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Friday, November 28, 2014

The importance of oil to the U.S. economy

I have seen a number of articles on the oil patch situation lately.  There is a huge amount of money being spent globally on energy projects.  From CAPEX Spending In The Energy Sector Keeps On Growing I found this.

Investment bank Barclay’s (NYSE:BCS) latest report on CAPEX budgets, the energy industry is expected to spend a whopping $723 billion on exploration and production (E&P) efforts in 2014. That’s nearly a 6.1% jump over 2013’s total CAPEX spending and will surpass the $700 billion-mark for the first time.
According to the survey of 300 energy firms, the bulk of that spending will occur in overseas fields. Roughly, $524 billion will spent on tapping new wells in places like offshore Africa and Middle East. However, North America will see the lion’s share of rising spending- roughly a 7% increase- as firms like Range Resources (NYSE:RRC) -continue to tap America’s shale formations.  

A 7% increase in spending in the U.S was probably significant in the boost to GDP we have seen this year.   Here is an interesting chart on U.S. oil production.

We are producing the most oil per day since the 1980s.  That is really some upturn in the chart the last few years.  I think this explains why Saudi Arabia which has been the largest oil producer for decades might feel a bit threatened.  I think they will be glad to stand by and watch the oil price drop.
This chart shows the break down of various sectors in SPX and their CAPEX and R&D.

The Energy sector has been the biggest chunk since 2006.  The total for 2013 was a little above $200 billion.  That is not chump change in our economy.

"The Energy sector accounts for roughly one-third of S&P 500 capex and nearly 25% of combined capex and R&D spending," Goldman Sachs' Amanda Sneider writes.

There is high paying jobs and expensive equipment involved in the process.  The energy sector has been a big boon to the U.S. economy and is probably the key reason why we are leading the developed world in growth.  I have already seen quite a few companies announcing plans to reduce expenditures next year based on the current oil price drop.  I have seen a number of significant price drops in my lifetime and none of them stopped until OPEC announced production cuts.  In the oil crash in 2008 they did not cut production until Dec. of that year.  So far no major producer is blinking.  Some countries like Libya are still trying to increase production.  I don't think we are anywhere near the bottom yet.

How will a major drop in oil prices affect the economy?  The reduction in CAPEX will clearly be a drag while the consumer will have extra money to spend.  This is rather complicated to figure out exactly what the affect will be.  Lets look at some numbers.  I think the most worrisome to me is the amount of junk bonds related to energy plays.  Check out this chart.

The U.S. junk bond market was around $1.3 trillion at the end of 2013.  That makes the current energy part roughly $200 billion in 2014.  What is particularly disturbing is the big surge this year (5% of $1.3 trillion is $65 billion).  That is a lot of fresh money allocated at much higher oil prices.  Have those borrowers even had time to get production going?  Since these were junk bonds the borrowers were clearly of marginal quality.  It seems likely there will be considerable defaults coming.  That could choke up the bond market once again.  Anybody remember the big oil bust in Texas in the 80s? Remembering Oil Bust of 1986 Reminds U.S. Drillers of Price War Risks  That lead to the savings and loan crisis that the government ended up having to bail out.  The U.S. economy did not go into recession over that crisis.  However, that may not be the case this time.  The PC revolution was powering the U.S. economy ahead in a big way and was totally unrelated to oil.  The economy today is barely growing above stall speed and actually is pretty weak in areas of the country away from the energy plays.  I believe an energy bust of that magnitude would have a much bigger impact on the U.S. economy this time.

The drop in oil prices is great for everybody outside of the energy world.  Lets look at some numbers.
The most recent estimates say the average U.S. household (about 115 million of them) uses 1200 gallons of gas.  That means every .10 drop in the gas price gives American consumers approximately $14 billion a year of extra money.  From the peak earlier this year the gasoline price has dropped about .90 which gives us about $124 billion of savings over the next year.  During the crash of 2008 gas prices briefly dropped under $2 for several months.  We could still see significant further declines in the gas price.  That is certainly a sizable amount of money.

There are pluses and minuses to the drop in oil price.  It is clear the junk bond market could be real trouble.  The so called search for yield caused by the ultra low rates from the FED has caused a lot of  money to flow into questionable places.  Keep in mind that the entire energy industry is highly leveraged.  Every well drilled is done with borrowed money.  Therefore the potential trouble in the bond market goes well beyond junk bonds.  A bust similar to the 80s will put many marginal companies out of business which will mean a loss of jobs along with defaults.  It is clear there is a significant risk to the economy should the oil price decline last.  With nobody shutting in production and additional drilling projects ongoing and coming online it seems highly likely the price decline will continue and will last for quite some time.  The economic growth from the savings of lower gas prices is a one shot deal.  Once prices level out there will be no additional savings.  The continued savings should benefit consumer spending, but won't really add to growth.

All in all it looks like the risks to the economy are greater then the benefits of the lower prices.  A bust will definitely cause major problems in the bond market which tend to have serious affects in the broad economy.  With the oil price in the 60s the higher cost producers are already in trouble.  From I have read an oil price in the 40s would be trouble for everybody.  I suspect we will get there at some point.  We are currently producing about 1 million barrels more per day then we use in the world.  It looks like nobody is cutting and additional production is coming on line every day.  There will be downward pressure on prices for quite some time.

I think the numbers involved with the energy industry indicate there will be significant negative economic affects from the rapid oil price decline.  While the savings to consumers is also significant it is spread out over long periods of time  The marginal energy players are already in trouble now.  Further price declines will only make that worse while adding more players to the troubled list.  I have not seen specific numbers, but I have read several times that many of these energy companies have been cash flow negative for years even at the higher oil prices.  I have heard people claim there won't be any trouble for 6 months or more because of producers being hedged with futures.  However, the futures data shows less then 250,000 contracts net short by commercial hedgers.  At 1000 barrels per contract that means 250 million barrels are hedged.  As per the chart above we are producing 9 million per day which is roughly 270 million per month.  Doesn't that suggest there could be trouble well before 6 months?  Keep in mind the size of the numbers globally indicate a cut in CAPEX spending could be a significant world event.

I have to admit I did not really see an oil price crash coming.  I kind of think most energy companies were also caught by surprise just like the 80s.  We know from past history that the decline so far (30 some percent) is not really unusual.  There have been a number of 60-80% declines in the past.  I find it interesting that the stock market internals started falling apart in early July at the same time oil started its meltdown.  Is there a connection?  Is the fall in oil possibly a black swan event because hardly anybody saw it coming?  The numbers show this could be a significantly negative event for the economy as odd as that sounds.  It could start feeding into the economic data at any time.  Maybe the oil patch was responsible for the unexpected increase in jobless claims this week (pure speculation at this point).  It certainly needs to be watched.


Daily update 11/28

Hmm.  Odd day for the day after Thanksgiving.  Here is the SPX daily chart.

SPX made a new all time high this morning.  However, it turned and ran from that high to end the day down.  Oil prices saw a big drop as OPEC did not announce any production cuts (as expected).  That is one thing I do not understand about the market.  Academics and the pundits are always saying how smart the market is.  It discounts the future they say.  There was ample information all week indicating there would be no cuts from OPEC.  Why didn't the market do more discounting ahead of time?  To me the reaction today makes the oil market look totally stupid.  There were 331 new highs and 164 new lows.  I would guess the oil patch produced most of the lows.  The expansion of new highs means the market felt pretty good this morning.  The day after Thanksgiving has a surge of retail investor trading as many are off of work.  We know the retail traders are very, very bullish so that makes sense.  I think the selling later in the day was the institutional traders.  Lets see what the futures chart looks like.

We ended the day with a red price bar.  There have only been two other red bars in this entire rally and neither of them saw any follow through selling.  Will that be the case again?  I guess that all depends on whether the drop in oil is significant to the broad market or not.  Lets see what IWM is doing.

IWM saw a severe bout of selling into the close and ended up down considerably.  This is starting to take the shape of a double top.  Follow through selling on Monday would be a pretty convincing bearish sign.  Got to watch this one next week.

This rally appears to me to have been driven largely by retail investors piling into the market.  They stayed bullish through the last decline while institutional investors panicked.  I can find no historical pattern that resembles the daily price chart.  That makes it hard to guess what happens next.  However, we have historical situations of retail investors piling into stocks while ignoring obvious risk factors.  That situation has never ended well that I am aware of.  That is exactly what it looks like to me.  The global economy is clearly slowing.  Relying on the U.S. economy to remain unaffected by that slowing seems to be very risky.  The global economy has been very much connected for two decades now.  We have a low volume, low volatility huge run up in the market.  Doesn't it seem like there could be an air pocket down below?


Wednesday, November 26, 2014

Daily update 11/26

The streak continues.  Here is the daily chart.

It was yet another closing high.  We had the lightest volume since the end of Aug.  Most people must have taken the day off.  I don't even know what to say about this super odd price levitation.  In all the years I have been doing this I have never seen such a big lack of selling pressure.  There has been no real downside testing since this rally started back in mid Oct.  Nearly everybody must think this market can only go up from here.  I have never seen such a strong group think about any market before.  I find it rather amazing in the face of a global economy that is clearly slowing down significantly.  If this turns out to be a sucker move it will go down in history as the biggest one ever.  Time will tell.

Have a great Thanksgiving to U.S. readers.  I hope everybody gets to enjoy some family time.


Tuesday, November 25, 2014

Daily update 11/15

Oh wow.  I believe it is the end of the world as we know it.  Can you believe SPX closed down two points.  Here is the chart.

This morning SPX tested Friday's high, but failed to find any buyers.  It then proceeded to test yesterday's low and found a few buyers.  There were 204 new highs and 25 new lows.  Both numbers were up from yesterday.  The oil stocks sold off significantly today causing the new lows to pick up.  I think that tax loss selling in those stocks may have started.  Whether that bleeds into the rest of the market remains to be seen.  Lets see what IWM is doing.

IWM is still thinking about whether to make a short term double top here or not.  This chart looks like it could tip over pretty easy.  I think a lot of people are watching this one.  Will it break out to the upside or fold?

There is an OPEC meeting on the 27th which just happens to be on Thanksgiving.  Oil was treading water for several days on hopes there would be production cuts announced.  There was an announcement today that there was no agreement to make any cuts which sent the oil price spiraling down again.  If they don't cut it would appear that oil is likely to go lower.  Which would probably send oil stocks lower as well.  Even though Friday is a part day there could be some activity based on the OPEC announcement.


Monday, November 24, 2014

Daily update 11/24

That was certainly a snoozefest.  Apparently everybody was waiting around for somebody else to do something first.  Here is the daily SPX chart.

If I counted the days right this is the 27th straight day above the 5 DMA which is a new all time record.  You have just witnessed history being made.  Obviously that will not last forever.  What happens when the streak ends?  Today was a record high close also.  On that record high close we had 163 new highs and 18 new lows.  The new highs remain very low.  So does intraday volatility.  We had a whopping 5 point range after the open. The 14 day historical volatility has gotten down to the lowest point in this entire bull market.  It seems unlikely to stay this low for much longer.  Whether we go up or down from here the daily range is likely to increase somewhat in the near future.  Today the market was back in equilibrium, just at a slightly higher level.  The question remains are we really heading higher in a serious manner or are we making the infamous megaphone top.  Technical divergences still remain.  Of course if we keep going up they will clear up.  If this is going to be a top I think it should turn down here very soon.  Many more up days and it should start to clean up the technical pattern.   Since we had a narrow range bar today breaking the low could induce some selling.  The next key level below is 2040.

Here is an interesting chart I ran across today.  It is a long term look at the Rydex bull/bear asset ratio. 

Friday saw a surge in the ratio well above even the 2000 high.  What I find most interesting is the middle part of the last decade.  Wall Street has been touting this bull market as the most hated bull market in history.  This ratio suggests the last bull market was much less loved then this one.  This year is showing a congestion pattern on this ratio just like we saw in 2000 at that top.  Is anybody left to buy?


Friday, November 21, 2014

Daily update 11/21

That was some day.  Here is the SPX chart.

It is rare to see an opening gap on SPX because they start updating it before all the stocks are open.  However, today's gap up was big enough to show a clear gap.  Thank you China and ECB.  Investors did not waste any time looking the gift horse in the mouth as they started selling right on the open.  The selling continued for hours with no sign of a big buyer anywhere.  That opens the door for this being an exhaustion gap.  We will have to see what happens next week.  Breadth ended the day at 64% positive after starting out 87%.  There were 225 new highs and 14 new lows.  That is the first time the lows dropped down to a reasonable level.  However, that is not a lot of new highs.  We had a number of days over 300 previously in this rally.  I can't blame anybody for not wanting to pile in long on this price pattern though.  I believe today ties the longest streak of days closing above the 5 DMA.  While the streak can certainly continue you have to think it won't last be much longer.  Certainly not the ideal time to be adding long exposure.  Here is a look at the IWM chart again.

While IWM had a big gap up it never traded above the recent swing high.  Like SPX it started selling off immediately and completely closed its gap up.  Will this turn into a very short term double top or will the bulls take control?  It closed below the high from three days ago so it did not quite turn its trend to neutral today.

The NAAIM survey dropped from 85 to 72 this week.  Some of the big boys were taking some money off the table recently.  There certainly was no sign they were putting it back on today.  We should be coming into tax loss selling season.  The energy stocks were smacked so hard it seems like there could be another bout of selling in them.  That might carry over to the broad market if that happens.

We have a very extended market with many technical divergences.  Today could have been an exhaustion gap.  Next week might be important.  If this was an exhaustion gap then a close below today's low could spark some selling pressure.  I don't really have any idea what to expect if we do head down.  I can find no historical pattern that comes even close to that SPX daily chart.  Some times big fast moves get completely retraced, some times they don't.  I heard them say on TV this week that SPX has been up the last six weeks of the year every year since 2004.  I don't miss many patterns, but for some reason I did not know that.  However, now that everybody knows it will it work this year?

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


Thursday, November 20, 2014

Daily update 11/19

SPX makes a slight new closing high.  Here is the daily chart.

The bulls bought the gap down this morning showing continuing support at 2040.  However, they did not show much buying enthusiasm above 2050.  Breadth was 62% positive as IWM had a strong day.  However, there were only 104 new highs and 38 new lows.  SPX did not close above Tuesday's high.  Will the bulls show up again tomorrow and chase price higher?  Here is a look at the new highs/lows chart.

The number of new highs has dropped off dramatically over the last couple of weeks.  This is very similar to what happened back in Sept. before the early Oct. swoon.  A rally needs some days over 200 to sustain itself.  A few days under 100 usually leads to a pullback in the near future. 

We had clear support at 2040 the last two days.  A close back below that level should be a good indication a pullback has started.  Market internals continue to weaken as SPX creeps higher.  We had a low volatility pattern and a range expansion to the upside.  However, we did not push any higher over the last two days.  That still leaves the door open that Tuesday was a head fake.  Will the bears step through that door and take control?

In Signs of a bull market top  I wrote "5. Surge in M&A and IPO activity". So I thought this tidbit from Mike Larson was interesting.

For the year, we’ve seen a whopping $1.5 trillion in transactions involving U.S. companies announced. That would make this the biggest year for domestic corporate buyouts since 2000. Throw in overseas firms and you’re talking about $3 trillion — a massive 50 percent increase year-over-year to the highest since 2007.

The years 2000 and 2007 should ring a bell.  We certainly have this sign of a bull market top in spades.


Wednesday, November 19, 2014

Daily update 11/19

No follow through from yesterday.  Here is a look at the SPX daily chart.

SPX pulled back this morning and dipped briefly below the trend line and yesterday's low.  The dip buyers stepped in and pushed SPX all the way back to slightly green before a little more selling took over.  Today is unequivocally bullish if SPX closes above yesterday's high.  That would indicate a successful test of prior resistance.  However, this action left us with a hanging man candle.  With price extended that could be an indication of a short term top forming.  Breadth was 62% negative.  There were 85 new highs and 57 new lows.  One day off of all time highs those numbers should worry bulls.  Another warning sign comes from IWM.

IWM closed below Monday's low.  That day was a downside follow through day from the reversal pattern last week.  Today turned the short term trend on IWM down.  Are the bears taking charge again?  The COMPX was also weaker then SPX.  Today looked like more rotation to safety. 

With IWM already turning down SPX looks a little precarious here.  The bulls need to take charge and push SPX to close above yesterday's high tomorrow.  A failure to do that is likely to lead to more weakness.  The McClellan oscillator crossed negative today and the 10 DMA breadth lines are almost there.  Downside follow through tomorrow should confirm a short term top is in place.  The strongest support is probably 2010.  Below that is the 50 and 100 DMAs around 1975.  Who shows up tomorrow the bulls or the bears?

This is a very interesting article.  It is a bit long by internet standards, but worth a few minutes to review.  The Beginning of the End of the Fossil Fuel Revolution (From Golden Goose to Cooked Goose)

Here is an interesting chart to ponder.

Every measure of internal market strength I know about shows massive negative divergences.  Maybe it is nothing, but what if it is something.


Tuesday, November 18, 2014

Daily update 11/18

Range expansion to the upside.  This was the 23rd day in a row that SPX closed above its 5 DMA.  This is the second longest streak on record.  The longest being 26 back in 1996.  Needless to say it is a rare feat.  This is really strange price action after that sharp move down.  This truly is a unique point in time.  I can find no historical comparison.  Here is the daily SPX chart.

SPX clearly broke above the upper trend line.  Will it be able to stay there?  Breadth was 59% positive after starting out 67% early in the morning.  There was some selling into the strength in the afternoon even though SPX kept plugging away to the upside until late in the day.  New highs were 184 and lows were 38.  New highs have been under 200 for a while now which is quite weak.  The number of new lows has remained elevated which is also a sign of internal weakness.  Lets look in on IWM again.

While IWM was up today it failed when it tested yesterday's high.  It remains well below its 11/13 high.  Does it matter that it is lagging?  I believe it does.  I guess time will tell if I am right or wrong on that.

I saw this from Dave Landry this morning. 

Volatility waxes and wanes. Traders don’t agree for long. Large moves often occur after volatility compresses. Back when I did a lot of mechanical testing, I learned that the first move is often a false one out of a low volatility situation. With that said, brace for a big move but don’t be too quick to jump on just in case the market does a head fake.

It is true that many low volatility periods have a fake out move before moving for real.  This is a good candidate for that.  Along with IWM lagging the market internals still remain seriously divergent.  Price is quite extended with 23 straight days above the 5 DMA.  There has been no shake out move whatsoever.  What happens when some real selling pressure comes in?  It is going to happen some day (at least I think it will it).  On the downside I will be watching 2040.  That would put us below the upper trend line and back into the recent trading range.  This 2050 area could be resistance as half century marks have done that before.

This is an interesting article on SPY gaps.  What Happens To Open Gaps in SPY


Monday, November 17, 2014

Daily update 11/17

Another slow creep up as SPX makes a slight new closing high.  Here is the daily chart.

SPX is still hanging out between the 6 SMA and the upper trend line.  Breadth was 54% negative.  I am changing the short term trend to neutral tonight.  Despite making higher closes SPX is only 3 points above where it closed on 11/10.  At this price level that is really nothing.  Lets see what the futures chart looks like.

The futures penetrated the 18 SMA overnight, but once again the dip buyers came in to save the day.  While the dip buyers keep showing up there has been no inclination to chase price higher.  This is a pretty long time for equilibrium to persist in such a narrow range.  This kind of pattern lulls people to sleep and then all of a sudden the range expands and the market starts moving again.  Lets take a peek at the IWM chart.

IWM followed through on the down side today from a bearish reversal pattern from two days ago.  I still think this is the key index to watch.  It bottomed shortly before SPX at the low.  It may be giving us a warning sign here. The COMPX was slightly negative also indicating there was an element of risk off today.  If that continues then SPX is likely to succumb at some point soon.  One more to look at is the breadth chart.

With SPX at a closing high both the McClellan oscillator and the 10 DMA lines barely have a positive cross.  This is clearly exhaustion.  This will get resolved with a range expansion thrust bar.  Something will happen that causes rally chasers or sellers to show up en masse.  Which will it be and when?


Friday, November 14, 2014

Daily update 11/14

More equilibrium.  It was hard to stay awake today.  Here is the SPX chart.

SPX briefly tested below the 6 SMA, but never got above the upper trend line.  There were a few sizable whacks on the futures today indicating a significant seller.  As before the dip buyers rushed in to buy.  However, they did not get any upside going as there was enough selling to hold the market in check.  Breadth was slightly positive.  There were 136 new highs and 47 new lows.  That is a very low number of highs when SPX made a new all time high close.  Once again the lows are elevated.  We are still winding up for the pitch.  This could be a doozy when it finally goes.  I want to take a look at the futures 60 minute chart tonight.

While the price action is very muted there is a potential head and shoulders top forming.  Notice all the big red volume bars starting on Oct. 29.  There is quite a bit of distribution going on.  This market looks very tired to me.  Breaking today's low is likely to usher in considerable selling.  The bulls need a strong thrust to show the willingness to chase price at these levels.

The market and sector status pages have been updated.

Have a great weekend all.


Thursday, November 13, 2014

Daily update 11/13

Curious day.  Here is a look at the SPX chart.

Last night I pointed out the 6 SMA was coming up to the upper trend line and one of them was going to have to break.  SPX tested above and below both of those lines and didn't like it either way.  We ended the day at 1839 and that makes four closes in the same area.  What we have here is perfect equilibrium.  Despite SPX closing up slightly the breadth was 62% negative.  IWM was down 1% which is inline with the breadth reading.  Money still seems to be seeking safety in big cap stocks.  Volume was kind of high for a day that ended up going nowhere.  Both bulls and bears were actively participating. There were 202 new highs and 69 new lows.  Oil made a four year low which put pressure on energy stocks.  That in turn made the new low number even higher then it has been lately.  Lets have a look at the futures chart.

We have the first red price bar since this rally began.  I am not sure I have ever seen it go that long before.  This is some move.  Price is still holding above the 18 SMA.  Does it break or bounce tomorrow?

IWM more then reversed yesterday's up day.  I think the market was weaker today then the big cap indexes made it look.  With four days closing in such close proximity SPX could be winding up for a decent move.  We should be moving into tax loss selling season which could put some downside pressure on the market.  Everything seems to be in place for a short term top here.  Just a question of whether any real selling pressure materializes or not.  As an example of the internal divergences here is a look at the number of stocks above their 200 SMAs.

That is a rather large divergence and is consistent with a bull market top.  Here is a look at the common stock advance decline line.

Breadth has been much stronger then volume on this rally.  However, this indicator is still showing multiple negative divergences.  Still toppy looking.  The bottom line is we have bullish sentiment off the chart and a poor technical condition.  That usually resolves to the down side.  Will it be different this time?


Wednesday, November 12, 2014

Daily update 11/12

Wow.  An actual down day for SPX.  I thought those had been outlawed.  Here is the daily chart.

Price is getting squeezed between the 6 SMA and the upper trend line.  One of those is going to break.  Whatever caused the gap down this morning put a bit of a damper on the market.  The breadth was slightly negative.  Usually the Russell2000 follows breadth as it is a very broad index.  However today it was up .55%.  I take that to mean that even the money going into small cap stocks is being concentrated in those stocks with the biggest cap.  That pushed the cap weighted index up despite the negative breadth.  The number of new highs dropped down to only 140.  They had been running over 200 almost every day.  The new lows remain elevated at 38.  That is not normal for a market starting a new leg up.  It would be completely normal if this is a blow off top though.  Lets take a peek at the futures chart.

The price action has lost all upward momentum now and is basically sideways.  If we break the 18 SMA I think SPX will move down to test the 2000 level. 

I think the market needs a news catalyst to really move much higher.  It is clearly showing exhaustion on what we know at this point.  While the dip buyers did rush in to buy today their enthusiasm is waning.  The market even sold off a bit going into the close which is the opposite of what it has been doing lately.  So far nobody has been very anxious to sell.  Until they do there is nothing to worry about on the down side.  Lets take a look at the GWL ETF weekly chart.  This an ETF based on the rest of the world without the U.S.

This ETF bottomed in early June 2012 very near the same time SPX did after its spring sell off.  It moved up along with SPX until June of this year.  It has clearly broke its 2012 uptrend line.  While some U.S. indexes are back to new highs GWL is not even close.  It is clear that global stocks are now in some kind of corrective phase that they have not seen since that 2012 low.  The oil traders keep talking about weak demand.  Is the global economy weakening significantly now?  Will the U.S. be able to stand alone in the face of global weakness?  Remember what the cold weather did last winter.  We are looking at another cold winter and possibly even colder by some forecasts.  When I look around the world it makes perfect sense to me why the U.S. market looks so much like a bull market top.  All those market divergences are still in place.  Can SPX stay out at new highs long enough to clear them up?


Tuesday, November 11, 2014

Daily update 11/11

The bond market was closed for Veteran's day (thanks to all those that have served).  That led SPX to a whopping 6 point intraday range.  Here is a look at the daily chart.

We eked out one more positive day in the slow creep up pattern.  Breadth was barely positive.  Is there any gas left in the tank?  That is normally about all the slow creep pattern lasts.  It might be time for a bit of a pullback or at least some sideways movement.  Lets see what the futures chart has to say.

Not only was today's intraday range narrow it was narrow overnight as well.  Altitude has been a bit hard to come by for the last week.  However, there has been no selling pressure either.  Hence the slow creep up.  Until something comes along that causes people to hit the sell button it is status quo.  Just remember that sometimes the slow creep pattern ends with a big thud. 

This is a good article with actual historical research on secular bear market lows.  Market Masters: Durable Secular P/E Lows Are a Combination of P and E 


Monday, November 10, 2014

Daily update 11/0

Another slow creep up day.  The last four days have seen slight price appreciation with breadth in low to mid 50% range.  I have seen similar moves from time to time.  It usually ends with a down move that retraces the entire slow creep up in 1 or 2 days.  This creep started from 2001.  Don't be surprised to see that level tested in the days ahead.  The pattern generally last 3 to 5 days so we could continue up again tomorrow.  Here is the daily SPX chart.

I adjusted the trend line I added Friday.  I first drew it from the two July peaks.  I moved to include the intraday peaks from Sept.  This encapsulates the extremes a little better.  It gives the market a little more room on the upside before hitting it.  Time will tell if this line is important or not.  Lets see what the futures chart looks like.

The +DI line has slipped below the ADX line and the MACD has crossed below its signal line.  The futures have clearly lost some momentum, but continue slowly moving up.  This chart looks ripe for a bit of a pullback at any time now.  Of course that does not mean it will happen.  That would require somebody to actually hit the sell button.

While the slow creep up pattern looks bullish it usually means the market is tired.   I can understand it being tired.  Look at the V pattern.  As I said before I can find no historical match for this situation.  We had a lot of technical damage done on the sell off that always has led to a retest of the low or some kind of consolidation before ripping out to new highs.  We don't have either.  I don't have a clue how this plays out.  I have seen those slow creep patterns reverse sharply, but not always.  Sometimes they just dip a bit and resume going up. 

There is no shortage of stocks well off their highs.  We are now coming into the tax loss selling season pretty soon.  Something to watch out for.  It may come into play this year.

Here is an interesting couple of charts.  These are Goldman Sachs indexes.

There was a clear global movement of money from economically sensitive stocks to defensive stocks.  It would appear that some investors are getting worried about the global economy.  Are they justified to be worried?


Friday, November 7, 2014

Daily update 11/7

Another mixed day.  The futures actually opened exactly at yesterday's 4 PM close.  Now that is a  rare event.  I can't recall that ever happening before.  It was a rather narrow range day as volatility dried up.  Lets have a look at the SPX chart.

I added an upper trend line that seems to capture the price action pretty well.  We are in the area of that line.  Will it stop the advance?  Time will tell.  SPY had another doji bar.  That is now four out of the last five days.  Despite a little bit of buying interest yesterday spurred by talk of ECB QE the market seems pretty hesitant.  Not that I blame it.  Look at that price pattern.  If there ever was a high risk time to put new money to work this it.  Best to keep holding times short on new index trades.  Here is a look at the futures chart.

The 18 SMA is getting ever closer since we are barely moving up now.  I  mentioned the -DI line last night indicating very over bought.  That played out today as the upside was difficult to come by.  However, people still rushed in to buy the dip.  No dip is too small to buy. 

At the last low the institutional traders panicked while the retail investors were calm, cool and collected.  How odd is that?  Retail investors have finally gotten over their fear of the market.  I am having trouble seeing how that is a good thing given the weak technical condition of this market.  So far that weak technical condition is not improving much.  Nothing to worry about though.  We know nothing can go wrong.


Thursday, November 6, 2014

Dollar index bull market?

The dollar index has been rallying very strongly since July.  Here is a look at the monthly chart.

The dollar index made a long term top between 2000 and 2002.  It made the ultimate bottom of that sell off in 2008.  Despite the FED printing up trillions of dollars it has traded sideways for years.  The rally last year actually turned ADX (marked by green arrow) higher.  This was the first rally since the major top that did that.  Notice that during the sell off earlier this year the ADX (marked by red arrow) actually fell.  On the current very strong rally ADX is once again rising.  That is a pretty good sign it is embarking on a bull market.  The current rally strongly broke through the 100  SMA for the first time since breaking it on the downside back in 2003.  It is now approaching the top of the trading range which should be significant resistance.  I would expect a pause or pullback here.  However, I think this has turned the corner into an actual bull market and is likely to break out above those 2009 and 2010 highs eventually.

What does that mean for the other markets?  Commodities in general are pretty strongly negatively correlated.  The gold bull market started at the same time the dollar index top formed.  A dollar bull market would very likely put a damper on all commodity prices.  What about stocks?  Check out this graph of long term correlation from What a Rising Dollar Means for Your Stock Portfolio.

Over the long history back to the 70s the dollar has been both correlated and inversely correlated with SPX.  However, over the last five to six years it has been the most inversely correlated in its history.  The fundamental reason for that inverse correlation is the amount of revenue that comes from outside the country these days.  A rising dollar will certainly hurt that revenue.

The dollar index needs to break out above the March 2009 high (89.62) to confirm the bull market.  Whether it can do that remains to be seen.  However, I think it is worth keeping an eye on just in case it does and that inverse correlation continues to hold up.  There have been many calls for the demise of the dollar on the internet.  Frankly I never really understood it.  Japan seems hell bent on destroying the Yen, but the U.S. has never really given any indication it wants that.  I don't expect that to change anytime soon.


Daily update 11/6

A little more up in most indexes.  Here is a look at the SPX daily chart.

Break out players continue to pile in.  The breadth dropped down to only 54% positive.  There were 191 new highs and 60 new lows.  The market is losing steam in both breadth and new highs now.  The new lows remain very elevated.  Lets see what the futures have to say.

The futures managed to climb above the resistance of the last few days and hold onto the gains into the close.  The -DI line is now down to 12 which is a very overbought level.  Most of the time they struggle to go higher and often pullback from that.  The last time that line got that low was 7/3.  You can see the struggle that ensued.  Lets take a peek at the IWM chart.

IWM is still below its high from Friday.  You might recall it bottomed a few days ahead of SPX at the last low.  I don't know if this is an early warning or not, but it could be.  It is worth keeping an eye on.

The futures indicate the market is extremely over bought short term.  At the same time market internals are weakening indicating a loss of momentum.  Bullish sentiment is at extremes I have not seen since 2000.  This still just feels like a blow off move to me.  I guess we will see what happens.

The July closing high in SPX was 2011.  A close below that would bring about a possible double top and could bring in some selling pressure.  Below 2000 and there could be a lot more sellers.  In the mean time lets see how far the break out players are willing to push price.

I have shown many market internal divergences.  Here is one that involves the credit market, not just stocks.  This is the Bloomberg financial conditions index.

Just like the stock market internals this one started diverging back in July.  This all happened at the same time oil started falling and the dollar started rallying.  I don't know exactly what is happening, but something seems to be in the works.


Wednesday, November 5, 2014

Daily update 11/5

The market gapped up to new highs on the futures, but once again sold off immediately.  I want to look at SPY again tonight.

Today was another hanging man doji bar.  That gives us four doji bars now with two of them being hanging man candles.  What an odd pattern.  SPX was up .57%, but breadth was only 56% positive.  It started out 71% positive on the opening gap up.  There was some selling into strength today.  The COMPX actually ended slightly in the red.  There were 257 new highs and 67 new lows.  Even with a big gap up to start the day and oil stocks up today the number of  new lows remained elevated.  I think that is still a big caution flag.  Something isn't quite right.  Here is a look at the futures chart.

The price bars went back to green in the night for the gap up.  They actually made a slight new high at the open.  However, the sellers went to work right away.  There is clear resistance here.  It is not just an absence of buyers.  However, they stop selling once price gets knocked down a bit.  Who runs out of ammo first the sellers or the dip buyers that come rushing in on the sell off?  While we have stalled here the 18 SMA is catching up.  Breaking that would probably be a good indication we are starting a pullback.

The longer we stay in this tight range the bigger the move should be when we break out.  I don't know how much longer it will take to make the decision.  Breadth is starting to weaken a bit so buying interest might be drying up some.  This is an important decision being made.  We might still have a few more days to go.


Tuesday, November 4, 2014

Daily update 11/4

I guess two doji bars were not enough, we need three.  The plot thickens.  Here is the SPX daily chart.

This morning's dip found support at the 2012 trend line.  However, the bounce from that line was not strong enough to get the market positive.  There were 220 new highs and 75 new lows.  Obviously the number of lows is way higher then it should be at this point.  The new highs are good, but need to stay above 200.  Lets see what the futures chart looks like.

The recent bar closes are staying in close proximity to each other.  It won't take much to turn the bars red or green from here.  There really is not much clue of what is to come.  It looks like a perfect equilibrium.  Yesterday the market tried to extend the rally and failed.  Today it tried to pullback and failed.  We are going to have to wait and let the market make up its mind.  This is a very important decision to make.  Continue the bull market or start a bear. 

The media has really been pushing the bullish story here.  Unless you are sleeping under a rock you have probably been reminded that Nov. starts the most bullish six months of the year.  Don't forget the 3rd year of the presidential term is the best for the market and of course it is always up and away after the mid term elections into year end.  While the historical patterns are true the setup into the 3rd year of the presidential cycle is quite different this time.  Here is a good look at the history.  Year 3 of The Presidential Cycle Is Unlikely To Go The Way Everyone Expects  It seems like every time they make a big deal about a seasonal pattern it fails to work.  They made a big deal over the sell in May thing the last two years, but it certainly did not play out as normal.  I think this is the most mentions I have ever seen of any historical pattern ever.  If the market is going to perform as normal and go racing up why are the internals so weak.  I have shown the divergence in the advance-decline line, bullish percent indicator and the number of stocks above their 200 SMAs.  Here are a couple more indicators.  One is based on new high/low data and the other on volume.

These are very clear and distinct divergences.  However, all divergences can clear up if price keeps moving up.  They need confirmation from price.  These indicators tell us two things.  The first thing is the odds of a failure on this retest of the high are much higher then at any other time in this bull market.  The second thing is that a failure here is highly likely to signal at least a very deep correction if not a full blown bear market.

While SPX stays in the range of yesterday's high (2024) and today's low (2001) it is likely to be quite choppy.  A close outside that range should see follow through.  On the downside I would expect that would mean a return trip to the 50 DMA to begin with.  On the upside we have nothing but clear skies.  If this market is going to head higher I think it needs to pause here for several more days to let the shorter MAs catch up a bit.  We are still extremely extended.



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