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Trend table status

Trend

SP-500

R2000

COMPX

Primary

Up 7/31/20

?- 3/31/20

Up 5/29/20

Intermediate

Up 10/2/20

Up 8/21/20

Up 10/9/20

Sub-Intermediate

Up 10/15/20

? 10/21/20

Up 10/13/20

Short term

? 10/19/20

? 10/19/20

? 10/19/20


Don Worden of Worden Brothers (makers of Telechart software) used to keep a trend table before his health issues got in the way. I always found it useful. Mine is slightly different. Hopefully helpful. Up? or Dn? means loss of momentum. ? by itself means trend is neutral. ?+ or ?- means trend is neutral with bias of up(+) or down (-)

Friday, June 2, 2017

Daily update 6/2 Volatility Signal Flashing for 10th Time Ever

Momentum follow through.


SPX has a blue bar indicating it closed above its upper Bollinger band is extended in price.  Breadth was only +54%.  It started out +59% at the open and even though the market proceeded higher during the day breadth diminished somewhat.  There was some minor selling into strength.  New highs expanded to 331.  That was less then the peaks in March (339) and Dec. (478).  New lows also increased and came in at 30.  Considerably elevated for a day like today at new highs.


The futures stayed outside the upper channel line today.


The green count increased only a bit today, but is just below overbought.  Lets take a look at the weekly version.


The green count back in March was 68, but has diminished to 56 now.  The intermediate indicator has rolled over a bit.  The weekly chart is showing some negative divergence in both indicators.  They are both positive, just weakening a bit.  This is only important if the current break out in SPX fails.

On the plus side SPX followed through on yesterday's thrust.  On the negative side the breadth was weak, XLF ended in the red, and IWM was well off its high.  In an ideal bullish world the transports, XLF and IWM will make it to new highs to confirm SPX and COMPX.  Until that happens I think we need to keep an eye out for a break out failure on SPX.  In the short term SPX is overbought both technically and in price.  This suggests the market is likely to consolidate or pullback back a bit in the short term.

The halftime show on CNBC was pretty comical.  The host was trying to have a balanced discussion from the panel members about the future direction of the market.  After they all went on and on about why the market was going to head higher he asked about what could go wrong.  They hammered the guy so bad for even suggesting the possibility the market could go down I felt bad him.  Steve Liesman even came to his rescue saying he was just trying to do his job.  I have been listening to these same people for years.  Normally when he asks what could go wrong they have answers.  I have never heard them berate him for asking the question.  Can people get any more complacent?  This reminds me of Warren Buffet's famous quote “And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful”.  That conversation sure sounded like greed to me.  Enjoy the ride if the market keeps heading higher, but remain vigilant just in case it doesn't.

Everything I have read up until this piece about low volatility indicated it was very bullish.  This article is about extraordinarily long periods of ultra low volatility Volatility Signal Flashing for 10th Time Ever.  Apparently the future has a much more mixed picture in this case.


Schaeffer's Senior V.P. of Research Todd Salamone noted last week that historical volatility (HV) on the S&P 500 Index (SPX) has been in the single-digits for an extended period. The last time this occurred was in early 2007, which preceded a major bear market. We were curious whether this was a common occurrence just before bear markets. Below is what we found when looking at previous times stock volatility was so low for an extended period.

120-Day Streaks Are Rare for the S&P 500

The 20-day HV of the S&P 500 has been below 10% for almost six months. As of last Thursday, it had been 120 straight trading days of sub-10% historical volatility. This is a rare event. The last time the streak lasted 120 days was over 10 years ago, in early 2007. It is only the 10th time the streak has lasted this long since 1928, the earliest point of S&P 500 data.

The table below summarizes the S&P 500 returns after these streaks. Stocks have tended to struggle, which is surprising. It was assumed that these periods of low volatility would typically occur during bull markets and would result in above-average returns going forward. However, looking at the average return and percentage of positive returns after these streaks reach 120 days, the index has underperformed.     



The market is higher 6 and 12 months later only 44% of the time.  Even when the market is up the returns seem to be muted from the anytime returns.  Here are the specific instances.


Low volatility was much more common in the 60s then any other time period since 1928.  The 1954 instance was the biggest winner.  However, that period came right after the end of the Korean war which probably means the market was making up for lost time from the multi year war.  Lets take a closer look at the 60s and early 70s with a chart.




Of the 6 instances in this time period only 2 were unequivocally bullish.  The 66 and 69 instances came just in front of recessions.  Here is the 1994 occurrence.


That one was really just a multi month pause with no big drawdown.


The market continued higher in 2007 for quite a few months, but volatility increased. 

Looking at these charts we can see the 63 and 64 instances are unique.  Those low volatility periods lasted much longer then any of the other instances.  They did not see an increase in volatility and/or a noticeable pullback after the streaks ended.  I don't really know why that period was different.  We don't know yet when this streak will end.  However, I can say the odds of not seeing an increase in volatility and/or a noticeable pullback from this instance would appear to be low.  While this low volatility does not necessarily mean something bad will happen to the market it indicates the bulls don't really have an all clear either.

The new vehicle sales reported yesterday showed the 5th straight monthly decline.  GM inventories were the highest since Nov. 2007.  That was the month before the great recession started.  All this while incentives are the highest in history.  The odds of production cuts this summer have to be increasing considerably.  That would certainly show up in weakening economic data.

Here is the last installment of technology for country folks.  I hope you enjoyed it.


Have a great weekend.

Bob

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