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Wednesday, January 31, 2018

Daily update 1/31

The selling may have run its course.

The market gapped up, but failed to rally.  Apparently there was some left over selling from the last two days.  After the FED meeting SPX traded down below yesterday's low for a while, but did not collapse.  Late in the day the market staged a strong rally.  That could mean we have a successful test of yesterday's low.  A gap up tomorrow might have better luck sticking.  Breadth was +51%.  New highs increased a bit to 88.  New lows dropped down to 110.  Bond related items have been causing a lot of the new lows.

The futures made a second test below the lower channel line, but came right back in.  Usually a positive sign.  They are trading up a bit at the moment. 

The red count increased a bit, but is still below 50. 

I would guess the pension rebalancing would be over now.  The first few trading days of the month are often bullish and we have a potential short term bottom in place.  If the bulls can engineer another gap up they might find more willing buyers tomorrow.  If the bears show up again and break today's low then the 20 DMA should be the next downside target.


Tuesday, January 30, 2018

Daily update 1/30

More selling.

Global selling preempted the usual pre FED day gap up.  However, SPX found its low in the first hour and traded sideways the rest of the day.  Breadth was -79%.  Another very negative day.  New highs dropped way down to 46.  New lows were up again to 246.

For the first time this year the futures made it down to the lower channel line.  They found support there early in the day and held it all afternoon.

The red/green count got a negative cross today.  A cross will often bring out buyers in a strong market.

The 10 DMA lines also got a negative cross.  The McClellan oscillator is even oversold.

Some people were blaming the selling on fears of rising rates.  I believe that is probably not the case.  The best explanation I heard is that the big move up this month in stocks and down in bonds caused pension funds to need to rebalance about $20 billion out of equities.  I would not be surprised if they didn't mostly finish that up today.  The selling has caused a bit of a short term oversold condition.  If the market is still as bullish as it has been all month the dip buyers may show up in the morning.  If the selling continues the 20 DMA (2788) could provide support.  The market was so extended that even after two very negative breadth down days SPX is still well above its 20 DMA.  You don't see that every day.  Curiously McClellan's bitcoin chart I showed in Friday's update shows a dip right about now.  If SPX continues to follow that pattern we should have another pop to new highs coming up soon.  It looks like we have the ingredients to make a bounce to new highs with the VIX sitting just below 15.

The state of the union address is tonight.  The president enjoyed a big bounce the next day after speaking to a joint session of congress last year.  It could happen again.


Monday, January 29, 2018

Daily update 1/29 SPY option data

Actual selling pressure.

The market must of thought it over did it a bit on Friday.  Breadth was -79%.  That is the most negative reading since last Aug.  The market was several days off its high that time.  It is unusual to have such a high reading right off a fresh new high and a strong day like Friday.  Down days have been in short supply this year.  Every one of them was a buying op.  It could be today will be no different. 

The futures came back inside the channel again.  They have not stayed there long this year. 

The green count took a big hit, but remains above 50.  The overbought condition has been alleviated.

Here is another look at the SPY option data.

In the last week they added over 100,000 calls to the 286 strike.  I have not been doing this very long, but that seems like a really huge move in a short time.  That means that 286 could be formidable resistance or a really big acceleration point for delta hedging should SPY get above Friday's high.  Above 286 it looks like 291 is the next strike with a significant number of calls.  Will the bulls keep pushing or take a pause?

Wednesday will be Janet's last FED meeting.  For many years now the day before a FED meeting has usually seen a gap up and a positive day.  Maybe the bulls will pull off that trick again.  We will just have to wait and see if SPY 286 is a problem for continued upside or not.


Friday, January 26, 2018

Daily update 1/26 Bitcoin leading indicator?

FOMO running rampant on Wall Street.

Clearly this year is different then last year.  Whenever we got to the highs last year the intraday price range contracted to almost nothing.  No problem this year.  Nobody seems to be afraid to buy the highs.  Just pile in no matter the price.  The breadth was +53% which was pretty weak considering the size of the move up.  Small caps under performed.  New highs were stable at 284.  New lows were up again to 77.  Probably a lot of bond funds as rates were higher again today. 

The futures just keep on heading higher.

The green count is fully overbought now.  Quite the show of strength.

Both the 10 DMA breadth lines and the McClellan oscillator are showing a weakening of breadth over the last couple of weeks.  The market is thinning out on the upside.  That is normal.  The market can go up for a while on very few stocks when people are chasing the big caps.

The historic move up continues unabated.  We don't need no stinkin' pullback.  Just buy, buy, buy.  I don't know what else to say. 

This is an interesting article from Tom McClellan.  Finally, An Actual Use For Bitcoin

I find this chart really interesting.  In Daily update 10/19 Yacht Life I wrote "I have been contemplating that a bitcoin crash might indicate the current bubble mentality that has gripped the world has come to an end.  Just a thought.  The stampede for the exit should be pretty interesting to watch."  Has the bitcoin bubble popped?  I think it probably has.  Is DJIA showing bubble like price action?  So it would seem.  The more we go up from here without any real pullback the more likely we are in a true blow off top (similar to 1929, 1987, and COMPX in 2000).  The major stock indexes rarely do the straight up blow off top.  It is much more common in individual stocks.  The aftermath of that kind of top is never pretty.

Have a great weekend.


Thursday, January 25, 2018

Daily update 1/25

Pause day.

We have definitely found some profit takers.  The sellers came out right after the gap up opening.  However, they did not do too much damage.  The dip buyers showed up to hold the market up the rest of the day.  Breadth was -52%.  New highs dipped down to 261.  New lows picked up to 63. 

The futures dipped below the upper channel line again, but found support. 

The green count continues to show considerable strength. 

There was an overhang of supply evident in the morning, but there was clearly an underlying bid in the afternoon.  The transports and semiconductor sectors have been relatively weak the last couple of days.  Nothing to worry about yet, but those are economically sensitive sectors so continued weakness might eventually be a problem.  Even at these elevated levels there has been enough dip buyers to absorb the profit taking.  It might take a news event to change that.


Wednesday, January 24, 2018

Daily update 1/24 Strongest trend ever

Trade war talk and a negative reaction to TXN's earnings put a bit of a damper on the buying today.

SPX traded below yesterday's low, but bounced back in the afternoon.  Breadth was -53%.  New highs were 354 as the market started out strong.  New lows came in at 36.  The transports and small caps were relatively weak today.

The futures penetrated the upper channel line, but bounced to close back above it.  That keeps them in accelerated up move mode for now.

Today the administration imposed some tariffs and said a weak dollar was good.  The dollar comments caught a lot of people by surprise and broke with a long standing tradition of strong dollar talk.  Both actions could upset some of our trading partners.  That may cause an increase in trade war rhetoric.  Hard to say.  While the stock market is ignoring pretty much everything it probably would not like signs of a trade war.  I don't see that happening just yet.  Should the global economy turn down again then things could change.

The market may be running into a few sellers.  Some day the market will go down for more then a few hours.  Until that happens enjoy the ride.

The 'Trendiest' Rally In US Market History

This is truly an unprecedented rally.  Looking at the chart above I see ADX above 50 during a rally has led to some pretty big gains down the road.  When the market does something it has never done before it is pretty hard to have any clue what will happen next.  The market is clearly overdue for some corrective activity, but odds favor higher down the road.


Tuesday, January 23, 2018

Daily update 1/23

Up again.

Not much to say.  Breadth was +57%.  New highs were 291.  New lows dropped to 24.

The futures remain outside the channel in accelerated up move mode.  Every time they get back in the channel buyers show up again.

The bears remain in hibernation.  SPX is unusually steep at new highs after such a long rally.  Normally we need a good sell off to get this steep of a rally.  I have seen lots of people try to explain why this move is justified in the fundamentals. This rate of climb looks more like pure momentum to me.  Momentum moves always seem to go further then what seems rational, but often end rather suddenly.  We are in record territory with the longest period without a 5% or more correction.  A 5% pullback should not surprise anybody.  It is bound to happen sooner then later.  I guess we just play along until it decides to stop.


Monday, January 22, 2018

Daily update 1/22 SPY option data

I feel like I am in an alternate reality where selling stocks has been outlawed.

Instead of pent up selling from last year there was pent up buying demand.  Breadth was +60%.  New highs picked up to 277.  New lows slipped back to 50, but remain elevated.  Price is getting a little parabolic here.

Futures keep on going up.  No price is too high. 

The melt up continues.  I keep hearing Kevin O'Leary on CNBC saying this is a great time to be an investor.  He sounds a bit euphoric these days.  I heard that M&A announcements are the highest amount to start the year since 2000.  We are seeing bullish sentiment extremes not seen since 1987.  Comparisons to those years are not particularly good for bulls in the long term.  However, in the short term there appears to be nothing stopping the market from going higher (except me saying there is nothing stopping the market from going higher).  Some day the extreme overbought condition may matter.

Here is the latest chart of SPY option data after last week's expiration.

The strike near the current price with the most calls is 186.  The next highest strike is 281 which SPY surpassed this morning.  Delta hedging from that strike might have helped accelerate the market today.  If SPY keeps progressing on the upside there could be more delta hedging up through 286.  Put support comes in around 275. 

I just don't get it.  No matter how hard I try.  Once upon a time a friend of mine bought a TSR-80 color computer and let me play with it.  It did not take long for me to see some day everybody would have a home computer and I went off to college to become a programmer.  While working at IBM in the early 90s I was exposed to the internet a bit before the world wide web got started.  It did not take long with the Netscape browser to see the power of the internet and that it would dramatically change the world.  It was obvious.  I hear so many people talking about crypto currencies and blockchain like they will change the world like the internet and home computers did.  Blockchain has been around for 10 years already.  Why all of a sudden is it going to forever change the world?  While I am sure there will be some uses for it there isn't anything it can do that I can see that could not be done another way.  They pitch crypto currencies as an asset class to themselves.  They say they are a store of value because they are limited.  While each individual crypto currency might have a finite number of units there is no limit to the number of crypto currencies that can be created.  There will certainly be better implementations then bitcoin.  What is to stop people from just simply moving on to the next hot currency leaving the old currency with little to no value?  Nothing.  I just don't get it.


Friday, January 19, 2018

Daily update 1/19 Dealing with a Runaway Market

Major indexes make new high closes.

That is a bit of an odd looking pattern the last four days.  Breadth was +65%.  New highs were only 236 compared to the 406 we had a few days ago.  New lows were very elevated once again at 82.  Bond funds likely the culprit there.

The futures refuse to pullback.  They popped back out of the channel again.  As extended as they are it might be tough to stay there, but I guess you never know.  Maybe no price is too high!

The green count is approaching overbought levels again. 

Here is a look at the weekly version.

The green count has reached overbought territory.  The last time we did that was back in March and the market consolidated for a while.  This could continue higher in the short term.  A clear peak should give us an indication a consolidation period has begun.

A lot of people were talking about the rise in the 10 year rate today.  It is up to the highest level since 2013.  The 10 year was slightly over 3% that year at the peak.  It obviously did not hurt stocks at the time.  However, about a year later the U.S. economy began to slow down.  That slow down lasted until the spring of 2016.  Logically one would think that rates would have to get up near 3% again to become a problem.  Between here and there we could see more money move from bonds to stocks.  Possibly driving stock valuations into the stratosphere.  The way this year has started out it is hard to argue with that possibility.  So far no dip is too small to buy!  I am not sure what happens should rates start falling again.  Short term rates have gotten above SPX's dividend yield.  I don't know if there is some level that would cause some money to flow back into bonds or not. 

Interesting article on using long term valuation models to forecast near term returns.  Dealing with a Runaway Market

Have a great weekend.


Thursday, January 18, 2018

Daily udpate 1/18

Today was weaker then it looked.

A bit of a choppy session.  Breadth was -70% despite the indexes only being down a little.  That suggests some rotation into the biggest of the big caps.  New highs were stable at 176.  New lows shot up to 88.  Some of those lows could be bond funds as 5 and 10 year rates made new 52 week highs.  Volume was elevated again despite small sized moves in the major indexes.  Another sign of rotation.

The futures closed back inside the channel.  Usually when they pop out and come right back in like this they end up visiting the lower channel line. 

The green count remains above 50 and below over bought.

The short term bull pressure lines have come together indicating buying pressure has waned recently.  The market needs another shot of buying pressure or it will consolidate or pullback.  The intermediate and long term lines are ok, but are not real strong.  They could go negative fairly quickly if selling pressure enters the market. 

The jury is still out on whether we are making a short term top here at 2800 or not.  The last I heard there was no agreement on keeping the government open.  There is the possibility of a shutdown  The shutdown in 2013 only had a minor impact on the market.  In this case the market is long overdue for a 5% or larger pullback.  A shutdown might act as a catalyst for some profit taking.  I can't imagine it would last long enough to really disrupt things.  I am still watching for a close below 2768 as a clue that a pullback may be starting.


Wednesday, January 17, 2018

Daily update 1/17 SPY option data

The bulls fight back as SPX closes at a new high.

The panic buying continues.  Today's volume was nearly as high as yesterday.  Breadth was +62%.  New highs dropped way down to 176.  New lows were stable at 55.  Once again elevated for a new high close.

The futures popped back out of the channel today.  Maintaining the uptrend for the moment.

The green count turned up nicely.  It remains above 50 and below overbought levels.

Volatility is definitely increasing so far this year.  Last year the intraday range shrunk up to almost nothing as SPX neared new highs.  This year the fear of missing out (FOMO) is higher then the fear of buying the top.  The increasing volatility can be the sign of a top.  However, that top could still be well into the future.  The volatility started picking up in 1995, but as you know the real top was not until 2000.  That was a very unusual moment in market history.  I don't know if we can count on something like that again or not.  Current valuation levels are considerably higher then 1995.  FOMO usually means we are in the final blow off top.  That stage can also last a while.  The bulls gave a good account of themselves today, but I am not entirely convinced we won't start a pullback from around this 2800 level.  Closing below yesterday's low (2768) could indicate the long awaited pullback is starting.  The increase in volatility this year should indicate pullbacks will be larger then they were last year (that assumes we actually have pullbacks). 

We are just a couple of days away from the longest period in history without a 5% pullback.  I would not object to that streak ending soon.  A little volatility for traders would be nice.  I have no idea what happens when it does end though.  We have had a record 14 months where the total return of SPX was positive.  In those 14 months we have traveled quite a long way.  I have to wonder if there won't be some pent up selling released at some point.  At least that seems logical in my mind. 

I seem to be having trouble remembering to show this chart.

I think this month was very interesting.  We had strikes with a lot of calls at 270 and 275.  On 1/3 SPY pushed up slightly through 270.  Over the next four days SPY raced up to 275 where it briefly paused for two days.  On 1/11 it pushed through 275 and raced higher to 280.  The acceleration might have been caused by delta hedging.  There is relatively few calls from here on up.  It would appear there is no fuel for further acceleration left.  It will be interesting to see where we end up at expiration.


Tuesday, January 16, 2018

Daily update 1/16

Found a few sellers.  According to Art Cashin the selling started on talk of Turkey amassing troops along the Syrian border for an invasion.  How long worries about that will last is anybody's guess.

Today started with a big gap up and ended in the red on high volume.  It is certainly possible this turns out to be a short term top.  Tomorrow should tell us more.  After starting out at +69% the breadth ended up -65%.  Historically that strong of a reversal has tended to have some downside follow through.  New highs were 406 which is the highest since Dec. 2016.

The futures ended the day just above the upper channel line.  They are currently still there.  Tomorrow they will either resume the rally and stay outside the channel or come back inside signifying the end of the accelerated up move. 

The green count slipped considerably, but remains above 50.

I think we will find out if there is any pent up selling now.  The year started out so strong investors decided to just hang on.  Since we had a strong reversal any pent up selling pressure should be released in the days ahead.  We have not had a reversal bar from a new high this strong since the Feb. 2016 low.  This may turn out to be nothing, but it could be something important.  The VIX has been rising steadily since the second trading day of the year while the market was flying higher.  It did not do that at any time last year.  Sometimes a VIX divergence like thist turns out to be a signal of a significant pullback.  However, that has not been the case since the Feb. 2016 low.  The VIX getting high while price was still near the highs ended up giving the market a shot in the arm to new highs.  I don't know that things have changed, but it is possible.   First off we need to see if there is any downside follow through to today's reversal.


Friday, January 12, 2018

Daily update 1/12

More panic buying.  No price is too high I guess.

At this rate SPX will reach 36,000 before long.  Breadth was pretty weak for the size of the up day at +51%.  Yesterday was unusually strong and today was a bit weak.  New highs were the highest since 12/8/16 at 389.  Higher then any day last year!  I think there is a definite possibility we are forming a short term buying climax. 

The futures keep on going.

The green count slipped a bit.  Still very strong.

SPX is now over 11% above the 200 DMA. for the first time since May 2013.  Generally it is difficult for SPX to maintain that for more then 4-6 weeks without a pullback or consolidation.  In 2009 and a couple of times in the 90s SPX was able to maintain that distance for many months.  The March 2000 top was just about this same level above the 200.  Most of the time the market continues higher over the months ahead, but like everything else in the market it is not guaranteed.  I saw a trader interviewed late this afternoon that replied he was ecstatic when asked what he thought about this rally to start the year.  There seems to be a lot of that going around.  It reminded me of a comment Dave Landry made back in 2000 something to the affect he figured the end was near when he could not wait to get up each morning to see how much money he was making that day.  The market is rarely this easy for very long.  We are getting euphoric here.  The market will correct at some point.  Whether that will be sideways or down remains to be seen.

Have a great long weekend.


Thursday, January 11, 2018

Daily update 1/11 Understanding Secular Stock Market Cycles

Panic buying continues.

All the major indexes closed at new highs.  Small caps were particularly strong.  Breadth was +72%.  That is rather strong for this stage of a rally.  Another day or two and we could be looking at a short term buying climax.  New highs were 286.  That is very near recent strong days.  New lows remain elevated at 34.

The futures bounced off the upper channel line and continued up.  Still in accelerated up move mode.

The green count turned back up, but is still below the recent peak.

The optimism is so thick you can cut it with a knife.  Today reminded me of Buffet's quote:
“Be Fearful When Others Are Greedy and Greedy When Others Are Fearful”.  People are clearly getting to the greedy stage.  How can we know when we have reached peak greediness?  At the rate we are going we could be up 20% in the fist half of the year.   I saw a headline on CNBC the other day that the market was off to the best start to the year since 1987.  I wondered whether that should make me feel good or bad.  The first half of 87 was really good.  The back half not so much.  For now I guess we just enjoy the ride and worry about it later. 

This is from a couple of years ago, but very interesting.  Understanding Secular Stock Market Cycles



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