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Friday, May 29, 2020

Short term overbought 5/29

SPX tested the 200 DMA from above today and bounced into the close.

Despite the positive close for SPX and most indexes, the breadth was negative.  The volume was very big today.  The downside volume was nearly twice the upside volume which is odd on a positive day.  SPX has cleared all the moving averages that I look at on weekly and monthly as well as daily. 

The futures keep bouncing off the 20 SMA.

Both the green line and the short term indicator are in overbought territory.

The medium term is also overbought.

About 44% of SPX stocks have climbed above their 200 DMAs.  That contrasts sharply with the number of NYSE stocks above their 200s as the next chart shows.

The average stock probably had more downside so there is more to make up.  The market is not completely put back together yet. 

The market ended May on a high note.  The big cap stocks have led this rally from the beginning.  What is unusual is that the first leg of a bull market coming out of a recession is always led by cyclical stocks rather than growth stocks.  That action is a clear sign the recession is coming to an end.  We do not have that this time.  It is still not clear exactly how the economy is going to do over the next 6 months.  The virus data showed a new high in the number of world cases yesterday.   It seems pretty clear we are not going to be back to normal in the next few months.  However, it is not clear exactly how the market is going to react to that.  Until something changes that causes some real selling pressure the bulls will stay in charge.

Have a great weekend.  Peace and good health to all.


Tuesday, May 26, 2020

Target hit 5/26

SPY closed the gap at  300.

SPX opened above the 200 DMA and stayed there until a sell off in the last 30 minutes.  This is a logical place for short term traders to take some profits.  Some kind of pullback or consolidation would be normal.  I don't believe we will close that last gap for quite some time.  The economy is clearly not going to be able to get back to where it was in Jan. for a considerable period. 

The green count reached overbought levels today.  The short term indicator is also in the overbought area. 

The FED liquidity caused a lot of buying, but the momentum has clearly slowed.  I think upside progress from here will be tough to come by.  I saw some option data that suggested retail investors were heavy buyers on this rally.  The Robinhood brokerage also put out some data suggesting the same thing.  In that light the AAII sentiment survey is pretty interesting.

The number of bears in the survey is still very high at 45%.  Investors are not particularly bullish.  Was a lot of the buying from retail traders rather than investors?  If the bulk of the buying since the bottom is from short term traders we will most certainly retest that low.  We could see some turbulence now that the 200 DMA has been hit, but not necessarily a roll over into a retest of the low right away.  There could still be plenty of dip buyers out there.  Until SPX breaks the 20 DMA swing traders should still be looking to buy dips. 

A lot of people are wondering if we are back in a bull market or not.

For the answer to that question we can look at the bottom panel at the long term bull pressure lines.  The green line needs to hit the blue line to signal a bull market.  There is no all clear sign here.  What does the monthly chart tells us?

I wish I knew!  Since Jan. 2018 it is possible SPX is tracing out an expanded volatility top.  However, it is still above the trend line from the 2009 low.  It also looks like SPX will close back above the 20 SMA.  A retest of the low will clearly end the bull market.  Since we just had the longest bull market in history is it logical to expect it to keep going up while the economy is in recession?  Since we just had the biggest crash in employment in history is it reasonable to expect everybody to be hired right back and for the recession to have an imminent end?  Is it reasonable to expect some businesses will not reopen after this economic shutdown?  We could see a wave of defaults that causes pain for markets.  Commercial real estate is of particular concern.  Since I do not have an all clear sign at this time I am very cautious longer term on this market.

Peace and good health to all.


Friday, May 22, 2020

Slow uptrend 5/22

The market proceeded higher this week as expected last Friday.  The slow uptrend remains in tact, but it is really slow.  SPX closed Friday only 2 points above the Monday close.  The last four days consolidated that move.  It may be ready to try for higher again next week.

SPX is consolidating just below the 100 SMA.  That 200 DMA is not far away.  There might be some sellers in that area. 

The futures show a bounce off the 20 SMA.  This is a good setup going into next week.

The green line is above 50 and the short term indicator is rising.  The bulls are still in control.

The medium and intermediate term indicators are also rising.

Here is a look at the active money managers sentiment index.

The peak so far on this rally came at the end of April.  There was a little bit of selling in May.  At today's close SPX has only gained 43 points since the end of April.  The big guys have been a minor head wind.  This next table is interesting.

Between 4/15 and 4/29 the NAAIM number went from 28 to 78.  That was a period of significant buying.  In other words they did not buy all that much in the early part of the rally.  SPX was 2783 on 4/15.  If SPX drops below that number in the future it could increase the selling pressure as those late April buyers would be under water.  The bullish number at 200 means the most bullish survey respondent was 200% long.  The bearish -50 means the most bearish respondent was 50% short.  With SPX below the 200 DMA being 200% long seems a bit risky.  The 50% bearish number means there could still be some short covering (but probably not a lot) to help push SPX higher if it keeps rising. 

Everything seems to be pointing higher, but upside progress is likely to continue to be slow. 

Have a great Memorial Day weekend.  While freedom may be somewhat restricted at the moment let us not forget all those brave men and women that gave their life for this country!

Peace and good health to all.


Friday, May 15, 2020

Pullback over? 5/15

The bulls came out to buy the gap down this morning and closed SPX above yesterday's high.

SPX closed back above the 20 SMA after just two days below and no confirmation of a break of that line.  That setup is usually bullish.

The futures consolidated just below the 50 SMA today.  This could still turn down on Monday, but if the futures are up they should continue higher next week.

The green count just crossed below the red line.  The overbought condition has been worked off.  The first cross after a strong rally often brings out the buyers.

The bull pressure chart shows the last peak came with the short term red line (top panel) above the green line.  The market was out of gas.  The long term chart in the bottom panel needs to get the green line above the blue line to give a sign the bull market is back on.  It still has not cleared the red line.  Usually bear market rallies last long enough to get that cross.  Of course we are in an unprecedented situation so history is not as useful as usual.  

Unless there is bad news over the weekend it looks like the market wants to try up again.  The 200 DMA could act as a magnet since we got fairly close before this pullback.  If the market turns back down the 50 DMA should catch it and it might only retest the recent low.

Have a great weekend.


Thursday, May 14, 2020

Top heavy rally 5/14

The rally off the March low as been top heavy as we know.  Here are an interesting chart and some words from SentimenTrader.

Some combination of FAANG or FAAMG (Facebook, Amazon, Apple, Netflix - or Microsoft - and Google) has been handily beating most other stocks. And that matters, because those stocks are huge, and they're driving a big portion of the gains.
In the 35 days since the March 23 bottom, the top 5 drivers within the S&P 500 have accounted for 138 points out of the total 565 that the S&P has gained. So, only 5 stocks have accounted for more than 24% of the total point gain.
We looked at every 35-day rally off of a 52-week low over the past 30 years and compared those that were the most top-heavy versus those that were more evenly spread, meaning the top 5 stocks made up less than 20% of the S&P's gains.
There was a very stark difference between the two, with top-heavy rallies not faring well.

Here is a look at the tick signals on this rally so far.

I count 6 tick accumulation signals and 2 almost.  There are 8 tick distribution signals.  Here is a look at what happened coming off the Dec. 2018 low.

Between the Dec. low and early Feb. there were 8 accumulation (1 almost) signals and 1 distribution (3 almost) signal. There was very little selling by money managers in the early stages of that rally compared to the current rally.

The futures got really oversold short term this morning as they hit the 100 SMA.  That combined with news the president would consider more fiscal legislation brought out the buyers.

I just set up this new look at market internals.  The red lines mark overbought and the green lines mark oversold.  Obviously the market was extremely oversold for a prolonged period of time.  That is very unusual.  The short and mid term charts were showing sizable negative divergences at the last peak as the market was thinning out.  The long term line has dropped below its moving average for the first time on this rally.  It spends most of its time above 50 in a bull market.  Obviously there are a lot of broken stocks after that big crash.

Listening to money managers talk is interesting.  There is a camp that thinks the fiscal stimulus and FED liquidity is more important than economic fundamentals for the market.  Another camp believes the fundamentals are so bad they could override the liquidity factor and push the market down longer term.  Looking at the tick signals makes me believe the fundamental crowd has the stronger opinion.  Without some really good news out of the medical community regarding a solution to the virus in the near term a retest of the low is still possible.

We could stay in a trading range for some time while investors gauge how the reopening of the economy goes.  Economic activity is certain to pick up in the months ahead, but how much?  That is the question on investor's minds.  I am not going to pretend I know the answer.  This is the most uncertain situation the market has ever had to deal with.  Back in 1918 during the last major pandemic there were few people in the stock market.  We have a much different situation today.  Conviction about where the market is going might be the one thing we should not have at the moment.

The big question is whether this rally has more to go.  The way the dip buyers have stepped in over the last few weeks it is hard to say it is all over just yet. SPX is still above the 50 DMA which could hold as support if the pullback continues.  A move up to test the 200 DMA is still a possibility.  I need more evidence to conclude the rally is over.



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