The ability of the S&P 500 to close well above the May 2015 highs has not really diminished the debate over the market’s future. The somewhat surreal Republican Convention that seemed to contradict decades of past policy did not seem to impact the stock market.
The opinion of the fundamental analysts has seen little change despite the new highs as they continue to believe they are not justified by their analysis. A few of the bears have converted to the bullish camp but most have not as the majority continue to argue why the market must be forming a major top.
The individual investor according to AAII was a bit less bullish last week as the bullish% dropped to 35.4% which is still well below the 40% level. The bearish% rose to 26.7%. As of July 19th Investor Intelligence reported that 54.4% of financial newsletter writers were bullish with only 23.3% bearish. Historically the bullish% has risen to well over 60% at a market top while the bearish % has been below 15%.
One of the more interesting arguments for why the market must be topping out is based on the observation that there is a surge in the construction of tallest buildings prior to a major recession or market top. I found this chart, which chronicles these observations since 1900, quite interesting. New tallest towers are under construction in Dubai, Shanghai and San Francisco.
The frustration expressed by some Wall Street professionals has its roots early in the year as advisors, like the Royal Bank of Scotland (RBS), advised their clients to sell everything. The recent data on institutional cash levels also suggests that many managers have missed this rally.
It is not surprising that many mutual funds have performed poorly in 2016 and that many clients are not very happy. Therefore any panic on Wall Street maybe based on the fear of further redemptions and a loss of business if managers continue to lag their benchmarks in the 3rd quarter.
Many feel that the recent surge to new highs in the S&P 500 is a fake out while others are convinced that the completion of the two-year trading range in the S&P 500 means that the market can go higher. Instead of just looking only at prices I suggest that investors look at the breakout in terms of the market internals.
As I commented in April “Charts Talk-Fear Walks” the new highs in both the NYSE Advance/Decline and S&P 500 A/D lines … means that the NYSE Composite and S&P 500 are both likely to make new highs”. Even though the NYSE is still 4% below its 2015 high the completion of the weekly trading range does project an eventual move to new highs.
It is my view that the ability of the NYSE A/D line to overcome year long resistance is a sign of strength and that it has implications for the market that are likely to carry over until next year. looking at what has happened after similar A/D line breakouts can help us better prepare for the weeks ahead.
The NYSE A/D line was in a 25 month trading range between June 1983 and December 1985, line a. The completion of this range (line 1) occurred after ten weeks of solid gains. It was followed by a five-week rally before the market pulled back for a few weeks. By July of 1986 (point 2) the S&P 500 had gained over 24%.
The A/D line had peaked ahead of prices in April 1986 and did not break out to new highs until January 30, 1987 as it stayed in the trading range for eight months, line b. By the time the S&P peaked in late August of 1987, it had gained 23%. As the S&P was making its high the NYSE A/D line as noted last time (see chart) had formed a significant bearish divergence which warned in advance of the October crash.
In 1994, the A/D line peaked and it was not until April 26, 1996 (line 1) that the A/D line was able to move to new highs, line a. After a minor 4% rally the S&P 500 underwent an eight-week correction (point b) that dropped the S&P 500 over 10%. By November 1996 the new rally in the S&P 500 was confirmed, line 2, as the NYSE A/D line had broken out of its six-month range.
In the following sixteen weeks the S&P rose another 11.9% as it peaked in the latter part of February. On the following eight-week correction (point c) the S&P 500 dropped 10%. The A/D line dropped below its WMA three weeks after the high but did not form any bearish divergences. Two weeks after the correction low the A/D line had already moved back above its WMA.
The most recent example of a long-term breakout in the A/D line occurred in December 2009 (line 1) as it was finally able to overcome the highs from 2007, line a. This time the S&P 500 just rallied 4% before it underwent a three-week correction of 9% (point b). The weekly A/D line just dropped back to its rising WMA on the pullback before it again turned higher. By April 2010 the S&P 500 had gained over 10%.
The correction from this high amounted to a drop of 17% and was not over until September 3, 2010 (line 2) when the A/D line moved to new bull market highs after breaking out of a five month trading range. I discussed this at the time Advance/Decline Line Hits New High.
Those who bought the PowerShares QQQ Trust (QQQ) based on the Viper ETF methods had a 28% gain in the next six months. By April of 2011 the S&P 500 had gained just over 24%. In July the A/D line dropped below its WMA which warned of a deeper correction.
So what does this mean for the current market? The weekly chart shows the completion of the S&P 500 trading range, lines a and b, last week. The width of the long-term range is an eye-popping 324 points so when added to the breakout level at 2135 it gives you a potential S&P 500 upside target of 2459. Of course one would never invest based on this projection as markets never go straight up or straight down. There are many hurdles to overcome before these long term targets could be met.
Since the NYSE A/D line has broken out at 2080, the S&P 500 has gained another 4%. At the time it was already up 14% from the February lows. My upside targets from the daily chart have been in the 2180-2200 area. The quarterly pivot resistance is at 2199 with the weekly starc+ band at 2209.
The fact that the market has had little in the way of a pullback over the past eighteen days suggests that we should be prepared for a 1-2 week pullback in the next month or so. The period from late August through September is a seasonally weak period for the stock market . There should be plenty of warning from the daily A/D analysis before we see a meaningful correction.
Such a correction should be the next good buying opportunity for investors as the market should then move even higher. A 10% rally from the A/D line breakout level of 2080 would give us an upside target of 2288. These I think is a reasonable upside target for the latter part of 2016 and early 2017.
This does not mean that one should be complacent as there are still challenges from the overseas markets which I will update next week.
The Housing Market Index last Monday declined slightly but still reflects solid growth as builders in the West are especially optimistic. Housing Starts continue to rise while Existing Home Sales also improved in June.
The Philadelphia Fed Business survey was weaker than expected at -2.9 as it reversed June’s gain. The Chicago Fed National Activity Index was a bit better than the consensus estimates. The Leading Economic Indicators (LEI) rose 0.3% in June which reversed the slight decline in May. As I have commented in the past it has a good record of topping out well before the start of a recession. It peaked in early 2006 and then broke its uptrend, line a, in the latter part of 2007. It will take 3-4 months of deterioration before it could top out.
The flash reading on the PMI Manufacturing Index rose to 52.9 which may be a good sign for the manufacturing sector in the weeks ahead.
On Monday we get the Dallas Fed Manufacturing Survey followed on Tuesday by the S&P Case -Shiller HPI, PMI Services Index, New Home Sales, Consumer Confidence and the Richmond Fed Manufacturing Index. The FOMC meeting also starts on Tuesday.
Durable Goods are out on Wednesday along with Pending Home Sales Index and in the afternoon we have the FOMC announcement. On Friday we get the advance reading on 2nd quarter GDP, Chicago PMI and the month end reading on Consumer Sentiment which did decline sharply in the middle of the month.
Interest Rates & Commodities
The yield on the 10 Year T-Note held its gains from the previous week as it is well above the recent lows. On the upside the next resistance is at 1.700-1.750% while a drop below 1.450% will suggest a drop in yields back to the recent lows.
Crude oil was hit hard last week as the September contract dropped $2.44 at $44.22. The 50% support level is at $42.71 with the daily starc- band at $41.96. Gold closed well above the week’s lows and I shared my detailed analysis of the gold futures last week in “Charts, Not Fear, Guide Gold Market”.
The Dow Industrials were up 0.3% last week while the Dow Transports lost just over 0.2% but the Utilities rebounded nicely as they gained 1.4%. Both the S&P 500 and small cap Russell 2000 were up over 0.6% and 1986 stocks advanced with just 1151 declining.
The technology sector led the way as it gained 2.2% much better than the 1.3% gain in health care while financial stocks were up just under 1%. Two of the tech winners last week came from the Viper Hot Stocks weekly buy list and were recommended in the past two weeks.
QUALCOMM Inc. (QCOM) was up 11.6% last week as it decisively broke through the resistance at line a. The weekly relative performance signaled it was a market leader in May and the daily OBV broke through resistance, line c, almost two weeks ago.
Facebook Inc. (FB) has earnings this week and gained 3.5% last week as it made a new all time high. The weekly and daily charts look strong as the daily RS broke its downtrend, line e, last week. The on-balance-volume (OBV) has moved above three-month resistance at line f, which has confirmed the price action. The completion of the weekly range has targets in the $133-$135 area.
The Spyder Trust (SPY) held firm last week and Friday’s close suggests it looks ready to reach the $219-$220 area this week. The daily starc+ band is at $219.84 with the weekly at $220.71. The 20 day EMA and daily starc- band are now in the $214-$214.90 area.
The daily A/D line closed at another new high Friday has it held well above its WMA as prices moved sideways. On the Brexit vote decline the A/D line held the support, line c, that goes back to March. This now is the first important level of support with further at the May lows. The daily OBV made a new high for 2016 in June but is still below the 2015 highs.
The iShares Russell 2000 (IWM) has traded in a tight range over the past nice days as it has held well above the early June lows, line b. The daily starc+ band is at $122.90 with the monthly pivot resistance at $124.90. The chart resistance from the March and April highs, line a, is now in the $125.50-$126 area. I will be looking for signs of a short-term top where traders should take profits.
The Russell 2000 A/D line held up better than prices in June and now has important support at line c. The pullback to its WMA on July 5th created a bullish buy setup. The 20 day EMA and near term support is at $117.48.
The PowerShares QQQ Trust (QQQ) is still slightly below the December 2015 high at $114.75 with the daily starc+ band at $115.45. The daily and weekly Nasdaq 100 A/D lines like those on the Dow Industrials are still acting stronger than prices.
What to do? The next two weeks should determine what kind of quarter it has been for earnings but so far it looks better than estimated which is what I have been expecting. This may help some tentative investors to move back in stocks. If yields continue to climb then we should also see funds move to stocks from bonds.
If the major averages get another strong close early this week then it will mean a sharper setback is likely to come from higher levels. Therefore those who are under invested should wait until we get a few sharp down days before they do new buying.
For more active investors and traders there are several ETFs where the risk/reward is better than in the market tracking ETFs. Specific advice on these ETFs is provided twice a week in the Viper ETF Report which is only $34.99 per month and includes my trading lessons. The subscription can be cancelled on line at any time.
The eight-day $120 rally in gold in reaction to the Brexit vote cleaned out those who remained on the short side and caused a new flood of buying as the long side of the gold market became even more crowded
As I pointed out on July 9th “The latest data from the CFTC shows that the long positions of money managers have made another new high even though margins were recently raised. In my experience this is a dangerous combination and I continue to think the long side is risky now.”
In trading Wednesday gold futures are down $14but many are confident the rally from the early 2016 lows is not over yet. The December Comex gold contract has dropped $60 per ounce from the July 7th high as even the events in Turkey could not interrupt the decline.
In over 30 years of analyzing the commodity markets I have paid particular attention to the open interest in order to identify both long and short-term turning points. This open interest analysis in January “Time To Squeeze The Short Oil Speculators?” indicated that the four-month slide in crude oil prices was likely to reverse. Crude oil completed its bottom just a few weeks later.
The number of long gold contracts held by money managers only dropped 3% in the latest period as their long position represents 33.4% of the open interest. Since late 2015 the number of long contracts held by money managers has surged 220,000 contracts. This suggests that more longs will be liquidated before the bullish sentiment has been significantly reduced.
So what do the monthly, weekly and daily charts say about the outlook for gold futures?
The monthly chart of gold futures shows that the futures formed a doji in December 2015 and then triggered a buy signal with the January close. (Chart is updated through 7/19)
- The monthly downtrend from the 2011 and 2012 highs has now been reached.
- Currently the gold futures are trading near the month’s low so the July close will need to be viewed in terms of the monthly open at $1324 to see if another doji has formed.
- There is monthly support at $1220 which corresponds to the 20 month EMA.
- Since prices are currently slightly higher for the month the OBV is slightly above its WMA but it has been weak on the rally.
- The Herrick Payoff Index (HPI), which uses volume, open interest and prices is showing the best strength since 2009.
- The HPI moved above the zero line at the end of February, point 1 and is still clearly positive.
- The WMA of the HPI could move above its WMA in July for the first time since late 2013.
The weekly chart shows last week’s reversal as the close was well below the prior week’s low. There is first good support in the $1295-$1305 area with the quarterly pivot at $1294. (Chart is updated through 7/19)
- The rising 20-week EMA is at $1272 with the uptrend in the $1240 area.
- The weekly starc- band and the quarterly pivot support are in the $1230 area.
- The weekly OBV only moved above its WMA four weeks ago as it made new lows in late May even though prices were moving higher.
- The OBV is still well below its long-term downtrend, line d, that goes back to early 2015.
- The weekly HPI moved above its WMA and the zero line at the end of January which was bullish.
- The HPI has been lagging prices since early June as it has formed a significant bearish divergence, line e.
- A decline in the HPI below the previous low and the zero line will confirm the negative divergence.
The daily chart of the December 2016 Comex gold contract is updated through Tuesday July 19, 2016. Therefore it does not reflect the $14 drop on Wednesday as December gold is currently trading below $1326.
- The daily starc- band is at $1299 while the 38.2% Fibonacci support from the December 2015 low is at $1256.50. The daily uptrend, line a, is in the $1250 area.
- The 50% support is at $1217.40 and it should hold on a correction as it is likely to terminate between the 38.2% and 50% support levels.
- The daily OBV has formed lower highs since last October as it has diverged from prices.
- The OBV dropped below its WMA on July 12th and this weakness was confirmed by the break of the uptrend, line c, late last week.
- The daily HPI formed a negative divergence, line d, at the recent highs.
- The violation of the support at line d generated a further sell signal.
- There is initial resistance now in the $1235-$1240 area.
What it Means: As the charts indicate the monthly, weekly and daily technical studies looked negative before the drop on Wednesday. Vipers ETF client have been on the sidelines as I became skeptical of the rally in June. I do think that the current correction is likely to be an excellent buying opportunity consistent with the bullish monthly indicators. I will be monitoring the weekly and daily technical studies for signs of a turn.
The Market Vectors Gold Miners (GDX) is down over 4% at $28.40 early Wednesday and has first strong chart and retracement support in the $23.50-$25 area. The SPDR Gold Trust (GLD) is down over 1% at $125.82 and has next good support in the $123-$124 area. The 38.2% support at $119.19 may be tested on the decline.
Those who are long have a tough decision as to whether you should sell now or try to ride out the correction. I would expect the decline to last a few more weeks at least. It typically takes some time to reverse such high bullish sentiment.
The widely anticipated monthly jobs report on Friday shocked forecasters as for the second month in a row they were way off the mark. In the June report May’s numbers were revised even lower to just 11,000 new jobs.
The 285,000 reading for Non-Farm Payrolls was above even the most optimistic CNBC forecast and the increase of 38,000 jobs in professional and business services was especially encouraging. Even manufacturing had a gain of 14,000. Still it is not surprising that some who have been warning about the deterioration in the economy were still not impressed.
The Non-Farm Payrolls chart suggests the trend may have changed with the June report but one should remember that this data series, like many of the economic reports, is subject to wide swings on a month-to-month basis. Many economists are more concerned by the fact that S&P 500 came within a fraction of the all time high and yields on the 10 Year T-Note dropped to new all time lows.
Technical indicators like volume, price as well as the number of stocks advancing or declining are rarely revised and this is one of the many reasons I favor technical over fundamental analysis. As I pointed out last week the fact that the A/D lines on the major averages did not make new lows during the post Brexit market decline was a sign of strength.
Friday’s gains were impressive as the major averages were up 1.5% or more and even more important there were 2711 stocks advancing and just 370 declining. The strength of rally was likely fueled in part by short covering as even after the close one long time market bear called the market’s reaction “comical”.
The continued disbelief in the market rally is a bullish sign. The weekly chart of the Spyder Trust (SPY) shows that the S&P 500 Advance/Decline line moved back above its WMA on February 26th and the SPY has gained 10% since the A/D analysis again turned positive. It made another strong new high this week as it continues to lead prices higher. Those who have been following my analysis throughout the bull market know that this analysis is what I use to determine whether I am buying or selling stocks and ETFs.
Even though many of the major averages have just made it back to their pre-vote levels many stocks have done much better. Two of the recent Viper Hot Stocks picks, CBOE Holdings (CBOE) and Paychex (PAYX) were identified as market leaders before the vote and are now 4.8% and 8.3% above their pre-vote levels.
Since the Brexit vote my inbox has been deluged daily by 6 or 7 times the average number of financial articles and for a while I thought my spam filter had been turned off. A very high percentage of the articles expressed a pessimistic view on the stock market and/or the economy.
Many focused on the dire consequences of the recent vote and how it must doom the Euro zone economies and lead to a global bear market. They may be right eventually but since the vote it has become clear that no one really knows how the UK exit from the European Union will pan out. There will probably not be clarity on this issue until next year and there is the potential for things to change significantly before the split is final.
Others are taking the view that the very low rates in the US and negative rates in other parts of the world are warning of an economic slowdown and an eventual collapse of equity prices. Those who are worried about the deflationary implications of low rates also believe it has to be negative for stock prices.
When I see one of these articles I will often take the time to read them and assess their argument. I also take the next step as I suggested in a column several weeks a ago ” Look Before You Leap” to look back at past comments from the author. I tend to pay more attention to an analyst’s warning if they had been positive on stocks for most of the bull market. On the other hand those who have been making the same arguments for 2-3 years are treated with more skepticism.
I have been analyzing the stock market since the early 1980’s and think I have gained insight from each bear market. I have also extensively studied past bear markets and my research has shown that over time there have been very few analysts or traders that have recognized the start of past bear markets. The current flood of articles seems to be driven by a race for the bragging rights once the bull market tops out..
If you study the market’s history you will find a number of comments near bull markets highs that are extremely similar. The 1973-1974 bear market was the most devastating since the depression as some widely held mutual funds dropped over 70% (See Kiplinger article) Very close to the early 1973 highs Barron’s ran an article titled, “Not a Bear Among Them” to describe the bullish consensus of institutional investors.
After the market had dropped 15% in 1973 Treasury Secretary George Schultz commented that there were “bargains galore” that he was not able to buy because of his position. Then in August 2007 which was just two months before the market topped out ” Treasury Secretary Henry Paulson explained that U.S. subprime mortgage fallout remained largely contained due to the strongest global economy in decades”. Don’t expect many to correctly identify the next bull market top.
As is evident on the charts the subsequent declines were quite devastating if you were on the wrong side of the market. In both cases the market internals warned of a top in advance and as I noted in early June the new high in the monthly A/D line sent a very bullish message about our current market.
Most of the bear market forecasters base their analysis on fundamental data such as price to sales , P/E ratios, high margin debt, etc. Those that use technical analysis try point out divergences between the US market and Chinese stocks or some other market that they feel is more important than the US stock market. The dismal performance of the hedge funds over the past few years has shown that most of these macro strategies do not yield profits
The strongest argument in favor of technical analysis is that if applied objectively it can tell you objectively when you are wrong. This is what is missing from most of the bear market forecasts is that they do not have an exit strategy. These authors rarely provide an objective way to determine that their analysis was wrong. They are therefore stuck with their market forecasts no matter how high a market goes.
This chart from last September was designed to illustrate how the level of bearish market commentary often peaks near a market ‘s correction low. In May 2010 an Economist article highlighted some of the market’s concerns as they said ” Fears are growing that the global recovery will falter as Europe’s debt crisis spreads, China’s property bubble bursts and America’s stimulus-fuelled rebound peters out. ” Does this sound familiar six years later?
Even in 2010 investors were cautioned about stocks because of a fear over deflation but just a few months later (red arrow) the S&P 500 had surpassed the 2010 high. This was an objective way to get back in the market’s rising trend.
Once again in the summer of 2011, US debt was downgraded and many thought we were starting a new recession. By October 13th “Be Bold, Be Fearless…Buy the Dip” there were clear signs that the market had bottomed based on the A/D line analysis but the S&P 500 did not make new highs until early 2012.
Those who were bearish in 2011 had an opportunity to switch back to the long side had they used a stop. I have noted additional points on the chart where using a stop above the previous high would have again confirmed the major trend.
As I discussed last week “The Investors Best Crisis Strategy” comparing weekly closing prices to the quarterly pivots can often be helpful in allowing one to stay in a major trend. The table from last week’s Viper ETF Report has the new quarterly pivots for some of the major ETFs.
Though many are talkign about an imminent recession the economic indicators that I watch are not sending any warning signals at this time. One of my favorites, the Leading Economic Index, shows no signs of a top and it will next be reported on July 21st.
The short holiday week most of the data, like the monthly jobs report, was better than expected. The PMI Services Index was about as expected the ISM Non-Manufacturing Index at 56.5 was much stronger than 53.3 which was the consensus estimate. Factory Orders declined but met consensus estimates.
The calendar is light this week with the Producer Price Index on Thursday along with jobless claims. It is followed on Friday by the Consumer Price Index, Retail Sales, Empire State Manufacturing Index, Industrial Production, Business Inventories and Consumer Sentiment.
Interest Rates & Commodities
As the yield on the 10 Year T-Note has dropped to a new all time low the most prominent bond fund managers, including Bill Gross and Jeffrey Gundlach, do not expect rates to drop much lower. Gross is shorting high yield bonds and does not think the jobs report will spur the Fed to raise rates. Both are also quite negative on the stock market. The fact that yields have reached the daily and weekly starc- bands in my opinion does favor at least a short-term reversal in yields.
The acceleration of gold to the upside over the past month has left me on the sidelines but I am still not willing to chase prices as the gold futures approach $1400 and the weekly starc+ band. The weekly studies are positive on gold while the daily indicators do show some divergences.
The latest data from the CFTC shows that the long positions of money managers have made another new high even though margins were recently raised. In my experience this is a dangerous combination and I continue to think the long side is risky now.
Crude oil has dropped down to test the minor 50% support level on Friday as last week’s inventory data pushed prices lower. A strong rally early this week is needed to indicate that a short term low is in place. Using the methods discussed in Friday’s Viper Trading lesson a rally in crude would have upside targets in the $54 area.
The major averages were led on the upside by the 1.9% gain in the Nasdag Composite which was followed by the 1.8% rally in the small cap Russell 2000 and the 1.6% gain in the Dow Transportation Average. The S&P 500 was up 1.3% and on the week the advancing stocks led the declining ones by a 2-1 margin.
In the latest AAII survey individual investors were a bit more bullish at 31.1% up 2.1% in the last week. The most significant change was the 6.8% drop in the % of bearish investors. The VIX has dropped back to 13.20 and is very close to the June lows. According to option expert Larry McMillan his analysis of the put/call ratios is bullish.
The NYSE Composite gapped higher Friday but is still within its trading range, lines a and b. A completion of this range would have upside targets in the 11,200 area and the May 2015 highs. The NYSE A/D line broke out to the upside over a week ago and closed Friday at another new all time high.
The A/D line has first good support at line c, with more important at the May low. The McClellan oscillator formed a bullish divergence at the post vote lows, line d, and is now in a short-term uptrend. The 20 day EMA is at 10,400 with the quarterly pivot at 10,352.
The Spyder Trust (SPY) closed just slightly above the resistance at line a but further gains are needed to confirm the completion of the trading range (lines a and b). The initial quarterly pivot resistance is at $215.11 with the daily starc+ band at $215.91. The trading range has upside targets in the $218-$222 area. There is initial support now in the $210 area with the 20 day EMA at $207.94. The quarterly pivot stands at $206.88.
The S&P 500 A/D line closed the week very strong as it held the support at line d, on the post vote drop. The move through resistance at line c on June 29th forecasted a new high for the SPY. The A/D lines for the IWM, DIA and QQQ have all moved to new highs and confirmed the price action.
What to do? The market correction last week was shallower than I expected and the strong weekly close made it a tough week for the bears. More pain is likely for them this week as a new closing high in the widely watched S&P 500 is expected. Nevertheless we should see a decent pullback in the next week or so that should be another buying opportunity.
The next significant target for the S&P 500 is in the 2180-2200 area and I continue to favor stocks over bonds. Investors should continue to favor positions in low cost, broad based ETFs or mutual funds.
As I mentioned a few weeks ago I think this earnings season may be much better than most expect. If this is the case it could help to bring some of the vast amount of cash on the sidelines back into the stock market. Viper ETF clients established long positions last week in the SPY, IWM, DIA, XOP and VWO.