Tutor Your Trade

Tutoring for your Investment trading

The Week Ahead: Potholes on the Value Path

Posted by on Apr 30, 2016

The Week Ahead: Potholes on the Value Path

The stock market had its biggest one-day drop since February on Thursday as the disappointing earnings from Apple (AAPL) and a weak 1st quarter advance reading on GDP added to the overnight selling pressure. The futures had dropped in reaction to the lack of BOJ action. After the close Thursday the market got a positive surprise as Amazon.com (AMZN) and LinkedIn (LNKD) both beat earnings in impressive fashion.

It appears that some traders had apparently bet heavily on more easing by the BOJ so the unwinding of these large new long positions likely accentuated the selling. The strength of the Yen has many nervous but the BOJ could change their minds quickly and decide to ease further.

For many traders the failure of the S&P 500 to close above 2100 the previous week was a reason to turn more bearish. My argument from last week’s column “A Bull in Sheep’s Clothing?” was that the new bull market highs in the NYSE and S&P 500 A/D lines as well as the low level of public participation in the stock market were not consistent with a significant market top.

One of the questions facing many investors is whether they should invest based on the basis of value or growth. The bear market in 2008 caused the ruin of many value investors as most do not use technical analysis and do not use stops on their positions.

Some well know newsletter writers recommended the big banks like Bank of America (BAC) and Citigroup (C) in 2008. The lack of risk control and the failure to use timing their entries or exits is the weakness of value investing. Hard stops are recommended in both the Viper ETF Report and in Viper Hot Stocks

Bank of America (BAC) was down 60% in 2008 while Citigroup ( C) was even worse as it lost over 73% so stops would have helped the value investor. The Spyder Trust (SPY) lost just 36.8% in 2008. Legendary value investor Bill Miller beat the market for an impressive 15 years in a row. In 2008 his heavy exposure to the financial stocks pushed two of his funds down 55% and 65% respectively.

He is still a force in the mutual fund industry as he “made big bets on airlines in 2008, 2010 and 2012” according to a Bloomberg article in 2014. He was way ahead of the curve as they were stellar performers in 2013 and 2014. Delta Air Lines (DAL) was up 46.7% in 2012, 132.4% in 2013 and just over 80% in 2014.

WA4-29a

DAL was up 4% in 2015 but is down double digits in the past month. As a technical analyst it is my view that the fundamental data lags the price action and so by the time the data shows that a stock is no longer undervalued it has often already have topped out.

Bill Miller still liked the airlines as of early February but the weekly chart shows a broad trading range, lines a and b, which is likely a top. The relative performance analysis for DAL has been dropping for the past five weeks as it has been moving lower while the market is moving higher.

The RS line broke important support, line c, at the start of April and the stock has lost 11% since that occurred. The OBV reversed back to negative three weeks ago and looks ready to break important support (line d) this week. From the chart above the next reasonable stop for DAL is at $39.90 and the completion of the trading range would project a drop below $30.

The absurdity of trying to assess the value of a stock came to light Thursday afternoon as two CNBC traders debated the merits of Amazon.com (AMZN) after it jumped 12% on their earnings. One trader was not impressed by the stock as it believed it was now fully valued. The other trader wondered how AMZN could be fairly valued now when it was not considered undervalued before it rallied on the report. A look back at the similar discussion in 2015 indicates their views on the stock have not changed.

WA4-29b

The two-month drop in AMZN did not alter the long term uptrend as the rising 20 month EMA was just tested. The rebound in March caused the OBV to rally from its rising WMA and the monthly RS line made a new high in late 2016.

As I noted on March 31st “The weekly on-balance-volume (OBV) on AMZN also made a new high with prices and will flip back above its WMA this week. This is a bullish sign.” I would not be surprised to see a move to the starc+ band at $774 in the next 2-4 months. As far as stops one would not want to see AMZN drop below the April low of $594.

So what’s the answer? I think those who feel confident about finding undervalued stocks must also use stops and technical analysis to time their buys and sells. The volume and relative performance analysis can identify when an undervalued stock has bottomed.

Besides the earnings surprises from both Apple (AAPL) and Amazon.com (AMZN) the other big news for the week was the strong action in gold as the futures were up over $66 for the week. The close was well above the March highs with the monthly starc+ band and pivot resistance at $1327. The monthly charts shows converging resistance, lines a and b, in the $1380 area. There is major resistance at $1500.

WA4-29c

My examination of both the weekly and weekly volume however does not convince me that this is the start of a major new uptrend as some are suggesting. The monthly OBV has not yet moved above its WMA or the March highs and is not confirming the breakout. In a strong market the OBV should be leading prices but the volume in the gold futures was lower than it was in March.

The monthly Herrick Payoff Index (HPI) is above the zero line and has reached the highest level since 2014. The weekly and daily HPI have not yet confirmed the new highs. The rally in the metals was helped by the sharp drop in the dollar index. As I noted last week there were some signs of a bottom on the daily charts but the drop to new lows has turned the daily analysis back to negative and it again agrees with the weekly analysis.

The Economy

WA4-29d

Other than the weak advance reading on 1st quarter GDP which showed just a 0.5% growth the economic data was not too bad. The initial reading for the 1st quarter of 2015 was also weak but the numbers did get better as the year progressed.

The New Home Sales on Monday were about as expected as inventory remains low. The Dallas Fed Manufacturing Survey was positive for the second month in a row. March Durable Goods were positive as defense goods were up while commercial plane orders were down. The S&P Case-Shiller HPI was positive Tuesday but was not impressive and the PMI Services Index came in at 52.1 as expected.

The Consumer Confidence came in at 94.2 was a bit weaker as the expectations for the future fell in April. Friday’s Consumer Sentiment at 89 was also weaker than the expected 90.4 but Wednesday’s Pending Home Sales were a bit higher than expected.

Last Friday’s Income and Outlay data indicated that “Spending is weak but income is solid” as the income trend has been positive all month. The Employment Cost Index indicated that wages are driving up costs in the 1st quarter which could bode well for the next few months. The Chicago PMI fell in April but it is still in a gradual uptrend so I will be watching the May numbers.

After this week’s reading we should get a better idea on whether the economy is really getting stronger. The PMI Manufacturing Index and ISM Manufacturing Index are out on Monday along with Construction Spending.

On Wednesday we get the ADP Employment Report along with Factory Orders as well as the PMI Services Index and PMI Non -Manufacturing Index. On Friday we get the monthly jobs report.

Interest Rates & Commodities

The FOMC announcement was dissected by the Fed watchers but it did not move rates much. The yield on the 10 Year T-Note dropped to 1.819% from the prior week’s close of 1.897% and is still locked in both their short and long-term trading ranges. The May jobs report could move the needle but it would take a few weeks before they could breakout.

WA4-29e

It was another good week for crude oil as the June contract gained $2.19 for the week and was up near 20% for the month. The daily chart shows that a doji was formed on Friday near the trend line resistance at line a. Prices were in a wide range on Friday but closed near where they opened the day. The weekly studies are still acting strong but most are still quite overextended.

The daily OBV has formed a negative divergence, line c, as it peaked on April 13 when crude also formed a doji. The HPI has also not confirmed the recent price action but is still well above zero line and its uptrend.

The energy stocks had a great month as the SPDR S&P Oil & Gas Exploration (XOP) was up 17.8% for the month. The monthly pivot resistance at $36.84 was exceeded last week and Viper ETF traders sold 50% of their longs for over a 20% profit. The weekly chart shows that long-term resistance so a pullback would not be surprising. There are further upside targets in the $38-$40 area.

The weekly relative performance completed its bottom over a month ago signaling that it was a market leader. The weekly OBV is acting much stronger than prices but is quite far above its rising WMA. There is first good daily chart support in the $31-$32 area.

Market Wrap

Both the Dow Industrials and S&P 500 both lost 1.3% for the week as it was the worst performance since early February. It was the second rough weak for tech stocks as the Nasdaq Composite fell 1.9% for the month. The drop late in the week did cause a significant uptick in bearish sentiment with “Sell in May” back in the headlines.

The earnings reports are still playing a major role in the daily market swings as with over half of the S&P 500 already reporting the per share earnings are down 6.7% according to Fact Set. This is better than was expected before the earning’s season.

WA4-29f

The weekly chart of the NYSE Composite shows that it came close to the next major resistance last week (line a) The 20 day EMA at 10,384 was tested Friday with weekly support starting at $10,200-300 area with the rising 20 week EMA at 10,093.

The advancing and declining stocks were pretty much even last week and the weekly NYSE A/D line has flattened out after making convincing new bull market highs. The WMA of the A/D line is rising strongly and represents important support, line b. The weekly OBV made a new high last week and reached trend line resistance, line c, before turning lower.

WA4-29spy

The Spyder Trust (SPY) dropped below the daily starc+ band on Friday as it had a low of $205.03 before it rallied in late trading to close at $206.33. This was just above daily support at line b. For May the monthly pivot is a bit higher than the close at $206.78 with monthly pivot support at $202.64. A close back above the $209.81 level is needed to reassert the uptrend with resistance at $210.40-$211.78.

The S&P 500 A/D line has pulled back to its WMA and has more important support at line c. A drop below its WMA and flattening in the WMA will typically precede a more serious correction. The OBV does look a bit weaker as it has dropped below its WMA and now has important support at line d.

WA4-29g

The daily technical outlook for the PowerShares QQQ Trust (QQQ) is considerably weaker than that for the SPY. The QQQ hit the starc- band on Friday and is now well below its declining 20 day EMA at $108.58. The monthly pivot for May stands at $107.35.

The quarterly pivot is at $104.74 and a weekly close below this level will signal a trend change. The monthly pivot support and the chart support is now in the $103-$103.25 area. There is more important support in the $99-$100 area.

The Nasdaq 100 A/D line dropped below its uptrend, line b, and its WMA last week. This suggests that a top is forming but a bounce is still likely over the short term. The OBV has also broken its support at line c, which is a sign of weakness.

What to do? The action last week turned the stock market outlook mixed as while the NYSE, S&P 500, Dow Industrial and Russell 2000 A/D lines have not broken support the Nasdaq A/D line has now topped out. This cannot be ignored as it looks as though the tech sector is giving us an early warning sign.

That does not mean the market is going to drop sharply right away as it typically will take a week or more for the market to rebound back towards the highs and complete a top. Such a rally should be accompanied by more warning signs from the other averages.

The action suggests that the sharper market correction may happen a bit sooner than I thought just a week ago. The weekly A/D lines for the broader averages indicate that a deeper correction will provide a better opportunity for long-term investors. More nimble investors and Viper ETF clients who have made some nice profits on the rally from the February lows should start taking profits on the next rally and use tighter stops.

Read More

The Week Ahead: A Bull in Sheep’s Clothing?

Posted by on Apr 23, 2016

The Week Ahead: A Bull in Sheep’s Clothing?

The rally in the Dow Industrial Average last week above 18,000 got the attention of many investors as well as the general press. The Dow made its high for the week on Wednesday as it reached a high of 18,167 which was just 1% below the May 19, 2015 all time high of 18,351.

The mid-week review of the technical outlook “Charts Talk-Fear Walks” I discussed the recent new highs in both the NSYE Advance/Decline and S&P 500 A/D lines. The fact that these measures of the market’s internal strength are acting stronger than prices means that the NYSE Composite and S&P 500 are both likely to make new highs.

The NYSE Composite is still lagging the other major averages as it is over 7% below the May 2015 high. The S&P 500 is just 2% below its high and the Dow Industrials is a bit closer as it is just 1.9% under the 2015 high. There has been much talk above the lagging action recently of the technology stocks as the Nasdaq 100 is still 6.1% below its all time high.

So what is likely to happen when the major averages do make new highs?

As the Nasdaq Composite was making a new bull market high in March 2000 there were few signs of concern in the financial media as one headline at the time stated “Dow 36,000? Why Stop There?” The Dow had made a high two months earlier at 11,750.

In an article from the day the Nasdaq Composite peaked above 5,000 some of the analysts commented that the Dow Industrials was going to continue to lag the Nasdaq Composite where the sentiment was more positive. Here are some comments;

“the Nasdaq could hit 6,000 before the end of next year.”

“Rising rates won’t hurt the new techies, but they might impact the ‘old economy’ customers,”

Clearly the sentiment was overwhelmingly bullish as noted in a 2010 CNET article. “An undeniably prescient strategist at Warburg Dillon Read, now part of UBS, told the New York Times that “I don’t see the end in sight.” The Los Angeles Times quoted a Banc of America Securities analyst as saying that, before “too long,” the Nasdaq index would double.

WA4-22a

The NYSE Composite peaked after the Nasdaq in September 2000, line a, and did not break its major uptrend (line b) until February 2001. The NSYE A/D line, as well as the Nasdaq Composite A/D line, had been diverging from prices since early 1998, line c. This was a sign that the rally over the past two years was narrowly based as just a few stocks were pushing the overall market higher.

The analysis of the advance/decline line has played an important role in my analysis for over 30 years and as I reviewed in “One Indicator Stock Traders Must Follow” the divergences do not always persist as long as they did in 1998-2000 before the market tops. In my experience the A/D line is much better identifying market bottoms. This chart of the NYSE Composite that I posted on February 25th, just before the bear market low, reflected the bullish divergence in the A/D line.

WA4-22b

In 2007, the NYSE A/D line peaked in June 2007 and then formed a lower high in July, line b. As the NYSE Composite was making a new high in early October (line a) the A/D line just rallied back to its downtrend, line b. This additional bearish divergence warned that the market was now quite vulnerable and that it was likely topping out.

The subsequent decline confirmed the negative divergence and signaled a new market downtrend. During the bear market rally in 2008, the A/D line failed to come close to this downtrend. The NYSE A/D line continued to lead prices lower as the market started to plunge in June.

As stocks were making their high in 2007 there was also plenty of optimism about the stock market and the economy. As noted in Bloomberg on October 12th “Some fearless forecasters predict that the Dow will streak to 16,000 and that the Standard & Poor’s 500-stock index will go to 1,700 over the next 6 to 12 months.”

Some analysts did express concerns over the Fed’s rate cut the prior month and the potential risk from the housing market. Few recognized that home building sector had completed a major top in June 2006. There was little concern over the economy except for those who had been warning about an economic collapse for several years. My favorite economic indicator, the Leading Economic Index (LEI), peaked in 2006.

WA4-22c

Clearly in 2000 the public was heavily involved in the dot.com stock boom and the annual survey from Gallup suggests it was even higher in 2007. Their results show 65% of individuals or jointly with a spouse was invested in the stock market. The percentage dropped to a low of 52% in 2013 and has risen only slightly this year to 55%.

The current low level of investor participation is not what one would typically see at a bull market high. The failure of the S&P 500 to hold above the 2100 level last week is already causing some concerns about the health of the stock market rally. Once we do see new highs I would expect to see a surge in articles that argue that the bull market is over.

Bull-In-Sheeps-Clothing

This is why I think the current market is a “Bull in Sheep’s Clothing” as the market’s underlying strength is being camouflaged. The strong action of the Advance /Decline lines (see market Wrap Section) is a clear sign of the market’s underlying strength with the low level of investor participation it is a strong indication that a new high in the averages will not coincide with a major bull market top.

WA4-22d

The first meaningful correction should provide a good opportunity to buy some of the market leading ETFS. The Viper ETF Sector Report helps to identify the market leading ETFS. It combines the quarterly pivot, relative performance and volume analysis to target the best ETFs for investors as well as traders.

In February it targeted the Materials Sector Select (XLB) and the Utilities Sector Select (XLU) which have been two of the best performers. We took profits in XLU but are holding over a 20% open profit in XLB and last week’s longs in the SPDR S&P 500 Oil & Gas (XOP) are already up over 13%. (The Viper ETF Report is just $34.95 a month and subscribers also get two free trading lessons)

The Economy

It was a mixed week for the housing market as last Monday the Housing Market Index came in at 58 as it was unchanged for the third month in a row. This suggests that builders are definitely confident but the low level of traffic is limiting the enthusiasm.

Housing Starts in March were surprisingly weak falling 8.8% as both single family and multi-family components were weak. The Existing Home Sales data on Wednesday was much stronger than expected as they rose 5.1% but had been revised downward in February by 7.3%.

The Philadelphia Fed Business Outlook Survey was expected to come in at 9.0 but instead was -1.6 down from the prior month’s reading of 12.4. This will makes the readings over the next few months more critical as stronger numbers will be important as we head into the summer months. The Chicago Fed National Activity Index was also weak in March.

WA4-22e

The Conference Board Leading Economic Index rose 0.2% in March after dropping the past three months. The chart suggests there may be some loss of upside momentum but there are no clear signs yet that it has topped out. Friday’s flash reading on the PMI Manufacturing Index was 50.8 which is positive but not impressive.

On Monday we have the New Home Sales and the Dallas Fed Manufacturing Survey with Durable Goods, the S&P Case-Shiller HPI and Consumer Confidence on Tuesday. The FOMC meeting also starts on Tuesday with the announcement on Wednesday afternoon. I am not expecting any significant change though volatility could increase.

The Pending Home Sales Index will be released Wednesday with the advance reading on 1st quarter GDP on Thursday. The Kansas City Fed Manufacturing Index is out on Thursday while Friday we get the Personal Income and Outlays, Employment Cost Index, Chicago PMI and Consumer Sentiment.

Interest Rates & Commodities

The yield on the 10 Year T-Note increased slightly last week to 1.888% with next short term resistance now at 1.940%. A strong close in yields above the mid-March high of 2.020% would signal even higher yields.

Crude oil’s drop at the start of the week was a good entry point as the June contract had an overnight low of $39 but then closed the week at $43.76. The weekly studies are positive but the there are some signs from the daily technical studies that the rally is losing some upside momentum. The technical studies still look strong on the energy sector but a pullback would not be surprising.

The strength of crude oil has been due in part to the lower dollar and more global analysts are have finally become aware of its weak technical outlook. The top in the dollar index was indentified in early February “Is This The Stock Market’s Secret Weapon?” when I suggested as weaker dollar could be supportive for stocks prices.

WA4-22f

The daily studies on the dollar index futures are now suggesting it may be forming a short term bottom. The daily chart suggests a potential falling wedge, lines a and b. There is initial resistance in the 9600 area with stronger in the 9700 area. The daily on-balance-volume (OBV) shows a short term bottom formation, line c, as it has moved above its WMA. The HPI, which uses volume and open interest, has been diverging from prices (line d) and is now slightly above the zero line.

Market Wrap

The Dow Industrials and S&P 500 gained just over 0.5% last week but lagged behind the action of the Dow Transport and Russell 2000 that were both up over 1.3%. The Dow utilities were hit hard as they closed down 3.5%. The market internals were 2-1 positive which has pushed the NYSE A/D line to another new high.

The weak earnings from tech giants Microsoft (MSFT) and Alphabet (GOOGL) pressured the technology sector which lost 1.9% for the week. There were a number of Nasdaq 100 stocks that bucked the trend as several of our Viper Hot Stock picks were up over 1% for the week. The oil & gas stocks were the big winners up 5.5% while health care and material stocks also recorded nice gains

WA4-22g

The weekly chart of the NYSE Composite shows that we are now closer to the next meaningful resistance at 10,649 (line b) with more important above 11,000, line a. The surge last week creates a band of good support now in the 10,000 to 10,200 area. The weekly NYSE A/D line is still rising very sharply and continues to lead prices higher. In June of 2014 a similar pattern in the A/D line was followed by five more weeks on the upside.

WA4-22h

The Spyder Trust (SPY) broke out of its trading range last week as it surged to new rally highs on Wednesday. There is next resistance in the $212.50-$213 area with the quarterly pivot resistance now at $214.70. The setback last week looks pretty normal as it has just taken SPY back to the 20 day EMA. There is further support in the $207 area.

The S&P 500 A/D line is still acting stronger than prices as the A/D ratios were positive on Friday despite what many thought of as the market’s overall negative tone. The A/D line now has good support at the late March and early April lows which if broken would be a sign of weakness. The daily OBV also made a new rally high last week and is well above its WMA.

The iShares Russell 2000 (IWM) closed on the highs last week and looks ready to test the next major resistance in the $116-$117 area. The Russell 2000 A/D line also closed on its highs and we are still holding our long positions in IWM but looking to taking partial profits at higher levels. The SPDR Dow Industrials (DIA) also is acting strong but it is getting closer to my target levels.

The PowerShares QQQ Trust (QQQ) was down 1.5% on Friday and has already reached first good support. As I noted earlier the decline was concentrated in just a few stocks and the A/D line is holding up well and is still close to its highs. This makes the action early in the week as those short the QQQ may now get squeezed.

What to do? The market’s internal strength on Friday suggests that the recent pullback may be over soon and that it is not the start of a deeper correction. The FOMC meeting may cause an uptick in volatility and if we do have a deeper stock market correction it should cause an increase in negative bets. Many are watching the low VIX level as another reason to bet on a deeper market correction.

Once the S&P 500 is able to make new highs I think one should be prepared for a round of selling but not a significant market top. Of course it will be the daily analysis of the A/D lines that will warn us if the market is vulnerable to a deeper market correction.

I continue to expect a sharper market correction in the next few months which should create a better opportunity for long term investors. The weekend scans of both stocks and ETFs are identifying some good opportunities each week but be sure you pay close attention to the risk of any new positions.

 

Read More

Charts Talk – Fears Walk

Posted by on Apr 20, 2016

Charts Talk – Fears Walk

Now that the S&P 500 has closed barely above 2100 and the Dow Industrials have moved back above 18,000 a few more of those on air analysts have moved to the bullish camp but many still have not. Some were waiting for a move in the S&P 500 above 2070 before they discarded their bearish stance.

Once again the market internals that is the A/D ratios have been strong with the A/D lines on the NYSE Composite and S&P 500 now well above the bull market highs from May 2015. When a majority of high profile traders were uniformly bearish on February 23rd (Don’t Follow Those Bearish Traders) it was the A/D line analysis that provided a clear reason why you should not join those traders on the short side.

Of course, the market needs bearish traders, recession forecasts and periodic bubble warnings in order to move even higher. Many of the investor fears on the “The Wall of Worry” from late February have now moved to the back burner but they are likely to crop up again in the weeks ahead.

Though the bearish arguments have subsided in the past month recently the argument was made, based on P/E analysis, that the market was now similar to 2008. In today’s column I would like to show why the market is much different technically now than it was in 2008.

CP4-20a

The NYSE Composite peaked on October 11, 2007 at 10,387 and on March 17th 2008 had dropped to 8362. This was a decline of 19.4%.

  • By May 18th the NYSE Composite rallied intra-day to a high of 9687 but closed at 9602 right on the 61.8% Fibonacci retracement resistance that was calculated from the October 2007 high.
  • The NYSE had formed a daily doji and the following day closed below the doji low triggering a short term sell signal.
  • Just four days later the prior swing low was violated confirming a new downtrend and by early June the March lows had been violated.
  • The NYSE A/D line had formed a series of negative divergences before the October 2007 high (One Indicator Stock Traders Must Follow)
  • The NYSE A/D line made sharply lower lows in March than in January (line c) which was a sign of weakness.
  • The NYSE A/D line was only able to move slightly above first strong resistance, line b, in May before it topped out.
  • By late June the A/D line had dropped to new lows.

The NYSE Composite made marginal new lows on February 11th at 8944 as it was down 20.5% from the May 2015 high.

  • Though the NYSE A/D line did make a marginal new low with prices, the S&P 500 A/D line did not.
  • As I noted at the time the NYSE High/Low and McClellan oscillator both formed bullish divergences at the lows.
  • The NYSE A/D line overcame its downtrend, line g, on February 26th confirming that the correction was over.
  • The A/D line then surpassed the November-December resistance, line f, in March confirming that the bull market was still alive.
  • A week ago the NYSE A/D line moved above the May 2015 highs, line e.
  • The next strong resistance for the NYSE is at 10,641 and the November 2015 high, line d.

CP4-20b

The Spyder Trust (SPY) is now up 3.5% YTD as it has closed above the upper boundary of the trading channel, line a.

  • The daily starc+ band is just above $212 with the monthly pivot resistance at $212.60. The weekly starc+ band is at $218.69.
  • The rising 20 day EMA is now at $207 with stronger support in the $204-$205.50 area.
  • The S&P 500 A/D line formed a bullish divergence at the February lows, line d.
  • The bottom was then confirmed on February 16th as the resistance at line c was overcome.
  • The move in the S&P 500 A/D line above the downtrend, line c, in early March was another bullish sign.
  • The A/D line was finally able to exceed the May 2015 high on April 1st (see Tweet).
  • The A/D line has turned sharply higher this week and while that does not rule out a pullback it would take some time before it could top out.

So what’s next? It has been my view since before the earnings season that the results would be better than the dire pre-earnings forecasts. The initial data suggests this may be correct but the next couple of weeks will be important. There are several ETFs, including SPDR S&P Oil & Gas (XOP) , that were recently added to the Viper ETF portfolio with several others that now look interesting.

Investors should be aware that despite the bullish technical outlook a 5-10% correction is likely in the next few months. Therefore as I discussed last weekend ” The Week Ahead: Risk-Can Your Portfolio Handle It?” now is a good time to take a critical look at your portfolio to determine whether your exposure to the stock market is appropriate.

Read More

The Week Ahead: Risk-Can Your Portfolio Handle It?

Posted by on Apr 16, 2016

The Week Ahead: Risk-Can Your Portfolio Handle It?

Stocks continued to surprise the majority last week as the market gains were quite impressive. As I pointed out last week the S&P 500 A/D line moved above the May 2015 highs. The weekly NYSE Advance/Decline has also now moved above its 2015 high, line b. The A/D line is also accelerating to the upside which is bullish for the intermediate term. This implies an eventual move in the NYSE Composite above the May 2015 high which means a potential 8% increase from Friday’s close. What could cause such a rally?

WA4-15a

The early earnings results have been beating the overly negative Wall Street estimates as while the revenue for Alcoa Inc. (AA) was down 15% and earnings missed the stock was up 6.8% for the week. The earnings from JPMorgan Chase (JPM) were much stronger than expected and the stock soared. The 18% slide in the quarterly profits of Bank of America (BAC) could not keep the stock down as it closed up 8.7%.

The experts are still looking for a 8.5% drop in quarterly earnings so it will be important that the results over the next few weeks continue to beat the street. The individual investor, according to AAII’s latest survey, is not convinced about better earnings as the AAII bullish% dropped 4.3% to 27.8%. The bearish% increased 3.4% to 24.9% while the very high neutral camp was unchanged but this is expected to change in the coming weeks.

WA4-15b

In 2011 the NYSE Composite peaked in May at 8718 and by October had dropped 26.4% from the high. The weekly NYSE A/D line held up much better than prices unlike what occurred in the A/D line since the May 2015 high. Still it was not until January 20, 2012 (line 1), over three months after the 2011 low, that the NYSE A/D line was able to move to a new high as the resistance at line a was overcome.

In 2012 the NYSE continued to move higher for another nine weeks and gained 6% before it started to correct. Subsequently the NYSE Composite dropped 13.2% in eleven weeks. The correction did hold above the 61.8% Fibonacci support before it again turned higher. By September 12, 2012 the NYSE had rallied 17.9% from the June lows. This was followed by a 7.9% correction and the NYSE Composite did not exceed the 2011 high until early 2013.

The correction in 2011 was more severe in terms of price than the drop in early 2016 but the speed of the decline this year likely caused greater levels of investor fear. Despite the strength of the recent rally the market’s action in 2011 does allow for the market to rally even more before there is a significant correction. Such a rally could take the NYSE Composite back to the 2015 highs. This should finally reduce the bearish sentiment.

This would likely be followed by a market correction as the high degree of bullish sentiment would make the market increasingly vulnerable. The 20.5% decline in the NYSE from the May 2015 high to the February 2016 low can be broken into two parts. The first was a 15.5% drop from May to the August low and then a second decline of 14.3% from the November high to the February 2016 low.

For most investors these two declines have made them very fearful about investing in the stock market while others are having trouble deciding how much to invest. With the NYSE Composite now higher for the year it is now a good time to review your strategy.

Though it was a tough call on January 16th “Is Bullishness Low Enough Now? “ I did not think then that we had started a new bear market and do not believe we will see one this year. It is clearly possible that we will see one or more 8-10% corrections before the year is over. That is what investors should focus on when determining their portfolio allocation.

Assuming a very conservative $100,000 account with 30% in stocks and 70% in bonds a 10% decline could mean a loss of $3000 or 3% of your portfolio (This assumes flat action in the bond portion of your portfolio) However a 50% allocation to stocks could translate into a $5000 or 5% loss. If you are not close to retirement then I would suggest a 70% allocation to stocks.

This might mean you would have to endure a drop of $7000 or 7% in your portfolio or if we had a decline like January’s it could mean a draw down of $14,000 or 14%. Therefore you have to ask yourself if that were to happen to you would it keep you up at night or make you sell when if Dow opened down 500 points?

If the answer is yes or if you are not sure then it maybe it is a sign that a smaller allocation to stocks might better fit your personality. Clearly if you are 40 or younger I would advocate 70-80% in stocks if you can weather any corrections. For the long term health of your portfolio one must avoid reacting emotionally to the markets.

WA4-15c

The upside reversal last week in the Euro zone markets is an encouraging sign as it is evident in the weekly chart of the SPDR Euro Stoxx 50 (FEZ) . A strong close above the $34 area would support the view that it has bottomed. The weekly OBV is holding above its WMA and a move through the resistance at line b, will signal upward acceleration. I will be discussing a strategy for FEZ in Monday’s Viper ETF Report.

The German Dax needs to surpass the 10,200 area to indicate it is ready to test the longer term downtrend in the 10,800 area. Though I pretty much dismissed most of the concerns on the “wall of worry” at the end of February the lagging action of the Euro zone markets at the time was a concern.

The Economy

WA4-15d

The latest reading on Retail Sales showed a 0.3% decline as auto sales continue to stall as they have not recorded a gain since last November. On a year to year basis there has only been a 1.7% gain as sales have failed to breakout above resistance, line a. The sales data from restaurants, apparel and department stores were all lower.

The Producer Price Index and Consumer Price Index were both lower than the consensus estimates which was disappointing. The Empire State Manufacturing Survey last Friday came in at an impressive 9.56 well above the consensus estimate of 3.0. This reading is consistent with the recent signs of expansion. The six month data suggests further improvement due to the weaker dollar. This data is consistent with the recent improvement seen in the Philadelphia Fed Survey.

Also on Friday the Industrial Production came in at -0.6% for the 2nd month in a row. It did not show the improvement that some were hoping for and the mid-month reading on Consumer Sentiment was down to 89.7 from last month’s reading of 91.0.

On Monday we get the Housing Market Index followed on Tuesday by Housing Starts along with Existing Home Sales on Wednesday. In addition to the jobless claims Thursday we also have the Philadelphia Fed Business Outlook Survey. There is more new data on manufacturing Friday as we get the flash reading on the PMI Manufacturing Index.

Interest Rates & Commodities

The yield on the 10 Year T-Note was a bit higher last week but is still locked in a short term range. A weekly close above the 2.00% area is needed to signal a rally back to the 2.20% area but the weekly technical studies still favor lower yields.

WA4-15e

The dollar index was a bit higher last week but it still looks ready to test my longer term target from February in the $92.50 area. The weekly OBV is still in a downtrend, line b, and is well below its WMA. The HPI still indicates negative money flow and is well below the major downtrend, line c.

Crude oil pulled back late in the week as traders were looking ahead to the weekend energy meeting. It still closed the week higher and though we may see a further pullback over the short term the weekly analysis looks strong.

Gold futures were lower last week and the overall action still suggests the decline is not over yet. The gold miners do look better technically and we may get a short term entry point next week.

Market Wrap

The Dow Industrials were up 1.8% for the week just a bit better than the 1.6% gain in the S&P 500. Both lagged well behind the 3+% gains in the Dow Transports and small cap Russell 2000. It was another strong week for the A/D line as 2503 stocks were higher with just 664 stocks closing lower.

Even though the 3.8% gain in the financial stocks got most of the press, material stocks also rose 3.7% as these two sectors did much better than the third place gain of 2% in the oil & gas stocks.

WA4-15f

The Spyder Trust (SPY) is still in its upward sloping trading channel, lines a and b. The close on Friday was still above Thursday’s doji low with short term support now at $205.81. There is more important support now in the $203 area. On an upside breakout of the range the SPY should rally to the $210-$212 area.

The S&P 500 A/D line made another new high on Wednesday with the weekly A/D line (not shown) also making another new high. For now it would take a decline below the April 7th low (line c) to weaken the trend in the A/D line. Also there was a new high in the OBV which continues to hold above its WMA.

WA4-15g

The ability of the small cap iShares Russell 2000 (IWM) to outperform the large cap stocks is a positive sign as these more speculative issues may help to push the overall market even higher. The weekly chart of IWM shows that it is now testing the weekly downtrend, line a. Once again the 20 week EMA at $108.23 did support prices. There is next strong resistance in the $115-$116.50 area which includes the monthly pivot resistance.

The weekly relative performance now appears to have completed a bottom as it turned up from its WMA and has broken the downtrend, line b. This confirms the positive action of the daily RS line. The weekly OBV has been above its WMA since early March and closed Friday just barely above its downtrend, line c.

The PowerShares QQQ Trust (QQQ) had solid gains last week but the Nasdaq 100 A/D line has not yet surpassed its all time highs from 2015. The weekly RS analysis is above its WMA but does not indicate that QQQ is a market leader.

What to do?

Even though the major averages posted solid gains last week there are still many who do not trust the stock market rally or the health of the economy. As I argued last week the misguided concerns over a debt bubble or an imminent recession were bullish for the stock market. There were some encouraging signs about the economy last week but it will be important that this trend continues in the next few months.

It is doubtful that the stock market action has encouraged new buying by the still cautious stock market investors. Even though new buyers of an index tracking ETF could still see another 5-8% on the upside they also have a 3-5% downside risk.

Therefore investors and traders should keep paying close attention to the entry levels as well as the risk on all new positions. For those not in the market you can either wait for the inevitable correction that is likely in the next month or two or alternatively start a dollar cost averaging program. My suggestion would be to make six equal dollar purchases every two weeks for the next three months.

The sector rotation continues to create new opportunities in some of the more specialized sector ETFs and there are several I am looking at for next week. For stock traders there are number of stocks that are consolidating and provide some good opportunities once they resume their major up trends.

The ability to read the volume patterns in a stock or ETFs can often make the difference between success and failure. Tom will be teaching a two-part interactive online class at end of April to a very small number of students. For more information – here is the link for the Secrets of Volume course.

Read More

The Week Ahead: Why Bubble Fears Are Bullish For Stocks

Posted by on Apr 10, 2016

The Week Ahead: Why Bubble Fears Are Bullish For Stocks

The stock market had it sharpest selloff last Thursday since February 23rd as the stronger Japanese Yen and sharply lower Treasury yields spooked investors. The dollar dropped 1.4% versus the Yen as it has reached its highest level since October 2014. The dollar decline has caught many by surprise though there were clear technical signals by February 6th that the dollar had topped out. Many who sold the Yen short have been squeezed though there is still a high short position.

Despite the rebound Friday the major averages are still locked in their trading recent ranges. Many are wondering whether we are going to see a normal market correction after the recent 12% rally or will sector rotation will take its place.

Some of the strongest sectors like the Dow Transports have already corrected 5.7% from the March 21st high but there needs to be more evidence before I can conclude it has completed its correction. Positive signals a week ago put the health care, biotech and energy ETFs on the Viper ETF buy list last Monday and they all had a good week.

WA4-8a

The markets are nervously waiting for the start of earnings season this week and by all accounts neither the investment pros nor individual investors are excited about the stock market. As noted in the WSJ last week the “Short interest, or bearish bets, on the average S&P 500 stock jumped to as much as 3.5% of available shares by mid-February”. The chart is bullish suggesting the trend can continue even though it did pulled back to 3.1% recently.

There are other signs that money managers have not trusted the recent rally. A recent survey of active managers conducted by the National Association of Active Investment Managers (NAAIM) revealed that they only have a 68% allocation to stocks which is well below the 90% that they would typically have after such a strong market rally.

Much of the pessimism is tied to their expectations that we will have another weak earnings season. In last week’s column “Should Investors Worry About Earnings Season?” I presented my view that the earnings season could be better than expected despite the widespread gloomy forecasts. I also pointed out that it was also not a reason for investors to avoid stocks.

In this environment the comments by Donald Trump last week that “I think we’re sitting on an economic bubble, a financial bubble” has likely made investors even more fearful. In my view this was goal of his comments. Unfortunately fear does sell which is demonstrated by the continued success of his presidential campaign.

Of course many others like David Stockman have been warning for years about the debt bubble and he has now come out with a trading service called “Bubble Finance Trader”. Some may remember his March 2013 op-ed for the New York Times where he warned of a coming economic meltdown and advised investors “to get out of the markets and hide out in cash.” This column coincided nicely with the upward acceleration in stock prices as the Spyder Trust (SPY) was up 32.3% in 2013. Trump also warned Americans in 2013 “to prepare for financial ruin.”

WA4-8c

The first market bubble that I observed as an analyst was the rise in gold during the late 1970’s and early 1980’s. The rise from $375 to $873 per ounce between November 1979 and January 1980 in my view was classic bubble activity. Those of you who remember the markets at the time saw the public stampeding to buy gold and melt down any silver they owned as it had risen from $16 to over $41 per ounce. (More on Bubbles from PBS)

Now a downturn in the growth of global debt may at some point have dire consequences in my experience investors who invest based on long term macro trends generally miss out on some great opportunities. Many have missed much of the bull market performance because they listened to the warnings of a new recession or a Euro collapse ever time the market dropped.

In terms of the US stock market there are still no signs of a bear market so the bubble fears are likely to just be another reason for investors not to invest in stocks until the market is significantly higher. The comments by Trump likely spurred the reaction by the four living Fed Chairs who downplayed the chances of a bubble and the risks of an imminent recession.

WA4-8d

That does not mean that the markets will be easy over the next several weeks as I am still concerned that the Euro zone markets like the German Dax do not appear to have completed their bottom. A few weeks ago I pointed out that Dax had just rallied back to retracement resistance before it turned lower. The lower close last week reinforces the downward trading channel, line a and b. The Dax needs a couple of consecutive strong weekly closes to suggest that it has finally bottomed out.

The Economy

The economic calendar was light last week as the PMI Services Index was disappointing while the ISM Non-Manufacturing Index was much stronger than the previous month. The ISM report was consistent with solid growth for a large part of the economy. This is a positive for the economy in the months ahead.

Thursday’s rather weak chain store sales in March are a concern though it may be due to the early Easter. These numbers could be an early warning for Retail Sales which will be reported this Wednesday. Also out are the PPI, Business Inventories and the Atlanta Fed Business Inflation Expectations.

On Thursday we get the Consumer Price Index and jobless claims followed on Friday by the Empire State Manufacturing Survey, Industrial Production and Consumer Sentiment.

Interest Rates & Commodities

WA4-8e

It was a wild week in the interest markets as the yield on the 10 Year T-Note dropped below 1.700% during the week, closing at $1.727%. The key weekly support still stands at 1.650%, line b. The weekly MACD formed lower highs at the start of the year (line a) and generated a sell signal on January 22nd, line 1. It is still negative which makes a break of the long term support and even lower yields quite likely.

WA4-8f

This WSJ table shows the wide gap between the yield on the US 10 Year and those from German and Japan where the yields are negative. If US yields do drop sharply it is likely to further add to the pain of the hedge funds and other traders.

The heavy short position in T-Bond Futures of close to $60 billion is evident on the chart. This could add to the pain of those who have fought the trend in the Yen and you will recall they were also on the wrong side of this market in the middle of October 2014.

WA4-8g

Crude oil was up 6% on Friday spurring quite a rally in the energy stocks as those in the S&P 500 were up 2%. The rally in crude was fueled in part by a massive short squeeze as traders had increased their short positions by over 30% in the reporting period that ended last Tuesday.

The weekly chart of crude oil shows that the downtrend, line a, was broken five weeks ago and the recent setback has not altered the positive technical readings. More importantly the on-balance-volume (OBV) had just pulled back to its WMA but turned higher with Friday’s close.

The Herrick Payoff Index (HPI) has been indicating positive money flow since March 11th which is consistent with the breaking of the downtrend, line b. The HPI has also formed a long term positive divergence as it was making higher lows, line c, while crude was making lower lows.

It was my view in late January that energy stocks could help the stock market recover from its recent sharp slide and I still think this is very likely. In last week’s column “Energy Pros Oil Picks Get A Technical Checkup” I took a technical look at some of the favorite picks from a panel of oil experts assembled by Barron’s.

Market Wrap

There were few bright spots last week as the Dow Industrials and S&P 500 both lost 1.2% while the Dow Transports were down 1.9%. Small and mid-cap stocks did a bit worse and declining stocks led the advancing ones by 700 issues.

Only the oil & gas and health care sectors were higher with gains of 2.2% and 1% respectively. The financial stocks were the big losers down 2.6% and even the consumer goods lost ground as they were down 0.8%.

According to AAII the individual investor because a bit more bullish last week as the bullish % rose 5% to 32.2%, The bearish % is still quite low at 21.5% while the number of investors who are neutral is quite high at 46.3%.

WA4-8h

The weekly chart of the Spyder Trust (SPY) shows that the range last week was quite similar to the prior week with major resistance, line a, still in the $208-$210 area. The quarterly pivot resistance is in the $215 area.

There is initial support now in the $202-$203 area with strogner at $199-$200 and the still rising 20 week EMA. It will be important that SPY does not have a weekly close below the quarterly pivot at $197.50. The S&P 500 Advance/Decline line made a new rally high two weeks ago but turned lower this week. There is initial support at the breakout level (line b) with further at the rising 21 week WMA. The daily A/D chart (not shown) is still locked in a trading range.

WA4-8i

The NYSE Composite gained 0.74% on Friday and the daily A/D ratios were even stronger than prices as they were 3-1 positive. The daily chart shows that the trading range is still intact with resistance at 10,280 and support at 10,000. The NYSE was testing its 20 day EMA for much of last week.

The NYSE A/D line has moved back above its WMA and positive A/D numbers early this week will suggest a rally back to daily resistance and a possible upside breakout. The McClellan oscillator has been diverging from prices, line c, since early March. It is now trying to turn up from oversold levels , line d, but does not yet show a typical completed top formation. A new rally high would likely be accompanied by an even stronger divergence.

The PowerShares QQQ Trust (QQQ) was down 1.3% last week with the 20 day EMA now at $108.03. There is stronger support at $104.74 which is the quarterly pivot. The Nasdaq 100 A/D line did not make new highs last week and is now barely below its WMA.

The Russell 2000 small cap index was down 1.8% last week though the iShares Russell 2000 (IWM) is still in a short term uptrend. A close below $107 would break the short term uptrend and suggest a decline to the more important support in the $104 area.

What to do?

The market was nervous last week as concerns over global growth grew as rates in some parts of the world are negative. The focus this week will be on earnings but investors should note that there has been some improvement recently in the economic data. I will be watching the data closely in the months ahead for signs this positive trend has continued.

Despite the stock market rebound there continues to be a lack of interest in stocks by many investors. Those who started the year thinking there were going to invest in the market were quickly discouraged by the market’s decline. Public warnings about bubbles and imminent recessions are also likely to keep many other investors out of the stock market.

It is the so called “wall of worry” that is a positive factor for the market’s uptrend as it is only when everyone is bullish, as was the case in the fall of 2007, that the market gets into trouble. I see no signs of euphoria when it comes to investing though too many are likely over committed to the bond market. If we do get a sharp decline in US yields as the technical suggest investors should consider reducing their exposure.

Until we get clear signs of a daily top from the A/D lines a trading range seems the most likely scenario for the weeks ahead. Investors and traders have to pay attention to the entry levels as well as the risk on any new positions.

Those who jumped into the red hot iShares Dow Transportation ETF (IYT) three weeks ago are already suffering a 4% loss and it could still decline a bit further before the correction is over. There are no signs yet that the large diversified ETFs that focus on Europe or Asian have completed their bottom formation.

Most importantly the market is likely to have further sharp corrections in the next few months so develop a firm investment plan now so you do not react emotionally when the market drops.

Editor’s Note: The ability to read the volume patterns in a stock or ETFs can often make the difference between success and failure. Tom will be teaching a two part interactive online class at end of April to a very small number of students. For more information – here is the link for the Secrets of Volume course.

Read More