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The Week Ahead : Investors – Fight These Fears

Posted by on May 30, 2016

The Week Ahead : Investors – Fight These Fears

As investors and traders head into the long Memorial Day weekend the S&P 500 is once again close to the April highs and the widely watched 2100 area. This is despite the raft of negative headlines that filled my inbox this week, including: The Market Is In For A Shock, A Market Under Pressure, Prepare For A Recession and The Recent Rally May Be A Head Fake.

It appears that many hedge funds and banks are short the stock market as they are looking for another rally failure. In last week’s column “Avoiding The Big Money Blues” I pointed out the hazards of following the hedge funds or well known money managers. Often when a majority of these big traders are on one side of a trade the market goes in the opposite direction. Last week’s action in gold was a good example.

There were early signs from the market internals last week that the recent trading was not going to lead to a sharper correction and a new rally phase was more likely. The evidence was strong enough for me to recommend that Viper ETF traders buy several ETFs that ended sharply higher.

This end of the correction was confirmed last week ( Uncovering Best Of Breed Stocks) as the Nasdaq 100 A/D line “moved above its WMA and the May 10th high”. As stocks continued higher through the week the technical studies have gotten even stronger. (See Market Wrap section)

Surprisingly, despite the strong stock market only 17.8% of individual investors are bullish according to AAII who pointed out “This is the lowest level of optimism recorded by our survey since April 14, 2005”. The very high neutral reading also goes back over 16 years. So what fears are keeping investors from buying stocks?

Many investors are again worried that the Fed will raise rates again this summer as comments from some Fed governors early in the week sparked more speculation. On Friday afternoon comments from Fed Chair Janet Yellen that it was “appropriate to gradually start raising rates” as further convinced many investors.

Many investors believe the popular misconception from the general media that higher rates are immediately bad for stocks. What they miss is that there is historically a long lead-time between when rates start to rise and before stocks actually top out.

WA5-27a

This table from Deutsche Bank details all of the rate hike cycles doing back to 1957. It reveals that on average it takes 41 months from beginning of a rate-hike cycle before a recession starts. As I pointed out in a previous Week Ahead column when rates were raised on June 30, 2004 the stock market continued higher until October 2007 and the recession started in December.

There was another rate hike cycle that began on February 4, 1994 with the S&P 500 at 469. This cycle only lasted until February of the following year but the S&P 500 stayed in a trading range and was unchanged for the period.   In fact, the early stages of a higher rate cycle can be a bullish period for stocks.

WA5-27b

Another major concern of investors is the new high in global debt as well as the sharp increase in corporate debt over the past few years. This was discussed in an excellent article in the WSJ and the chart shows a solid uptrend (my annotation) and the series of new highs. It is positive that because of declining interest rates the global debt-service ratio is well below the 2008 high as according to J.P. Morgan the “cost of interest payments, as a share of GDP, has fallen to 7% from a peak of 11%” in 2008.

This could change in the next few years if rates do indeed move higher. In China the debt to GDP ratio has increased 80% since the recession but their debt service ratio has not changed in the past two years. Of course not all debt is the same as most realize that student debt has doubled in the past six years and there is much debate about the quality of some of China’s debt.

Some investors have been avoiding stocks since they have been told for the past two years that stocks were expensive and should not be bought. This is a regular argument from some perpetual bears and at some point they will be right. They argue that the P/E or Price/Earnings of stocks is at historically high levels. Some point to the Shiller CAPE Ratio (Cyclically Adjusted PE Ratio) developed by Yale professor Robert Shiller who won a Nobel prize for his work.

Fellow academic Jeremy Siegel is one of many to question his approach even though they have been long time friends. It has been noted that this model was negative in May 2009 and according to an article in Financial Advisor it has signaled that stocks have been overvalued for much of the past 35 years.

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As a technical analyst I am suspicious of any conclusions based on earnings or other financial data as I have found the price and volume action to be a better determinant of value. I would argue that the technical studies will top out well ahead of the earnings data as was the case in 2007. Some also point to the Price/Sales data that is featured in this chart from Ned Davis.

My annotation on the chart points out that the major trend in the S&P 500, line a, is clearly intact. Also even though the support in the Price/Sales (line b) was broken in 2008, the new highs in 2013 reaffirmed the positive overall trend. Some well known bears have been using this data since 2014 as a reason that the market cannot continue higher.

The sharp stock market decline in early 2016 had many fearing a new recession as articles supporting this view dominated the press at the start of the year. Since early in the bull market I have not believed the fears of a new recession and often times these fears have peaked at correction lows. I have remained positive on the economy based in part on my favorite indicator, the Conference Board’s Leading Economic Index (LEI).

WA5-27d

The most recent chart of the LEI was featured last week and it has an excellent record of peaking out well before the start of a recession. Some excellent work on the LEI has been done by Doug Short and this long term chart shows how this measure of the economy has consistently peaked well ahead of a recession. The positive April LEI data has reaffirmed the overall uptrend.

These I believe are the four most common fears that are keeping many investors out of the stock market. It will likely take much higher stock prices before the sideline investors decide to buy stocks.

The Economy

The week started off on a disappointing note as the flash reading on the PMI Manufacturing Index came in at 50.5 which is just above the key 50 level. This Wednesday we get the more important ISM Manufacturing Index and the PMI Manufacturing Index. The Richmond and Kansas City Fed Manufacturing data are still weak as both are still in negative territory.

The New Home Sales came in at the highest level since January 2008 which was a monthly surge of 16.6%. On Thursday the Pending Home Sales Index was up 5.1% which was the third gain in a row. This coincides nicely with the technical outlook for the home building ETFs which were looking positive as the week started and have has been recommended to Viper ETF clients.

The flash reading on the PMI Services Index last Wednesday was down from the prior month and at 51.2 is just barely above the key level of 50. On Thursday the Durable Goods came in at an impressive 3.4% which was much better than the consensus estimates of 0.3%. Inside the capital goods component did drop for the third month in a row so this will bear watching in the weeks ahead.

Friday’s 1st quarter preliminary reading on 1st quarter GDP at 0.8% showed some improvement over the advance reading. Corporate profits were down 3.6% in the first quarter matching the decline in the 4th quarter of 2015.

WA5-27e

The month ending Consumer Sentiment at 94.7 was pretty much what the market was expecting. It is up a strong 5.7 points from the April report which breaks the pattern of lower highs. The increase in expectations implies confidence in the jobs outlook.

Even though we have a holiday shortened week there is plenty of data ending with the monthly jobs report on Friday. A good number, in the view of many, will increase the odds of a Fed rate hike in June or July.

There are other key reports this week as on Tuesday there is the Chicago PMI , Dallas Fed Manufacturing Survey, the Case-Shiller Housing Market Index and Consumer Confidence. In addition to the PMI and ISM Manufacturing data on Wednesday we get the corresponding services indexes on Friday along with Factory Orders.

Interest Rates & Commodities

Interest rates showed little change last week despite the GDP report and the comments from the Fed Chair as the recent trading ranges are still intact. No clear signs yet of a breakout despite the apparent growing opinion the rates will be hiked this summer.

Last week I cautioned about the risks on the long side of the precious metals and the miners. This was based on the negative technical readings and large long position by the hedge funds. The gold futures were down $39 for the week while the Market Vectors Gold Miners (GDX) was down over 7%. The strong volume that accompanied the precious metals bottom early in the year suggests that an important low was likely formed so I am looking to get back on the long side once the correction runs its course.

Crude oil continued higher last week as the $50 level basis the July contract was overcome during the week. The weekly studies are still positive but a doji was formed on Friday so I would not rule out a sharp pullback in the next week or two.

Market Wrap

The technology stocks led the market higher has week as the S&P 500 Technology sector was up 3.6% for the week clearly outpacing the 2% gain in the Dow Industrials and S&P 500. The better than expected GDP data on Friday did calm the markets. Euro zone stocks were also strong as the Stoxx Europe 600 gained 3.4%.

WA5-27f

The market internals were very strong with 2482 stocks advancing and just 695 declining. This has pushed the NYSE A/D line to another new rally high. As I noted at the end of February the move in the A/D line above its weekly WMA was a bullish sign for the intermediate term. The shallow nature of the recent pullback in the A/D line is also a sign of strength.

The fact that the A/D line has already moved well above the late 2015 highs suggests that prices will follow and move the NYSE resistance at 10,600, line a. The May 2015 high at 11,254 should eventually be overcome which means a rally of 7.5% from Friday’s close.

The weekly OBV has moved solidly above its WMA with important support at the recent low and the uptrend, line b. The monthly OBV is currently above its WMA and a monthly close above it would be another positive sign.

WA5-27g

The Spyder Trust (SPY) broke through its downtrend, line a, last Tuesday though the ranges narrowed late in the week. On a move above the April 20th high of $210.94 the quarterly pivot resistance is at $214.61 with the weekly starc+ band at $217.08.

There is initial support now at $208.50 with the rising 20 day EMA. The S&P 500 has broken its downtrend, line b, but is still barely below its April high. The weekly A/D line (not shown) has moved strongly above its prior high and is acting much stronger than prices. The daily OBV has moved above the April highs and is starting to act stronger than prices.

As I noted last week the Powershares QQQ Trust (QQQ) was starting to act better than the SPY as it triggered a daily doji buy signal on Friday May 20th. The very favorable risk/reward analysis favored new buy recommendation in the QQQ for Viper ETF traders. The entry strategy, explained in a trading lesson on entry levels, targeted an entry price very close to the week’s lows.

There are a large number of stocks in both the Nasdaq 100 and IBD Top 50 that are likely to give new buy signals in this weekend’s Viper Hot Stock scans. I will also be focusing on those stocks that will give new monthly buy signals next Wednesday.

What to do? The strong action early last week moved the A/D line analysis from the corrective to the positive mode. This is a sign that the market is just starting a new rally phase and the low level of investor bullishness should be another positive for the stock market. It think the hedge funds and debt focused traders still favor the short side and I think they well be disappointed.

I would expect the stock market to correct next week and one sharp down day could give the bears some hope but I think it would be a buying opportunity. There are a number of ETFs and stocks that will look attractive on a pullback. I am looking to add to positions at levels where the risk can be well controlled.

For investors a pullback of 1-2% should be an opportunity to buy a well-diversified U.S. or global ETF that has a low expense ratio. I am also looking at some of the ETF that concentrate on the Euro zone markets as they are also starting to act better.

Over the past thirty years I have focused on educating new investors and traders as I feel those who are willing to study and do the work can be successful. if you are interested in learning more subscribers to either my Viper ETF or Hot Stocks service get regular trading lessons that are designed to both educate and train my subscribers. New subscribers are also sent the four most recent trading lessons with their $34.99 monthly subscription.

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The Week Ahead: Avoiding The Big Money Blues

Posted by on May 21, 2016

The Week Ahead: Avoiding The Big Money Blues

It has been a choppy week in the stock market as after Monday’s sharply rally stocks grinded lower before turning higher on Friday. Even though the stock market has failed to break to the downside this week, most but not all of the daily studies still indicate that the market is still in a corrective mode.

This was based on my analysis of the A/D data which has done an excellent job of keeping me on the right side of the market for many years. This analysis is detailed in the Market Wrap section of each Week Ahead column so you can follow along to see what signs I am looking for to change my outlook. The daily signals have to be viewed in the context of the weekly analysis as when both are negative it can signal a more severe market decline. That was the case last summer and early this year.

This A/D analysis allows me to rate the market outlook as positive, neutral or negative. When the market is in the positive mode the market leading ETFs and stocks can easily record double-digit gains in 4-6 weeks as was the case after the February lows. Investors following the Viper ETF Report closed out longs in the Materials Sector Select (XLB) last week for over a 17% profit.

The correction warnings of course can just be a sign that the market is merely consolidating or undergoing sector rotation. The regular monitoring of the A/D lines can then alert the analyst when the market has resumed its major trend.

Much was made last week of the news that one of Berkshire Hathaway’s managers had invested $1 billion in Apple (AAPL). Coincidentally AAPL did show up on last Monday’s Viper Hot Stocks buy list before the Berkshire news hit the tape.

Many investors and traders at one time in their careers have taken a position in a market because that is what the “big money ” was buying or selling. A new position established by a high profile investor, hedge fund or money manager is often reported by the press or in an SEC filing.

As I noted in a recent article on the hedge fund bubble the stocks they favor generally do worse than the major averages. Since last October I have commented that I could not understand how a mutual fund or hedge fund could justify such a grossly overweight position in Valeant Pharmaceuticals International (VRX).

WA5-20c

From a recent Fortune article this chart shows how much better those stocks that have a low concentration in hedge funds have performed then those that are widely favored by the hedge funds. If a widely held stock starts to drop then the hedge funds often try to get out at the same. For example in the first six weeks of 2016 those stocks most favored by hedge funds, measured by the GS Hedge Fund VIP Basket, dropped 5% more than the an equal weighted index of the S&P 500.

This data was further supported by an article in the weeked WSJ which reported that buying those stocks favored by hedge funds only gives one a very small edge which is not meaningful when transaction costs are included. The very short-term traders can often briefly capitalize on the news but they do not stay long.

Many can also be tempted to follow the hedge funds in the commodity markets. Over the past month there have been many bullish forecasts and recommendations on the gold market. As I pointed out again last week the technical studies suggested that gold was topping out.

WA5-20a

Last week the gold futures closed below the prior week’s doji low triggering a sell signal. The futures look ready to close the week down $20. Even though the gold futures have risen from $1050 to over $1300 the on-balance-volume (OBV) has been unable to move above the peak from early in the year and has stayed below the longer-term downtrend, line a.

The Herrick Payoff Index (HPI) uses volume and open interest to measure the flow in or out of a commodity. At the end of January the HPI moved above the zero line indicating that the money flow was now positive. The HPI rallied strongly for the next eight weeks as gold rallied over $170 per ounce. Even though gold has moved higher the HPI formed a negative divergence, line b. A drop in the HPI below support at line c, will be more negative.

Another reason I was not enthusiastic about buying gold was based on the Commitment of Traders report. It is released each Friday by the CFTC which shows the long and short positions in the major commodity markets. If you are interested in the COT data it is free from the CFTC. Also I just discovered a new site that appears to have nice charts on the COT data (http://freecotdata.com/) that you might want to look at though I have not fully analyzed their reports.

The COT Large Trader Index from Trade Navigator shows when these large traders are overly long or short. Since March 11th the large traders or managed money have been predominantly long gold as the Index has been close to 100 (point 1). It may take a drop back below $1200 before the large traders sell out their long positions. A similar peak occurred in the latter part of October 2015, point 2, just before gold dropped $50.

In January 2015, point 3, the Index reached a similar extreme when gold was above $1300 and it subsequently plunged well over $200 in the next six months. The twin peaks in 2014, point 4, also preceded a sharp drop.

WA5-20b

Of course a high level of long or short position can continue for some time so it is important that one use technical analysis in conjunction with the COT data. In March 2015 the large traders were heavily short crude oil (point 1) which correlated with positive technical signals as both the OBV and HPI had moved above their WMAs.

Crude oil rallied for eight weeks and then started to move sideways as the Large Trader Index reached 100. As I noted in the Week Ahead column last June this sideways action was negative and by early July the weekly technical studies had turned negative. Crude oil subsequently dropped from $75 to $26 a barrel in early 2016.

In the January 22nd article “Time To Squeeze The Short Oil Speculators?” there were signs that the shorts were starting to cover. The Large Trader Index rose from 0 to 50 for a few days before it again turned lower. This was a precursor to the bottom as the weekly HPI moved strongly above its WMA on February 19th even though the Index was at zero as the smart money was short.

By the middle of March the smart money was on the long side with the Index back to 100 (point 3). The Index has dropped back to 75 but there are no strong signs yet from the weekly studies that oil has topped out. Therefore if you are considering a position in a stock, commodity or ETF that is a favorite of the smart money please do your own research before you take a position.

 

The Economy

The manufacturing data was generally weak last month as Monday’s Empire State Manufacturing Index dropped to -9 while most were expected a +7 reading. The Philadelphia Fed Business Index was also weaker than expected as new orders contracted. The Chicago Fed National Activity Index was only a bit better than expected but Tuesday’s Industrial Production jumped to 0.7% which was higher than expected.

The data for the housing market was quite good with the Housing Market Index at 58 is showing solid optimism by the builders. The Housing Starts were also strong and Friday’s Existing Home Sales indicated low, but steady improvement.

WA5-20d

The all-important Leading Economic Indicators increased to 0.6% which was a sign that April was a good month for economic data. The chart shows that the LEI has clearly turned up as this was first positive month since last November. As I have mentioned in the past, this indicator has a good record of topping out well ahead of a recession so April’s data is a very good sign for the economy.

This week we have the flash PMI Manufacturing Index on Monday followed on Tuesday by the New Home Sales and the Richmond Fed Manufacturing Index. On Thursday we get the Durable Goods, Pending Home Sales and the Kansas City Fed Manufacturing Index. This is followed on Friday by the preliminary reading on 1st quarter GDP and the month end reading on Consumer Sentiment.

The FOMC minutes last week raised the possibility that the Fed could raise rates in June but I continue to think this is unlikely. Even though the Fed Funds futures now show a 30% chance in June and a 55% chance in July. Yields rose during the week to a high of 1.882% but then settled back on Friday. They are still locked in a trading range.

Market Wrap

Even though stocks gave up a good part of their gains on Friday the S&P 500 was up 0.3% for its first gain in four weeks while the Dow Industrials closed down a fraction. The action in some of the other averages was more impressive as the Dow Transports were up 2.2% while the Nasdaq Composite gained 1.1%. The weekly advance/decline ratio was slightly negative.

Half of the major sectors were higher last week led by technology’s gain of 1.8% and a 1.5% rise in the oil & gas stocks, health care, financials and materials were also higher for the week. The other five sectors were lower as the utilities lost 2.3% while consumer services dropped 1.7% for the week.

According to AAII the individual investors have become even more skeptical about the stock market as the bullish% reading dropped further to 19.3%. Over the past 29 years it has only been below the 20% level 30 times. The VIX is still at very low levels as it has failed to break out on several attempts.

WA5-20e

The weekly A/D lines on the NYSE and S&P 500 are holding near the highs and are still well above their rising WMAs. The daily chart shows that the NYSE rallied up to its 20 day EMA and former support, line a, on Friday. The NYSE A/D line has turned up but is still below its WMA. A move above the May 10th high is needed to indicate the correction is over. The McClellan Oscillator dropped below support at line d, last week before Friday’s rally. A strong move above the zero line and the long-term downtrend, line c, need to be overcome to signal a change in the trend.

WA5-20f

There were mixed signals from Friday’s close in the Spyder Trust (SPY). The close was above Thursday’s doji high which is a short term positive but the day’s high at $206.10 was just barely above the still declining 20 day EMA. This is typical of a rebound in a downtrend but to signal even lower prices the SPY needs to drop below Thursday’s low at $202.78.

The S&P 500 A/D line has turned up after slightly breaking the support at line c. The A/D line is still below its declining WMA and the downtrend, line b. This resistance as well as the May high (see arrow) need to be overcome to signal that the correction is over.

WA5-20g

The most positive signs last week came from the technology stocks as the PowerShares QQQ Trust (QQQ) was up 0.9% but was not able to close above the weekly doji high at $107.50. The quarterly pivot at $104.74 was tested again last week but appears to have held. The weekly downtrend, line a, is in the $110.30 area with major resistance in the $114-$115 area.

The weekly Nasdaq 100 A/D line has turned up after testing its WMA and the former downtrend, line b. This is potentially a quite bullish setup. The daily A/D line (not shown) has moved back above its WMA after appearing to hold the support from late March. A few more positive days of market internals is needed to push the A/D line above its downtrend.

On Friday the small cap iShares Russell 2000 (IWM) did much better than the SPDR Dow Industrials (DIA) but the A/D lines for both are still in their downtrends.

What to do? After a very strong market rally from the February 11th lows to the latter part of April the stock market started to move sideways. The deterioration in the A/D indicators and volume suggests that the risk on new long positions was increasing. The high level of complacency also indicated the market was vulnerable.

This kind of deterioration can be followed either by a sharp drop of 5% or by a period of sector rotation. Risk management plays an important part in my recommendations. I would rather stand aside and avoid possible corrections then buy when I felt the risk was high.

The current low level of bullishness and the fact that very few participated in the rally from the February lows does allow for another strong rally. There is the potential for new highs in many of the major averages. This should be signaled in advance by new up trends in the A/D lines. Those investors that embarked on a dollar cost averaging program earlier in the year should continue to buy a regular intervals,

An important part of both the Viper ETF Report and the Viper Hot Stocks Report are the Trading Lessons that are sent out every few weeks. There are designed to help subscribers better understand the markets. They are quite detailed with many specific examples.

Last week’s two part Viper Trading Lessons focused on my A/D analysis and also featured examples of how combining the weekly/daily analysis could have helped one sidestep past corrections.

New subscribers to either service (just $34.95 per month) get the three latest Trading Lessons including:

Finding The Best Entry Levels

Finding A Good Exit Price

Telltale Signs of a Correction

 

 

 

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Retail Rout: Buy It Or Not?

Posted by on May 11, 2016

Retail Rout: Buy It Or Not?

The powerful rally Tuesday caught many on Wall Street by surprise as the financial media was searching for a reason as to why stocks rallied. Their inability to find a plausible fundamental reason why stocks were strong had them concludes that “it must be technical”.

The ability of the NYSE Advance/Decline line to move back above its WMA last Friday, as noted in last weekend’s technical review, was a sign momentum had shifted. The A/D ratios were over 3-1 positive Tuesday and all of the A/D lines, even the lagging Nasdaq 100, have moved back above near term resistance.

The fact that the Spyder Trust (SPY) was able to overcome the May 2nd high at $208.18 is also a positive sign. However in my view the market needs to add to these gains in the next day or so in order to signal that the SPY can test if not exceed the recent highs at $210.92. The SPY would have to reverse to the downside and close back below $205 to reverse the positive momentum.

Much of the focus this week is on the retail sector as the April Retail Sales report is out on Friday. The March reading of -0.3% was disappointing but economists are looking for a sharp rise in auto sales to boost sales in April. The SPDR S&P Retail ETF (XRT) has been lagging the SPY this year as it is up 1.3% versus a 2.8% gain in the SPY.

The key question now is whether there are any signs that this retail ETF is on the verge of becoming a market leader and whether the technical studies on the SPDR S&P Retail ETF (XRT) or two leading department stores show any signs of bottoming.

CP511a

The monthly chart of the SPDR S&P Retail ETF (XRT) reveals that it dropped in early 2016 between the 38.2% and the 50% support levels from the 2011 lows. The relatively long monthly tails on the candle chart in January and February indicate there is good demand below $38.

  • XRT closed down 4.3% in April as a higher close was needed to turn the monthly studies positive.
  • A close above the February high at $46.50 would break the downtrend, line a.
  • The monthly relative performance turned lower from its WMA in April and it needs to move through its downtrend in order to suggest that it is a market leader.
  • The RS has important support at line c, and in 2016 it did form slightly lower lows.
  • The monthly OBV has also turned down after failing to move above its WMA on the rebound from the lows early in the year.
  • There is important long-term OBV support now at line d.

The weekly chart of the SPDR S&P Retail ETF (XRT) shows that it has been drifting lower since it peaked in early April at $46.50 (line e). The ETF has been trying to bounce this week and stay above the quarterly pivot support at $43.49.

  • There is additional support at last week’s low of $42.37 with the weekly starc- band at $40.64.
  • On a move above the April highs there is stronger resistance in the $48-$50 area.
  • The weekly RS line is trying to turn up from the early 2016 lows but is well below its WMA.
  • A move in the RS line above the downtrend, line f, will indicate that XRT has become a market leader.
  • The weekly OBV has been acting much stronger than prices as it is holding well above the early 2016 lows.
  • A much stronger close in the next few weeks is needed to move the OBV back above its WMA.
  • The daily studies are negative and it would take some time before they could bottom.

CP511b

Nordstrom, Inc. (JWN) reports its earnings after the close Wednesday and it is down 1.1% YTD. The stock peaked at $59.37 in the middle of March. It is down over 17% from this high

  • The 20 week EMA is at $52.88 with the weekly downtrend, line a, in the $60 area.
  • There is next support at $46.37 with the monthly pivot support at $44.92.
  • The weekly relative performance has dropped below the early 2016 lows.
  • The drop in the relative performance below support, line b, last fall was a good sell signal.
  • The on-balance-volume (OBV) is trying to run up but JWN would have to close sharply higher in order for it to move back above its WMA.
  • The daily studies are negative and need at least a daily close above $53.82 before they could turn positive.

Macy’s Inc. (M) reported a drop in sales of 7.4% and lowered their sales and earnings guidance for the year. The stock is down over 7% in early trading and is well below last week’s low at $37.40. The late 2015 low and weekly starc- band are now being tested.

  • The drop early Wednesday could erase all of the year’s gains and the quarterly S2 pivot support is much lower at $29.93.
  • Before its earnings both the weekly and daily studies were negative.
  • The weekly RS line dropped below its WMA on April 1st signaling it was weaker than the S&P 500.
  • The weekly OBV has been trading in a narrow range, line g, and has dropped back below its WMA.
  • Volume this week is likely to be heavy so the OBV could see a sharp drop.
  • There is initial resistance at $37 with the declining 20 day EMA at $39.03.

What to do? When buying a sector ETF or stock it is important that the weekly technical studies support your decision. Often times I will look to buy a retracement to good support when the weekly studies are positive but the daily indicators are negative. The risk management is a key part of this strategy but when the dominant weekly trend takes over a market can really move.

Heading into this week there was no technical reason to be long the SPDR S&P Retail ETF (XRT) or especially Nordstrom, Inc. (JWN) and Macy’s Inc. (M) who were reporting earnings. The earnings from Macy’s Inc. (M) highlight the potential risks and though Nordstrom, Inc. (JWN) could surprise the market there is still no reason to buy.

If you are interested in finding out how the weekly and daily can help generate unique stock trading ideas you might try the Viper Hot Stocks Report .

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The Week Ahead: The Bubble No One Is Discussing

Posted by on May 7, 2016

The Week Ahead:  The Bubble No One Is Discussing

The initial reaction to the weak jobs report Friday caused further selling in early trading Friday. Investors apparently were more concerned about the weakness in the economy than the prospects that the Fed will not raise rates soon. Based on the Fed fund futures the odds for a hike in June are at 13%, 30% in July and only 42% in September.

The trading for the first week of May has caused a further drop in bullish sentiment as according to AAII only 22.3% are now bullish which is down 5% from the previous week. This is the lowest reading since the 19.24% reading from February 12 which was one day after the market’s low. This low bullish reading then corresponded with the key technical readings (Is There Blood In The Streets Yet?) that indicated the stock market was finally bottoming.

Investors should also remember that the January 15th 2016 reading of 17.9% was the lowest since 2005 and was much lower than any reading during the 2008 bear market. This sentiment data is best used as a contrary indicator which means that a high level of bullishness is a potentially negative for the stock market while a low reading can be positive if it lines up with the technical readings.

Typically the bullish% has been quite high at past major market tops and the average bullish reading of individual investors from November 1999 through April 2000 was over 52%. This included a peak reading of 75% in early 2000 as the Nasdaq Composite was making its high.

At the bull market high in October 2007 the bullish% peaked at 54.6%. Since the start of the current bull market in 2009 the highest reading has been 63.3% in December 2010. The highest reading in 2015 was 51.7% but it only barely made it above 40% late in the year. Though the current reading does not mean the market cannot decline it is not consistent with a major top as many of the weak longs have already been sold.

The bearish sentiment is still quite low at 30.3% as it was much higher at 48.7% at the January and February lows. The high 47.3% neutral reading would need to typically drop before the reading would be consistent with a correction low.

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The financial press was focused last week on the Sohn Conference which raises money for pediatric cancer. At the conference many of the best-known hedge fund managers share their investment ideas to conference attendees and the often conduct extensive interviews. The long-term chart of the performance for various hedge fund strategies from Bloomberg shows that “all of them have weathered the same steady decline in rolling ten-year returns since 1999.”

It was my view in July 2014 “The Week Ahead: One Bubble Starting to Burst?” that the hedge fund bubble was bursting. I had wondered the previous month why many high net worth investors were still putting money in hedge funds with their high fees and dismal performance. The largest US pension fund CalPERS had announced in July 2014 that would stop investing in hedge funds and this was when the bubble started to burst.

It has been a rough few years for hedge funds as in 2015 as two of the best known hedge fund managers lost over 20%. Just last week American International Group (AIG) reported a quarterly loss of $183 million which was due in part to a $537 million drop in their hedge fund holdings. MetLife (MET) also reported a 19% drop in earnings as their hedge fund holdings also performed very poorly.

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It should therefore not be a surprise that investors pulled $15 billion out of hedge funds in the first quarter which was biggest outflows since the first two quarters of 2009. If First Capital’s hedge fund manager Dan Loeb is right this may just be the start as he called the 1st quarter as “one one of the most catastrophic periods of hedge fund performance “. Furthermore Third Point also said “”There is no doubt that we are in the first innings of a washout in hedge funds and certain strategies”.

Though some look to the hedge fund managers for stock ideas Bloomberg’s Hedge fund VIP Index stock (GSTHHVIP) has not done well as their most widely held stocks which have seriously under performed the Spyder Trust (SPY).

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Though some of these stocks are in the scan list for the Viper Hot Stocks I have not recommended any of them. The chart of the corresponding index of those stocks that are not widely held by hedge funds (GSTHHFSL) has significantly outperformed the S&P 500 as the index has skyrocketed since the July 2015 lows.

Many of the hedge fund managers have macro views which I have always had a problem with they typically do not use technical analysis so they do not have a clear exit point when the position goes against them. Several again expressed their negative outlook for both the US economy and stock market. One hedge fund manager, Richard Deitz from VR Capital Group does see opportunities in Europe and likes Greek debt.

markit

Eurostat recently surprised the markets as they reported a 0.6% increase in the growth of the 19 bloc Euro union. However the economic data for Europe is mixed as the Markit Eurozone PMI has dropped back its uptrend, line a. The data shows strong improvement for Spain, Italy and France but the PMI has been deteriorating for Germany. One wonders how long the other Euro zone economies can continue to improve if Germany stays weak. This makes the Euro zone data over the next few months even more important.

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Since early March I have been concerned about the failure of some overseas markets to keep pace with the US stock market. The German Dax Index was only able to close above the 61.8% Fibonacci retracement resistance from the December 2015 high for two days in April before it turned lower. The uptrend, line a, is now being tested with next good support in the 9500 area. This is 3.7% below Friday’s close.

The Nikkei 225 was also not able to stay above its 61.8% resistance level before dropping sharply back to chart support at line b. A weekly close back below the 20,000 level would be quite negative technically and should also cause a large increase in bearish sentiment.

The Economy

The manufacturing data on Monday was pretty much as expected with the ISM Manufacturing Index at 50.8 with the consensus estimate at 51.5. It was a similar result from the PMI Manufacturing Index and Construction Spending held firm. Also last week Factory Orders showed a solid 1.1% gain in March but the February report was revised down 1.9%.

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The PMI Services Index came in at 52.8 and though it was not impressive it was the best reading since January. The recent improvement in the service sector is evident on the chart of the ISM Non-Manufacturing Index as it has had solid gains in the past two months. The reading at 55.7 is still well above the 50 level.

The economic calendar this week is relatively light with Import and Export Prices on Thursday along with the jobless claims. On Friday we have Retail Sales, Producer Price Index, Business Inventories and the mid-month reading on Consumer Sentiment.

Interest Rates & Commodities

It was a wild week for interest rates as they fell for most of the week but then after an early decline rallied to close higher on Friday. Trading ranges are intact across multiple time frames with short-term support now at 1.685% and resistance at 1.941%.

Crude oil closed the week lower as it was down $1.26 but managed to close $1.40 above the week’s lows. The weekly studies are still positive and volume increased late in the week as prices rallied.

Gold also rallied on Friday and based on the technical studies it looks as though the pullback is over. The correction in gold futures was fairly shallow as it just dropped 2.4% from highs while the Market Vectors Gold Miners (GDX) had over a 10% correction. One concern for me is that the hedge funds have their largest long positions in gold since 2011.

Market Wrap

The Dow Transports and Russell 2000 were hit the hardest last week as they were down 1.7% and 1.4% respectively. The Dow Industrials were down only 0.2% while the Dow Utilities gained over 0.7%. There were 1759 stocks declining while 1413 advanced.

Consumer goods and services were the only positive sectors as both posted slight gains. Oil and gas were hit the hardest as they were down 3.4% while the material sector lost 2.4%. The health care stocks were down over 1% and the industrials lost 0.6%.

Last weekend I thought that the correction might be over by mid-week so it has lasted longer than I expected. The late day reversal Friday is likely the start of a short-term rally as the SPDR Dow Industrials (DAI) did generate a doji buy signal on the close.

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The weekly chart of the NYSE Composite suggests that this is just a normal pullback with the 20-week EMA at 10,112. The 38.2% Fibonacci retracement support from the January lows is at 9557 which is 3.4% below Friday’s close. A strong weekly close above last week’s high would indicate the pullback is over. This would be consistent with the low level of bullishness and the overall skepticism about the stock market’s rally.

The weekly Advance/Decline line has turned down slightly but is still well above its rising WMA. The break of resistance, line a, in the A/D line was a bullish sign early in the rally. The weekly OBV has dropped further but is still above support at its rising WMA.

The daily A/D line (not shown) turned up Friday                and is now back above its WMA which is an encouraging sign. The McClellan oscillator rose to -89 after holding above the early April lows at -136.

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The Spyder Trust (SPY) needed to close above Thursday’s doji high at $205.85 to generate positive short-term momentum but it fell just short. The 20 day EMA is at $207.34 and a close back above this level would be positive. A daily close above $209.81 would be a sign that SPY is going to challenge the April 20th high. The decline last week came close to the daily starc- band which is now at $203.82. There is stronger support at $201.74, line a.

The S&P 500 A/D line has turned up but is still barely below its WMA. It has held so far well above the more important support at line c. The OBV has been much weaker as it dropped below its support , line c, and is now well below its declining WMA.

The technical studies on the Powershares QQQ Trust (QQQ) still look the weakest as the Nasdaq 100 A/D line (not shown) has dropped below the late March and early April lows. The daily A/D line has turned up but it would take a couple of days on the upside just to reach its declining WMA. The weekly A/D line is still above its WMA and more important support.

The iShares Russell 2000 (IWM) tested daily support on Friday before closing higher. There is stronger resistance at $111.68. The Russell 2000 A/D has turned up from support which is consistent with a pullback in an uptrend.

What to do? The deterioration in the Nasdaq A/D line last week warned of last week’s market decline. This makes the action this week now more important. The positive weekly technical readings and low bullish sentiment still suggest that this was just a correction not a significant top.

A further rally this week will need to be watched closely especially the A/D numbers. Two consecutive strong closes with A/D ratios that are better than 2-1 positive will suggest that the uptrend has resumed. If on the other hand the S&P 500 rally stalls at first resistance in the 2075-2083 area and the A/D ratios are weak it will be a sign of weakness.

A lower close this week will indicate that the market correction is going to take prices back to the more important S&P 500 support in the 2000-2015 area. That would not be enough the alter the positive intermediate term trend but it will mean that the next rally is more important.

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