seems to be no energy here whatsoever.  Lets take a look at the futures chart.

The futures broke the uptrend line today.  We got a red price bar for the first time on this rally.  This should indicate we are in a consolidation/pullback phase.  Whether we go sideways or down probably depends on the news flow.  The market is more vulnerable to a sell catalyst now then it has been since the last low. 

I still see the July SPX high of 1991 as key on the down side.  As long as we stay above that the door is open to more upside if rally chasers show up.  So far they have been in short supply.  The last two price bars look short term toppy to me, but they need downside confirmation to be meaningful.  So far we have had low volume and low volatility.  Low volume can also go the other way if something causes people to want to adjust their portfolios and there is not a lot of liquidity around.  That brings us back around to the news flow which is impossible to predict.


Tuesday, August 26, 2014

Daily update 8/26

SPX manages a close above 2000 (2000.02 to be exact) for the first time ever.  Sometimes you just have to laugh at the totally random market.  Here is the daily chart.

Another miniscule volume day.  The last two bars have upper tails indicating there is some resistance at the round number.  We had 184 new highs which is better then yesterday, but nothing to write home about.  Is that because the big boys are all on the beach?  The low volume certainly suggests there aren't many traders around.  On the downside I will be watching a drop below the July high of 1991.  That would indicate a failed break out and could bring in some sellers.  Lets see what the futures chart has to say.

The futures have been crawling up the trend line lately.  They ended the day just above it and right where they opened at 9:30.  They are currently trading slightly below it in after hours, but we will have to see where they are tomorrow.  A confirmed break of that line should indicate we are in a consolidation/pullback phase.  The gains the last two days have all come from the overnight gaps as the futures ended the day right where they opened.  That leaves SPY with double doji bars with very narrow ranges at all time highs.  That would seem to indicate some indecision here.  Will that indecision turn into decisive buying or selling?  IWM had a strong day and is now clearly above its 50 DMA.  This is a positive as long as it keeps pushing higher.  Lets have a look at the RTH weekly chart.

Last week RTH broke out to a new high after trading sideways since last year.  I find this move a bit peculiar.  It came after all the earnings reports were already out.  The break out day happened right after Dollar General inserted itself into the merger discussion going on between Family Dollar and Dollar Tree.  I suspect the break out was on investor merger mania.  Will the break out stick?  If it does there are plenty of beaten up retail stocks that could benefit from the interest in this sector.  That should also be a positive for the broad market.  If it fails that could be a negative sign for the economy in general.  I will be watching this one to see what happens.

I am sure everybody is familiar with the seasonally weak Sept. to Oct. period for stocks.  That means that SPX is littered with July and Aug. highs.  This particular break out to new highs has come on the lightest volume all year.  SPX is only 9 points above the July intraday high.  It is easy to see how this new high could reverse in Sept. into a significant pullback.  Especially with QE coming to an end.  I have thought all along the market was not going to wait until the meeting that officially ends QE to sell off.  A normal market would be more likely to sell off and bottom around that meeting.  There are still lots of market internal divergences hanging out there.  This is a time to pay close attention to what happens.  A sharp reversal in Sept. is possible. 


Monday, August 25, 2014

Daily update 8/25

SPX hits 2000 intraday.  Check out the daily SPX chart.

The volume was so light you almost have to squint to see it.  Despite a sizable gap up the futures ended the day just 1 tick above their open.  Breadth went from from over 74% positive early in the day to 58% at the close.  That probably indicates there was some minor profit taking after touching 2000.  New highs at 168 were not particularly exciting.  We have had two days over 180 recently, but none over 200.  The prior bounces off the 100 DMA all had a day over 200 before SPX could sustain trading above the prior high.  Today was the perfect opportunity for the bulls to make this market look strong and they failed to do that.  Lets take a peek at the futures chart.

The first hour today had the lightest volume in the first hour of any day in this contract.  There is also a lot of air between here and the 50 SMA.  Price remains extremely stretched.  We ended the day just above the uptrend line.  Do we break that line or bounce off it again?  Here is a look at IWM.

What does today tell us?  Not a lot from what I can see.  IWM gapped above the resistance line this morning, but oscillated around it quite a bit during the day.  It closed merely .02 above it.  Can we say that resistance is conquered?

The breadth has been very good on this rally.  However, the volume and new highs have been seriously lacking.  I think it is going to take some buying pressure to keep price moving higher.  We did not get that today.  The narrow intraday price range (6.5 points today) looks a lot more like a top then anything else.  I guess we will see if this latest break out sticks.  Below the 7/24 high (1991) selling could pick up a bit.

This was an interesting article.  GMO: "There Is No Safe Place To Hide"  If you are not familiar with Jeremy Grantham from GMO  here is a snippet from Wickipedia about him.

Grantham has built much of his investing reputation over his long career by correctly identifying speculative market "bubbles" as they were happening and steering clients' assets clear of impending crashes. Grantham avoided investing in Japanese equities and real estate in the late eighties, as well as technology stocks during the Internet bubble in the late nineties.
Here is an interesting snippet from the article.

We have been writing quite a bit about why asset allocation today is in one of the toughest investing environments we’ve ever encountered. And it’s not just because we think equity markets are overvalued. No, we’ve seen that plenty of times before over the past decade or so. Remember the technology bubble of the late ’90s? That was challenging, sure, but what got lost in the shuffle was that while U.S. large-cap stocks were outrageously overpriced, it turned out that real estate investment trusts, emerging equities, and international small caps were deliciously priced. And it was perfectly clear to us what we had to do: avoid technology and own the cheap stuff, even though it might have looked a bit unconventional. Then we entered the 2007–2008 credit bubble, and while, yes, virtually all equity markets were overpriced, it was perfectly clear to us what we had to do: hide and wait. And that was not a bad proposition because there were plenty of safe places to hide—Treasury Inflation-Protected Securities, U.S. Treasuries, and a strategy we had developed called Alpha Only—and earn a decent, if not spectacular, return.

Today’s environment, however, is quite distinct, as seen in the chart below, where we lay out the GMO seven-year forecasts in a volatility (an imperfect shorthand for risk) versus return format for the traditional asset classes, or betas. This beta desert is so challenging because not only are there no asset classes that we believe are priced to deliver 5% real return (the red line), there is also no safe place to hide and wait (the green circle).

It sounds like Mr. Grantham is saying there are so many bubbles around there is no safe place to park money.  There have been periods of global asset deflation in the past.  Is this a time when that could happen again?


Friday, August 22, 2014

Daily update 8/22

Pause day.  Here is the daily SPX chart.

SPX did not quite get to a new high today.  It tested yesterday's low and held so far.  Volume really, really dropped down to almost nothing.  So even though it was a down day there was very little selling pressure.  It is not surprising people hesitated to chase price here.  We are quite over bought short term.  I don't think today told us much.  Here is the futures chart.

The futures tested the support line twice today, but ended above it.  The uptrend line is coming up to meet price.  It should push price higher early next week or it will get broken.  Which will it be?  Lets take a closer look at IWM.

IWM acts like it has a magnet at the 50 DMA.  I marked out a little box denoting the battle zone.  It has to get above the 8/19 high or the 8/21 low to indicate the direction of the next move.  Inside that box is nothing but noise.  I don't think SPX is going to continue higher very far without IWM playing along.  I suspect this is the battle that will determine whether SPX ends up with a double top or not.  I will be watching this closely intraday next week.

SPX had trouble staying above 1880 in July.  Will it be able to do it this time?  The pundits have been crowing about the earnings growth for Q2.  If that does not drive us higher I am not sure what will.  There are some worrisome signs in the global economy.  Will that hold back the buyers?  I have lots of questions, but no answers.  One day at a time now.

Here is another eye opening chart on the lack of recovery in this recovery.

Apparently it is better to be older these days.  I can understand why some people wonder if we truly ever exited the great recession.  No other post WWII recovery has been like this.

The market and sector status pages have been updated.  Have a great weekend all.


Thursday, August 21, 2014

Daily update 8/21

SPX closes at a new all time high.  They were really crowing about that on TV today.  I had to laugh a bit.  The close was fractionally above the 7/24 intraday high.  So in almost a month SPX has gained less then 1 point.  I think that is certainly something to get excited about.  Here is the daily SPX chart.

That sure is a straight up move.  Will it last?  Some moves like this are kick offs to new legs higher and some are blow off moves that get largely or completely retraced.  Given the lack of volume and divergences that abound I lean towards this being a blow off move.  Lets take a look at the futures chart.

 I marked the former high in this contract with a support line.  Will old resistance become support?  That is only about 4 points below today's close.  Not much room to work with at the moment.  The market needs to push higher before we get a pullback to have much chance here.  Today was like pulling teeth.  It looked like a real struggle to gain any altitude. 

Yesterday I mentioned the market could pullback and take off again.  Now that we have made a slight new high a pullback becomes much more problematical.  This is an aggressive retest as the 18 SMA is still below the 50 SMA.  That makes the market very stretched in the short term.  Chasing a market in that condition is pretty tough and historically there are lots of times when people didn't do it.  I think it probably takes good news.  That is one thing that is hard about looking at historical SPX charts.  While the chart can look a lot like some other instance the news flow at the time can be radically different.  This rally looks like just another bounce off the 100 DMA with a complete lack of selling along the way.  I don't think it is fundamentally driven.  While the breadth is strong the volume has been very light.  Now we are at the moment of truth with SPX at the high.  Will they chase it or will they sell it?

I have read a number of things lately that seem to indicate a lot of people are expecting Yellen to be extremely dovish at the Jackson Hole conference.  She speaks tomorrow at 10:00.  I have noted the extreme lack of selling on this rally.  Could that be why?  I find this kind of interesting and odd.  All the talk coming out of the FED recently has been about how soon to raise rates.  Are people hoping she will say not any time soon or something?  Most of what I have seen from this conference in the past has been a lot of talk about monetary theory and little or nothing about the actual current situation.  Last year the conference was mostly about how ineffective QE is.  I would not be surprised if her speech has absolutely nothing to do with what the FED will do in the near future.  I wonder if there is a chance the market gets disappointed by what she does or doesn't say.

Something is different this time.  Here is the latest NAAIM investor survey.

This week's survey was 56 which was up only slightly from last week's 50.  For the last two years we can see that every pullback to the 100 DMA has seen a big surge in the survey coming off the low.  This survey has normally been in the 70s or 80s by the time new highs were reached.  Something would seem to have made the big boys a bit nervous this time.  What that could be is hard to guess as there are numerous things that might be causing it.   This survey would seem to validate the idea this rally was not fundamentally driven.  While we have seen two lower peaks in this survey already this year those peaks were well over 80.  That is not the case at the moment.  That makes this test of the high in SPX very important.  If we turn down again with investor confidence this low they may be more apt to sell.  At the very least they might be less apt to step in at the 100 DMA as they have been.  Watch this retest closely.


Wednesday, August 20, 2014

Daily update 8/20

Test of the highs.  Oddly the futures and SPY made slight new highs while SPX did not.  Here is the daily SPX chart.

SPX is now very over bought short term as it tests its old high.  Will people be willing to chase price in that condition?  This was the first negative breadth day in this rally.  Since it was an up day for most indexes and at the highs that is pretty rare.  It might be temporary or a sign the rally is fizzling out.  We will have to see if it continues or not.  There were also less new highs today then yesterday 145 to 186.  People might be losing their nerve a bit here.  IWM closed down and back below its 50 DMA.

There sure are enough divergences around.  Does any of that matter?  It is pretty easy to imagine how this retest could fail, but you never know.  I have no idea what is going to happen now.  I still think the SPX 50 DMA is the best pivot for the down side.  We could easily pullback a bit from here and rally again.  It is still time to take it one day at a time and see what develops.

I have presented a number charts that show how this recovery is the weakest one since WWII.  None better then this chart.

I don't think there is any data that shows the disconnect between Wall Street and Main Street any better then that.  We may be creating jobs, but they must not pay very well.  The pundits can say what they want about how strong the economy is.  I still say it is pitiful.


Tuesday, August 19, 2014

Daily update 8/19

A little more up.  Here is the daily SPX chart.

SPX got within 10 points of its intraday all time high.  Breadth has been strong on this rally, but the volume has been totally absent.  Still no sign of any selling pressure whatsoever.  I guess everybody has caught on to the game of the 100 SMA bounces.  No need to take profits until we make new highs.  Now that the pattern is so obvious one would have to expect it will end soon.  Usually it ends about the time I discover it.  Lets have a look at the futures chart.

The futures stopped at a line that was resistance a couple of times back in early July.  I don't know if this is significant or not.  When this close to the high people can get a little nervous about chasing price.  That is really a pretty straight up move.  People are certainly afraid of being left behind.  Now we wait and see what happens.  The market may mess around here a little bit while it decides what to do.  The SPX 50 DMA is still the pivot on the downside.  All the sellers seem to be on vacation lately.  Maybe they stay there the rest of the month if nothing bad happens.

Here is something a little different.  This is a ratio of the corporate bond ETF LQD and the junk bond ETF HYG plotted against the Dow. 

We only have a few years of history on these ETFs so the study is somewhat limited.  However, we can see that in general when the ratio is rising the volatility in the Dow tends to be low and upward progress is significant.  When the ratio is falling or going sideways the volatility in the Dow tends to be higher and upside progress more difficult to come by.  The ratio has been falling since late last year and once again the Dow has struggled on the upside.  However, we have not really seen an increase in volatility so far.  The current move down looks like the longest one yet without a significant pullback in stocks.  Does that mean the pullback is yet to come or it won't happen this time?


Monday, August 18, 2014

Daily update 8/18

Another gap up, another go nowhere after the gap day.  Here is the daily SPX chart.

SPX completely filled the 7/31 gap down today.  Today's high was right at the .786 retrace level.  The upper 50 Keltner channel band is also right there.  Those look like the last two pieces of resistance between here and the all time high.  If things work the same as the last 5 bounces off the 100 SMA SPX should make a new high before closing below the 50 SMA (1957).  IWM closed above its 200 SMA, but just below its 50.  The COMPX closed at a new bull market high.  Will people show up to chase it higher?  I am not real sure of that.  Take a look at the number of NASDAQ stocks above their 200 MAs.

The spring pullback really took down their numbers.  The return to new bull market highs by the COMPX in June and July repaired some of the damage.  However, the recent sell off, though small in magnitude, really took down the number again. This is far weaker then it was at any point last year.  This is a pretty major divergence at the moment.  If the COMPX ends up turning back down this will look a lot like an important top. 

While SPX seems to be progressing back to the highs there are still some serious divergences hanging out there.  This is still time to take it one day at a time.  It seems like the futures gap up about 10 points any time there is no bad news.  However, the intraday range remains very narrow.  There is a lot of sideways action with occasional pops.  It still looks more like an absence of sellers rather than eager buyers.  That always presents a problem.  As long as no catalyst comes along to cause sellers to show up the market floats higher.  However, if sellers show up price can collapse pretty quickly because there aren't many buyers around.  Tread carefully.

Bespoke put a out a chart showing the average movement of stocks the day of earnings.  Check this out.

Stocks Down on Earnings Again

This is not just SPX it includes more then 2400 companies.  It is obviously rare for stocks to be down as much as they were this quarter.  Last quarter was even worse.  This happened after expectations were lowered considerably going into earnings the last two quarters.  It is interesting that there are so many quarters where stocks were treated really well on earnings over the last few years.  We have had 6 quarters in this bull market where the reward has been higher then the highest quarter (Q4 03) in the last bull market.  Analysts have been busy ratcheting expectations up for Q3.  I think this is the first time in a long time they have done that.  Will companies be able to get over the higher bar?  This chart probably explains why IWM is showing a lot of relative weakness to SPX.  The smaller cap stocks are probably skewing the averages.  Remember they were the most over valued as a group.  I don't know if this tells us much about the future direction of the market or not. It does explain why we are not flying up this year like we did last.


Friday, August 15, 2014

Daily updatre 8/15

Strange day.  Here is the daily SPX chart.

The market gapped up yet again and SPX traded above its 50 SMA for the first hour.  A little after 10:30 stocks sold off and oil, bonds and gold rallied.  This was supposedly on news that Ukraine fired on a Russian military convoy that had entered Ukraine.  I found reports of the Russian convoy entering Ukraine before the market even opened.  Somehow nobody cared until after 10:30.  I can't remember ever seeing a time when the market was so nonchalant about everything.  Isn't that what complacency looks like?  Nothing can go wrong because the market can only go higher, right.  Lets take a look at the futures chart.

The futures closed above the 100 SMA at the 10:00 bar, but ended the day back below it.  That was quite a dip intraday and quite the recovery in the afternoon.  People were not afraid to go home long over the weekend.  No worries mate.  No mater what happens in the world the FED can fix it.  We still need a confirmed close above the 100 to indicate the probability that this resistance will be conquered.

This is the messiest market I have seen since 2007.  The COMPX was within a few points of its all time high this morning.  At the same time IWM is mired below its 200 DMA.  Both of these indexes are considered risk on/off indicators.  What are they saying then?  All bear markets start with some kind of divergence along these lines.  Of course not all divergences like this mean a bear market is coming.  However, I think it would be hard to find instances of a massive divergence on this order not leading to a pullback bigger then 4% on SPX.  I just don't believe we are done on the down side yet.

Back in May SPX stayed in a trading range until IWM got a good rally going off its 200 DMA.  I don't think SPX gets to new high ground unless IWM gets going on the upside.  If it gets clearly rejected at the 200 it could put some selling pressure on SPX again.  SPX traded above the 7/30 low this morning so while it did not completely fill the big 7/31 gap down it did technically fill the gap.

Last night I detailed a lot of resistance in this area.  Today that resistance held.  What happens next week?  I talked a bit about the prior 5 bounces off the 100 DMA also last night.  In all of those instances a close above the 50 DMA led to new highs.  Once the bounce off the 100 started SPX never closed below its 6 SMA before closing above the 50.  With that in mind here is my battle plan.  Work the long side until either SPX closes below the 6 SMA or above the 50 and back below it.  Either of those actions by SPX would indicate it is different this time. 

Wall Street economists point to the strength in Q2 as a sign there is no recession near.  This data table indicates you can't really tell much by that.


This table shows the GDP growth 1 quarter before a recession stated for the last 60 years.  As you can see a 4% print is not really all that rare is it.  Note these are after the revisions.  I suspect the original Q2 print might be revised lower as more revisions come out.  Keep in mind we have never had a quarter as weak as Q1 without it being associated with a recession.  We can see from the data that while Q2 bounced back considerably it is not an all clear that we are not near a recession.  It is normal not to know we are in a recession for 6 to 12 months after it starts when a majority of data revisions are in.  Quite a few consumer related companies are complaining about poor sales.  That just does not seem consistent with the supposedly strengthening economy.  I still have a feeling the economy is not nearly as strong as Wall Street wants us to believe.  I guess we will see.

Last December I showed a chart from John Hussman based on research from Didier Sornette's book Why Markets Crash.  Here is the chart comparing SPX to Sornette's ideal bubble pattern to refresh your memory.

I saw this chart today with the SPX pullback magnitudes on it.


We certainly have the same pattern of ever smaller pullbacks. This means we have bubble valuations combined with a bubble pattern in price.  Maybe it is different this time.  Maybe it is the same.

The market and sector status pages have been updated.  Have a great weekend.


Thursday, August 14, 2014


Does this situation matter to the market?  Some days it seems like it does and others it seems to be ignored.  Russia has been carrying out military exercises along the border for quite some time now.  It first started out with 20,000 troops.  It then went up to 33,000 troops.  The latest round that ended on Friday had 45,000 troops.  I think we can all agree that there is a 0 percent chance that Ukraine is going to invade Russia.  So why the troop build up?  Can there be any other motive other then invasion?.  We have seen this same play before many times in history.  Move your troops next to the border of your less well defended neighbor.  Then one day invade.  Anybody remember Iraq/Kuwait.  Pay absolutely no attention to what Putin says.  Pay great attention to what he does.  What he is doing now points to an invasion of Ukraine someday.  The game is to intimidate the Ukrainian military forces so much they will offer little to no resistance when the invasion comes.  Until Putin reduces troops back below 20,000 or so we must assume invasion is the end game.  I don't think the markets will like that very much.  The current level of sanctions seem to be having economic impacts already in Europe.  Since NATO is not going to go to war with Russia over Ukraine I must assume an invasion will ratchet up the sanctions.  Are money managers really anxious to buy now with all this going on?  I think it will be very difficult for the market to keep making new highs without a clear peaceful resolution. 


Daily update 8/14

A little more up on a very narrow intraday price range.  Here is the daily SPX chart.

SPX closed just below its 50 SMA.  It was yet another light volume day.  SPY volume was down right miniscule.  It looked like a lack of sellers more then an eagerness by bulls to buy.  Lets take a look at the futures chart.

The futures made it up to the 100 SMA today.  This is a potential resistance area.  The top of the Keltner channel (dashed purple line) is also here and can be resistance.  There is more.  Here is a look at the 60 min. futures chart of intraday data.

The red lines mark the 7/31 big gap down.  We just about made it up to the lower line today.  This is another point of possible resistance.  Should we get through the upper line we should be on the way to new highs.  To top off the resistance points the 200 SMA is also in this area.  It kind of looks like this could be a tough area to get through.

Starting in June of last year SPX has had a series of bounces from the 100 DMA.  The current bounce is the 6th occurrence.  The first time was the only time the 50 DMA provided any resistance.  That lasted a few days before blasting through it.  Once closing above the 50 DMA every occurrence has seen SPX make new highs before closing below the 50 DMA again. All those lows are V bottoms.  That might turn out to be important because V bottoms do not provide much support when tested way out in the future.  IWM has spent the last four days just below its 200 DMA.  Obviously it has some resistance there.  So do we blast through the 50 again on the way to new highs or does the bounce end around here?  Stay tuned.

Here is my mark up of the long term Dow chart I showed yesterday.

The prior red areas all had a prolonged period of falling/sideways prices that established a higher low.  The declines we have had since this bull market started are nothing but blips.  Despite what Wall Street might want everybody to believe I have a sneaky suspicion that bear markets have not been permanently eliminated.  Until we get through one and the market does not crash we can't proclaim the red period is over.  If you have read the article on secular bull and bear markets you know we need to see the monthly ADX fall during the bear market.  That will be an important sign of a change in character.  If you overlaid a valuation chart onto this one you would also see that none of the other green periods started with valuations anywhere near what we have today.  In fact current valuations have only been seen in 1929 and 2000.  Both of those instances started periods of red bars.  In an era where the global economy is barely growing I find it hard to believe that today's super high valuations will stand the test of time. Unless of course it is different this time.


Wednesday, August 13, 2014

Daily update 8/13

Up and away some more.  Here is the daily SPX chart.

SPX closed above the 8/11 high and the price bar turned green today.  It sure looks like we are on the way to the 50 DMA.  Volume continues to be extremely light.  This should be enough to turn the short term trend up.  We will have to see what happens if we get to the 50 DMA.  Here is look at the futures chart.

The futures finally confirmed the break above the 200 SMA.  They have also managed to climb above the 50 SMA.  It is another 9 points up to the 100 SMA which would put SPX very near its 50 DMA.  That 100 could be stiff resistance as the 50 SMA has crossed below it.  This rally does not seem all the energetic to me so we will see what happens.

IWM did not get above its 8/11 high and is still below its 200 DMA.  SPY really struggled to get going today for some reason.  It was testing its intraday lows while many other indexes were making new intraday highs.  The Dow struggled also and ended the day showing relative weakness even to SPY.  The futures are up a bit after hours and we had a pretty long consolidation this afternoon so we might get a little more upside tomorrow morning.  This rally still seems a little precarious.  I think we need to continue taking it one day at a time.

Is Macy's a canary in the coal mine.  Check out this chart.

Macy's is the green line.  In 2000 and 2007 Macy's topped out a bit before DIA.  The 2002-03 low was a bit complex as Macy's bottomed way back in 2000.  The 2009 low shows Macy's bottoming in late 2008.  While it is too early to say Macy's has put in an important top the chart does show it breaking below a monthly double top similar to the double bottom it made in 2008-9.  Today's break down came on heavy volume after earnings.  Not necessarily the kiss of death as there might not be any follow through.  However, I think it is worth watching.

Here is an interesting article on how micro cap stocks might be a good sign of risk appetite.  Watching Micro-caps to Gauge Risk-Appetite  I didn't even know the IWC ETF existed.  Check out this interesting chart.

We can see that IWC topped before DIA in 2007.  This is all the data there is for that ETF so we can't see the 2000 top.  The logic makes sense to me that this ETF would top earlier then the big cap indexes.  It is certainly in much worse shape then IWM and that is pretty bad.  This one already looks like it has completed a big top formation to me.  Isn't primary trend already down?

This is a nice look at the longer lasting stock market cycles I call secular bull and bear.  Study the red periods a bit and see if you notice anything different about the current one from all prior red periods.  I will mark the chart up tomorrow with what I think is a significant difference.



The information in this blog is provided for educational purposes only and is not to be construed as investment advice.