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Should Investors Tune In Or Tune Out?

Posted by on Aug 27, 2016

Should Investors Tune In Or Tune Out?

The stock market moved sideways for most of last week with the heaviest selling on Wednesday. Finally on Friday we got Janet Yellen’s long awaited comments from Jackson Hole where she said “the case for raising rates has strengthened in recent months.”

This did little to change the already low expectations for a rate hike in September but then Fed Vice Chairman Stanley Fischer hinted on CNBC that a rate hike was still possible next month. The S&P futures reversed course on his comments as the futures dropped 20 points.

This increases the focus on the September 20-21 FOMC meeting which makes it more likely that it will be tough three weeks for investors and traders.  It does not help that we are entering a seasonally weak period where an increase in market noise can play a larger role.

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The recent tight ranges and low volume does make the market more vulnerable to wide swings. This low volatility is evident on this Bloomberg chart as there has been only one day with a 0.80% range since mid-July.  In the article they commented that “the market is locked in its tightest trading range since the end of 1965.”  ( I took a look at the chart of the time period and the S&P 500 peaked out early in 1966 and then dropped over 20%)

The volatility is likely to be different  in September as on Friday the S&P futures dropped below the lows of the past fourteen days. The stock market rallied Friday afternoon and the Spyder Trust (SPY)  closed  just barely above the doji low of two weeks ago. Therefore a weekly doji sell signal was not triggered but it could be next week if SPY closes below $217.23.  As I discuss in the Market Wrap section the A/D lines have not yet moved into the corrective mode.

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Many are wondering if we do get a market correction in the next few weeks how far might the S&P 500 or SPY fall?  The fact that the 20-week EMA at $213.32 is still rising strongly is a healthy sign. It does not rule out a drop below the EMA  as part of a correction in the major trend. It would take more time and a deeper correction before the SPY could complete a major top.  The 20-week EMA is now 1.8% below Friday’s close.

The weekly S&P 500 A/D line has been flattening out after rising strongly since February (section b). It also could correct back to its WMA but it shows no hint yet of topping out.  The A/D line is still clearly on the February buy signal. The recent action shows some similarities to early 2013 (chart on right) as there was also a strong six-month rally before there was a meaningful correction. From early January through the middle of June 2013 the SPY stayed above its strongly rising EMA.

In 2013 the SPY corrected for five weeks as it dropped below the 20 week EMA for two weeks before the market again turned higher. The selling in the stock market increased in late June (point d) after Fed Chairman Ben Bernanke commented that the bond-buying program could be stopped by the end of the year. This pullback turned out to be a great buying opportunity.

The weekly A/D line was also very strong in 2013 as it stayed well above its sharply rising WMA (section c). The A/D line turned down the week SPY made its high and over the next five weeks it dropped close to its rising WMA.  The weekly OBV did not break down during the correction as it only moved slightly below its WMA. From the high to the low the SPY declined 6.4%.

The SPY currently has weekly support from early June at $211-$212 with further at $209 to $210. A decline equal to what occurred in 2013 would take the SPY to the $205.60-$207 area.

The comments from Fischer and other Fed officials will stimulate more debate next week and in the past few years these periods have often increased the investor uncertainty and have dampened their enthusiasm for stocks. According to AAII individual investors became more cautious last week as the bullish % dropped 6.1% to 29.4% and 29.6% are bearish.

For the past month I have suggested that investors trim the weak stocks , ETFs or funds from their portfolios.  This process will be much more difficult if the market does correct further. I would also suggest that investors tune out the financial TV media until after the next FOMC meeting. My concern is that the endless Fed banter will cause some to change their investment plan at just the wrong time.

Maybe I am alone in being irritated with and frustrated by the endless parade of analysts discussing if the FOMC will act or whether they should.  There are quite a few traders who seem to have a strong opinion that the Fed should raise rates now. Apparently they think they know what is best for the economy even though many real economists are not that sure.

There are also quite a few elected representatives who want the Federal Reserve to follow set rules in the future. Anyone who studies the economic history going back to the early 1900’s realizes that no two recessions are really the same. One cannot recover from a recession by following set rules and clearly the severity of the last recession caused more structural damage than any economic downturn since the Great Recession. It is not surprising that Janet Yellen is now considering a change in the Fed’s inflation guidelines.

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Last week I discussed the feared bond market bubble where I stressed my view that if interest rates do turn higher there should be plenty of warning from the technical studies.  Though the month is not over yet it does seem as though rates will close higher in August. As I noted last week the weekly MACD is positive but the monthly MACD still looks weak. The monthly downtrend, line b, is well above the market at 2.00%, line a.

The yield on the 10 Year Yield note rose from 2.00% to 3.00% between  May and December of 2013 2013.  This turn was signaled technically at the end of May as the weekly yield chart completed a reverse head and shoulders bottom formation by moving through resistance at line a.  The positive MACD in 2013 was in agreement with the weekly analysis.

Through the daily and weekly monitoring of the bond market and the key ETFs there should be clear evidence when the bond market turns the corner.

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The technical outlook for the Dax Index has improved over the past few weeks as the downtrend from the 2015 highs, line a, has been decisively broken. This was consistent with improving economic data from the Euro zone countries. This suggests that if these markets do correct with the US market the Dax could pull back to the 20 week EMA in the 10,000 area which may create a good buying opportunity.

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The expected market correction should create some good opportunities in both the index tracking ETFs as well as some of the key sectors. The weekly chart of the DJ US Technology Index looks especially interesting.  The recent weekly dojis near the weekly starc+ bands does favor a pullback over the near term. However it is more important that the major resistance at line a, was overcome in July. It is now important support.

The breakout was confirmed by a move in the on-balance-volume (OBV) through the long-term downtrend, line b. The relative performance has also completed its weekly bottom formation as the resistance at line c was overcome. For Viper ETF investors and traders this should create some new buying opportunities.

Over the past few weeks my scans of the Nasdaq 100 and IBD top 50 stocks have revealed a majority of new sell signals. Subscribers of the Viper Hot Stocks Report are now holding a majority of short positions  but a correction should create some excellent buying opportunities in those stocks which have become the new market leaders.

The Economy

Last week’s Chicago Fed National Activity Index was stronger than expected while the Richmond Fed Manufacturing Index was weaker. The manufacturing sector continues to be a concern as the flash reading on the PMI Manufacturing at 52.1 was a bit weaker than expected.  The focus this week will be on Wednesday’s Chicago PMI as well as Thursday’s ISM and PMI Manufacturing indices.

New Home Sales were very strong last week but due to low inventories the Existing Home Sales were down. This week we get the S&P Case-Shiller Housing Price Index on Tuesday and the Pending Home Sales Index on Wednesday.

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Last week’s Durable goods report showed a healthy 4.4% increase but the preliminary reading on 2nd quarter GDP came in at 1.1% which was weaker than the advance reading. The chart of GDP does show a concerning downward trend in the yearly data while some of the Feds own models forecast a more healthy GDP in the 3rd quarter. Consumer Sentiment at 89.8 was weaker than the expected 90.7 but the internal numbers did reflect optimism over the job outlook.

As this week progresses the focus will be on Friday’s jobs report as economist speculate that an increase of 200,00 jobs or more will increase the odds of a rate hike by the Fed.

Interest Rates & Commodities

Crude oil rebounded on Friday but still closed the week lower. In Friday’s technical review of the crude oil market “Another Wrong-Way Crude Oil Trade”  I demonstrated how technical analysis, unlike the fundamentals, can give you a unique perspective on crude oil.

The careful monitoring of the open interest (the number of futures contract outstanding) through the Herrick Payoff Index can help you determine when you should be buying or selling. The daily studies from Friday’s article did improve with Friday’s higher close.

The gold miners were hit hard last week as the gold futures dropped $20. This makes a further decline likely but the gold miners are likely to drop further with next good support for GDX in the $24 area.

Market Wrap

The Dow Utilities and Transports led the market lower last week as they dropped 2.4% and 1.3% respectively. The S&P 500 lost just under 0.70% while the small cap Russell 2000 was up slightly for the week. There were 1413 stocks advancing and 1701 declining with about the same number of new weekly highs as the prior week.

Only the financial stocks were higher last week as they managed a 0.38% gain while the technology and industrial stocks were a bit lower. Consumer goods were down 0.63% while the consumer services lost 1.18%.  The furor over Mylan and the cost of their EpiPens hit the health care stocks as they were down 1.58%.

In an interesting Barron’s article Mark Hulbert pointed out that Hulbert Nasdaq Newsletter Sentiment Index stands at 80.6% and he commented that it was “higher than the highest level to which the HNNSI rose at the tops of the last four bull markets.”

After the market dropped on the Brexit vote it hit a low of -55.56% which turned out to be an excellent buying opportunity. I think a 2-3% drop in the Nasdaq would lower these numbers significantly.

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The daily chart of the NYSE composite shows the wider range on Friday but it is still above the support, line a, in the 10,600-700 area. A break below this level could signal a decline to the quarterly pivot in the 10,350 area. A strong close above 10,900 is needed to return the focus on the upside.

The NYSE A/D line has dropped back to its still rising WMA but is still above it. A decisive break is needed to suggest a deeper correction with more important support at the August low, line b.  The McClellan oscillator has been declining since mid-July and is already slightly oversold at -104.

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One of the bright spots is the iShares Russell 2000 (IWM) as it bounced from the 20 day EMA on Friday. It is still in the upward sloping trading channel, lines a and b. The daily starc+ band and near term resistance is in the $125-$126 area.

There is good support initially in the $121 area with further at $119 which was the August low. The Russell 2000 A/D line made a new high early last week as it is still well above its rising WMA and the support at line c. The A/D line has additional support at the August low with major at line c. The OBV is testing its WMA but is still barely positive.

The daily relative performance analysis indicates that the IWM and the PowerShares QQQ Trust (QQQ) are both acting stronger than the S&P 500. The QQQ has first strong support in the $114 area which if broken could signal a drop to the $110-$111 area.

What to do?  The increase in the market’s ranges last week may be warning of a further decline but the A/D lines have not moved into the corrective mode. Still the market risk seems high given the low volatility, concerns over a possible rate hike and a job report on Friday.

I continue to recommend that investors actively look at their portfolio to see if they have any weak holdings. If the market does start to correct those weak holdings are likely to decline more than the overall market.

For investors since a 5% decline is possible in the SPY you will need to decide whether you want to ride out a correction or sell on strength and look to re-buy lower. Though September could be a rough month there is likely to be a great buying opportunity for a stock market rally into early 2017 as there are no signs of a recession.

If you like Tom’s analysis and want specific entry/exit advice on ETFs you might consider the Viper ETF Report which is just $34.95 per month and can be cancelled at any time..

 

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Another Wrong Way Crude Oil Trade

Posted by on Aug 26, 2016

Another Wrong Way Crude Oil Trade

Most experienced commodity traders know that crude oil is one of the more volatile commodity markets where the gains as well as the risks are high. Having followed the crude oil market for thirty years I am still amazed how many try to trade this market based on fundamental analysis. Over the years through my past crude oil training sessions in Singapore and London  I have made a number of converts.

This week the new head of one of the oldest commodity trading firms recommended shorting crude oil at $50-$55 according to Bloomberg based on bearish fundamentals. Those who follow the crude oil market may remember the negative headlines on crude oil as prices dropped in early 2016.  The decline was based on the perceived weak demand, concerns over the economy and a rising trend in oil rig counts.

This data is the focus of the major financial news networks. In early January as crude oil prices were collapsing a Barclay’s commodity analyst commented to CNN  that “The fundamental situation for oil markets is much worse than previously thought.”  The sharp slide was due in part to small speculators dumping long positions. As was also the case during the July decline many jumped on the short side of the market based on these bearish forecasts.

Just a week later on January 21st I pointed out in “Time To Squeeze The Short Oil Speculators?” my analysis of the open interest (the number of crude oil contracts outstanding) suggested those on the short side were about to get squeezed.  As it turned out crude oil made its low on January 20th.

Though many have maintained an overall bearish outlook on crude oil prices in 2016, the energy ETFs like the Energy Select Sector SPDR Fund (XLE) and SPDR S&P Oil & Gas Exploration & Production ETF (XOP) have outperformed the Spyder Trust (SPY) YTD by 10-15%.

As crude oil dropped below $40 in early August several analysts were calling for a drop to $35 or lower based on their negative fundamental analysis.  On August 3rd, Zacks Equity Research even advised shorting oil and the energy ETFs (Oil in Bear Territory: Short Oil & Energy ETFs)

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As was the case in January the technical outlook was much different in early August. A look at the weekly analysis will illustrate why the $50-$55 level is so important.

  • The weekly chart shows the doji low in early August and the key resistance in the $51 area, line a.
  • A weekly close above this level would complete a reverse head and shoulders bottom formation as the August low may represent the left shoulder.
  • The upside target from this formation is in the $75-$80 area.
  • The Herrick Payoff Index (HPI) which uses volume, open interest and prices has been diverging from prices since 2015, line d.
  • The HPI also formed a short-term divergence early in the year that was confirmed by the move above its WMA and the downtrend, line c.
  • On the July drop the HPI dropped back below the zero line but moved back into positive territory just after the August lows.

The daily chart of the October crude oil contract shows the thirteen day rally from $40 to $49.36 which thoroughly confused the media and likely added to the mounting hedge fund losses.

  • The daily HPI crossed back above its WMA on August 4th which was two days after the low.
  • The downtrend in the HPI, line e, was broken as crude consolidated for two days before it accelerated to the upside.
  • The HPI has just pulled back to its WMA suggesting that the recent pullback may already be over.
  • The plot of the open interest shows an increase of almost 150,000 contracts from July 22nd to August 11th.
  • The open interest has now dropped below the July lows, line f, as many of those new short positions have likely been forced to cover.

What to do? There were signs on Thursday August 18th that crude oil and the energy ETFs were close to a short term top. In the Viper ETF Report I follow the Energy Select Sector SPDR Fund (XLE), SPDR S&P Oil & Gas Exploration & Production ETF (XOP), Vanguard Energy ETF (VDE), the VanEck Vectors Oil Services ETF (OIH) and United States Oil Fund (USO).

In addition to my analysis of crude oil I use the relative performance of these ETFs to the Spyder Trust (SPY) along with the on-balance-volume (OBV) to determine when to buy and sell. Traders were long XOP from July 28th and took short term profits a week ago.

The bearish fundamental outlook and the recent shorting advice should be enough to push crude oil prices above key resistance and complete the major bottom formation.  For serious crude oil traders I do a three hour class on using the HPI if you are interested  email me at wentworthresearch@gmail.com for more information.

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Don’t Worry This Bubble Market Turns Slowly

Posted by on Aug 20, 2016

Don’t Worry This Bubble Market Turns Slowly

The stock market recorded nice gains on Monday but then returned to its narrow trading range since it has not had a 1% move either up or down for the past month. The Spyder Trust (SPY) has been grinding higher as it is up 1.3% during the period.

Even though the broad market gains have not been impressive the attitude of many professionals, as expected, has become a bit more positive. At the end of February I discussed  why investors should not avoid stocks because of their fears over China, weak crude oil prices, earnings or a weak economy.

It was also important that with the close on February 27th “the weekly NYSE A/D line has moved back above its WMA for the first time since the start of the year”. The daily chart of the Spyder Trust (SPY)  shows the both the bullish divergence at the February lows as well as the break of the downtrend in the A/D line.

Despite the pickup in articles that are more positive on the stock market more high profile bears keep coming out of the woodwork. In a letter to investors in his $28 billion dollar hedge fund manager Paul Singer thinks that the negative yields in many of the world’s bond markets has investors facing “the biggest bond bubble in world history” .

He also fears a drop may be very sudden and very sharp. I found it interesting that Elliott further stated “Everyone is in the dark….Experience doesn’t count for much, and extreme confidence may be fatal.”  Is this possibly an excuse for the continued poor performance of the hedge fund industry? It has been my view for over two years that the hedge industry as entered its own bear market.  (“The Bubble No One Is Discussing”)

In last week’s column I wondered why there was not any euphoria amongst stock investors despite the many proclamations of a major bull market top.  The bond market is clearly a very crowded trade as nervous investors fight for yields but most bond traders I come across are nervous not euphoric.

These concerns come as the stock market is ready to endure another month or more of obsessive discussion on whether the Fed will raise rates. This Friday Janet Yellen will be giving a widely anticipation presentation that is likely to be fully dissected by the bond market CSIs.

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This will be the start of another round of painful debates even though the futures markets currently reflects that there is a low chance of a September rate hike. It seems that many investors are still convinced that a rate hike will be negative for stocks and that it will likely cause a recession.   As I have noted in the past this only typically happens late in a rate hiking cycle, not at the start.

The long-term chart of 10 Year Constant Maturity yields has the recessionary periods shaded in grey. Prior to the recession in 1970 rates had been rising for a number of years, line a. This was also the case during the recession in 1973-1975, line b, as rates continued to rise after the recession was over.

The major rise in rates occurred in the late 1970’s as the Fed was trying to fight inflation. The yields finally peaked above 15% as the economy was entering a new recessionary phase. The chart shows that since 1990 yields have been in a well-defined downtrend, line d.

Even during the recessions in 1990 and 2000 rates were still in near term downtrends and yields moved even lower after the recessions were over. The last real tightening period that started in 2004 is just a shallow uptrend, line e, on the long-term chart. This uptrend was broken at the start of the last recession in early 2008.

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For a few years I have expressed my concerns that many bond fund and ETF investors are not fully aware of the capital risk in their bond holdings. However I do not think we will see a fast and furious reversal of the major downtrend.  I am confident that the technical studies will warn investors in advance of a trend change. In early 2015, the MACD broke its downtrend, line a, which was confirmed by a MACD-His buy signal and signaled higher yields.

From the low at 1.65% yields eventually rose to 2.400% before topping out in July of 2015. By early in 2016 (point 1)  it was clear that the downtrend in yields had resumed. In early July the yield closed above the quarterly pivot at 1.474% which was a sign that the rates were stabilizing. The MACD has now crossed above the signal line (point 2) and the MACD-His is weakly positive. The downtrend and 20 week EMA are now in the 1.644% area but as yet there is no strong evidence of a bottom.

The weekly OBV on high yield funds like the SPDR Barclays High Yield (JNK) are still clearly positive and show no signs yet of tipping out. In the past the high-yield ETFS have done a good job of signaling changes in the trend of interest rates. In summary, the bond market is massive and a change in its trend will take time. A weekly close above 2.00% in the 10 year T-Note yield would be the first sign of a change in trend.

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The individual investor was a bit more positive on stocks last week as the bullish% rose 4.3% to 35.6% with the bearish% pretty much unchanged. The TickerSense blogger poll suggests a decreasing amount of bullishness at 47.83% with 30.43% bearish.  This is down from its peak of 62.5% from the middle of July.

On June 27th things were much different as only 26.9% were bullish which was not that much different from the 17.4% reading near the February lows. As I always mention the sentiment data must be in agreement with the technical indicators before you take action.

The widely watched but often misunderstood CNN Fear & Greed Index is unchanged from last week at 76 which is extreme greed but it was 90 a month ago.  As I have previously pointed out several of the components when they are high and rising indicate strength. It is not until they top out that it turns negative.

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The emerging markets seem to have been added to every buy list over the past week or two but this week’s action suggests their timing may be a bit off. This Bloomberg chart shows the MSCI Emerging Markets Index (EEM) and the MSCI Currency Index.

In late July and early August the currency index was in a solid uptrend, line b, while the emerging stock market index had a sharp drop on August 3rd.The uptrend in the Currency Index was broken last Wednesday and as it has started to diverge from stocks,  line a.

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Any further pullback will be in the context of what does look like a very bullish market. The weekly chart shows that the close on July 15th completed a reverse head and shoulders bottom formation as VWO moved above the neckline at line b.  Since VWO broke out there has been little in the way of a pullback. There are projected targets and chart resistance in the $42-$43 area.

The breakout was confirmed by the uptrend in the relative performance and the move above key resistance. The weekly OBV is above its WMA but lagging prices. Viper ETF Traders sold longs in VWO from early July on August 11th for a 10% profit. The daily starc+ bands had been reached as well as one of my upside targets.  A more meaningful correction is likely in my view and should provide an opportunity for both investors and traders to buy.

The Economy

It was another week of mixed  economic data as Monday’s Empire State Manufacturing Survey saw a 4.2% drop while the Housing Market Index at 60 reflects  a healthy optimism from builders. On Tuesday, Housing Starts were strong up 2.1% while new permits were flat. There was good news from Industrial Production which jumped 0.7% for the second monthly gain in a row.

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The all-important Leading Economic Index (LEI)  rose a healthy 0.4 that was well above estimates. As this frequently featured chart from Doug Short reveals the LEI has a good record of topping out well before the start of a recession. It is unlikely to top out this year as there is a healthy time lag and this supports my positive outlook for stocks. The Philadelphia Fed Survey came in as expected.

On Monday we get the Chicago Fed National Activity Index followed on Tuesday by New Home Sales as well as the Richmond Fed Manufacturing Index. They are followed Wednesday by the flash reading on the PMI Manufacturing Index and Existing Home Sales.

Durable Goods are out on Thursday followed by the preliminary 2nd quarter GDP along and Consumer Sentiment on Friday when Janet Yellen also speaks at 11:00 AM ET.

Interest Rates & Commodities

The sharp drop in the dollar last week is guiding the commodity markets and helps to explain the sharp rise in crude oil just as the majority of analysts were turning bearish and looking for a drop below $35.

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In The February 6th column “Is This The Stock Market’s Secret Weapon?” I discussed the evidence that the Dollar Index had topped out and what the implications were for commodity prices, emerging markets and earnings.

The recent rally in the dollar has failed below the $98 level and Fibonacci resistance. The close Friday was right on the weekly support at line a. A decline below the $93 level will confirm a resumption of the downtrend with support at $92 and then $90. The weekly Herrick Payoff Index (HPI) dropped below the zero line on Friday indicating the money flow is now negative. The HPI has important support now at line b.

The HPI on the October Crude Oil contract crossed above its WMA on August 4th which was one day after the low in the $40 area.  It has now rallied to the $49 level and did form a doji on Friday.  There is next resistance in the $50-$51 area with the weekly starc+ band at $52.07.

The daily studies are positive but are getting overextended on a short-term basis which increases the odds of a pullback. This should also be a good opportunity to get back on the long side of the energy ETFs as they have been leading the market higher for the past few weeks.

Gold and gold miners are still in a corrective mode but the weaker dollar should be a positive for both. They could see one more drop if stocks are able to surge to the upside.

Market Wrap

The NYSE A/D line ratios were just slightly positive last week with 1666 stocks up and 1447 down. The Dow Industrials and S&P 500 were fractionally lower but the Dow Transports managed a 1.58% gain. The small and mid-cap stocks did better than the S&P 500.

One again the oil & gas stocks led the market higher gaining 2.1% followed by a 1.7% gain in the basic material stocks. The industrial, financial and technology sectors managed just slight gains while the telecommunications stocks dropped 3.7%.

There are no signs yet of a correction but the narrowing of ranges and the flattening action of the A/D lines suggested to me that the risk on the long side was increasing. Therefore I recommended in the Viper ETF Report last Wednesday that traders should take nice profits on long positions in the SPY, IWM and DIA.

The first sign of a correction would be a 1% or more decline in the S&P 500 that was accompanied by 3 to  1 negative breadth. Until this occurs another push to the upside cannot be ruled out but the potential reward on new longs in the market tracking ETFs does not seem to be worth the risk.

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The NYSE Composite dropped to its rising 20-day EMA last week but on both days rebounded to close higher. A new high at 10,876 was made on Monday with quarterly pivot resistance and the daily starc+ band in the 11,000 area. The rising 20 day EMA is at 10,778 with a band of further support in the 10,600-650 area, line a.

The range in the NYSE A/D line has narrowed but is still holding above its slightly rising WMA. A drop below the early August low would be the first sign of weakness. There is more important support at the uptrend, line b, and then at the June highs. The McClellan oscillator failed to overcome the zero level last week and shows a six-week pattern of lower highs, line c.

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On a short-term basis the Spyder Trust (SPY) made new highs Monday but closed near the lows. With the selling Tuesday the S&P 500 A/D line dropped slightly below its WMA. It recovered to close the week back above its flat WMA.  A decline below the A/D support at line c, would confirm that a correction was underway.

There is resistance for the SPY at $219.50-$220 and a strong close above this level is needed to signal a rally to the $222-$223 area. There is minor support at $217 which if broken should trigger a decline to the $214 area, line a. A close below this level would set the stage for a decline to the $211 area, line b.

The iShares Russell 2000 and the Powershares QQQ Trust (QQQ) are still looking positive technically but the SPDR Dow Industrials (DIA) does show a bit more weakness. Even though the averages did not have impressive gains many stocks did have impressive gains.

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In last week’s scan of Nasdaq 100 and IBD Top 50 stocks there were an equal number of new buy and sell signals. Viper Hot Stock traders currently are holding more long than short stock positions. One of our stellar performers was Xilinx , Inc. (XLNX) as it was up 5.5% last week.  It had broken out of a major trading range (lines a and b) four weeks ago with next upside targets in the $60 area.

The relative performance and OBV both turned positive before prices broke out to the upside. There are a number of stocks that have either completed major base formations or have broken out of long-term trading ranges like XLNX . These are stocks I will be looking to buy on a correction.

What to do?  The failure of the market last week to rally more sharply did turn me a bit more cautious over the short term.  A stronger rally is possible this week but in order for me to want again to trade the long side the A/D lines will have to start rallying more strongly.

There has been some increase in bullish sentiment but it seems now that the underinvested professionals are helping to support the market. They are more likely to get caught up in the Fed rate speculation until the FOMC meets in September.

For the past few weeks I have been strongly recommending that investors not be complacent and take the time to weed out any weak holdings from your portfolio. Once the market does start to correct, which seems likely in the next month, those weak holdings are like to decline more than the market.  For investors I think there will be a better investing opportunity by October.

In reviewing a number of client portfolios there have been a number of stocks that I felt clients should sell while others I thought had good long-term charts. If you would like our help in reviewing your portfolio please email me at wentworthresearch@gamil.com.

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The Week Ahead; What’s Missing From This Bull Market?

Posted by on Aug 14, 2016

The Week Ahead; What’s Missing From This Bull Market?

The stock market spent most of the week consolidating its gains after the sharp rally in reaction to the July jobs report. Thursday’s sharply higher close and very positive A/D numbers suggests that stocks are likely ready for another push to the upside as the S&P 500 challenges the 2200 level.

The new high in the major averages and leading action of the advance/decline lines has still not convinced everyone as Goldman Sachs advised their clients on August 1st to “avoid all stocks for the next three months”. They are also sticking with their yearend target for the S&P 500 at 2100 which is 3.7% below current levels.

It has not been a good year for Goldman Sachs as on February 16th they advised selling gold short when the December contract was trading at $1209. As of last Thursday’s close at $1350 it is up 11.6% since this recommendation.  Their crude oil forecasts also seem to be out of sync as they turned bullish three weeks before it topped out in June. As they continue to lay off staff I hope they consider hiring some good technical analysts.

There has been a shift in some of the market commentary as it is not nearly as negative on the stock market as it was in July. If the S&P 500 can close above 2200 I would expect to see a further reduction in the bearish commentary. There are still many bearish article as mid-day Friday as one article advised to Sell Everything based on the following questionable bullet points.

  • Our greatest investment minds are warning investors to avoid stocks and bonds.
  • There are a multitude of fundamental reasons for this warning.
  • Perhaps the most paramount of all is the issue of moral hazard.

Moral hazard – really?  Looking back at the author’s previous articles I found his February 25th 2013 article proclaiming it was still a secular bear market.  The 53% gain in the Spyder Trust (SPY) since this article illustrates the danger of having an inflexible investment outlook and fighting the trend.

There was little change in individual investor sentiment over the past week as the bullish % just rose 1.5% to 31.3% while the bearish % was unchanged at 26.8%. The neutral camp at 42% is still quite high. The CNN Fear & Greed Index is still well in Greed territory  at 76 as it has been for the past month or so but it is below the recent highs.

I have found this measure to be much better at market bottoms than at market tops. This is because when two of its components, stock price breadth and stock price strength, are very high my analysis indicates it is a sign of a strong as well as healthy market.  High levels are not necessarily bearish unless they start to diverge and then turn lower. It should be noted that stock price breadth  does not track the actual A/D data as it looks at the advancing and declining volume.

Put and Call option data is a contrary indicator as when too many are buying puts it is a sign that too many are bearish on stocks. Converesely a prolounged period were the call buying is much higher than the put buying it can be a negative. It is the change in their trends that indicates a market turn.  This data is often quite early and option expert Larry McMillan last week commented that his analysis was now showing  some signs of turning.

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So what’s missing from this bull market?  Legendary investor John Templeton divided the bull market into four stages as indicated by his famous quote. In my view the prevailing sentiment from the market low in 2009, when pessimism was the highest,  until early 2012 was one of skepticism.   Many may recall that during the correction in the summer and early fall of 2011 many believed that the US economy had begun a new recession.

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In 2012 there were few periods of sustained optimism as many feared that the Euro zone debt problems would cause a split and the US faced the fiscal cliff at the end of the year. Of course 2013 was the best year of the bull market as the S&P 500 only came close to its rising 20 week EMA in late 2012 just after the A/D line turned bullish by making a new high.

The S&P 500 stayed strong until the fourth quarter of 2014 when there was a four week 10% correction that dropped the S&P 500 back to the 1820 level .  During this period there was a low level of investor participation as on Sept 8th a CNN article “More US families own cats than stocks” they reported that the Federal Reserve data indicated the “lowest level of stock ownership in 18 years”.

At the time I did not think that this completed a major bull market top as historically major tops such as those in 1929 and 2000 have been accompanied by more investor participation and euphoria. This period could have represented the period of optimism but such a low level  of individual investor interest was not consistent with stock investor euphoria.

Some noted analysts like Ed Yardeni in July 2014 felt that this was a period of stock investor euphoria  and many feel the same way now.  A Federal Reserve report from October 2015 stated that “fewer than 15 percent of U.S. households own stocks directly”.

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Psychology plays a major role in investing and there are a number of stages that investors typically go through. This is nicely presented in the graphic above from www.wallstcheatsheet.com and all investors should be aware of the various stages as they are often observed even on a short-term basis.  Many went through the stages of panic, capitulation as well as depression last January and February.

If you are currently feeling quite smart because you have accumulated great profits since the market made its low in February  (The Week Ahead: Is There Blood In The Streets Yet?) you may want to fight your current mood and take some profits now.

Even though I would not be surprised to see a near term market top in the next few weeks I think there are several sectors or industry groups that will come to the forefront as the market corrects. Last week the market was surprised by the double-digit gains in retail stocks like Nordstroms (JWN), Macy’s (M) and Kohl’s (KSS).

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This helped confirm the bullish outlook for the SPDR S&P Retail ETF (XRT) which had been recommended  to Viper ETF subscribers since the latter part of July. It broke out to the upside on Thursday ahead of the disappointing Retail Sales report.  I find the supply/demand characteristics of industry groups and individual stocks are more reliable than any one monthly report. By monitoring the relative performance of all active ETFs the new market leaders are generally identified well in advance.

The Economy

The Retail Sales report was the most disappointing in a light week for economic data. The PPI was lower than expected as it was down 0.4% while the consensus was looking for a 0.1% gain.  Business Inventories were up slightly while Consumer Sentiment was pretty much unchanged at 90.4.

The calendar this week is more crowded with the Empire State Manufacturing Survey and Housing Market Index are out Monday with the Consumer Price Index, Housing Starts and Industrial Production scheduled for release on Tuesday.

On Wednesday we get the FOMC minutes which are followed on Thursday by the Philadelphia Fed Business Outlook Survey and Leading Indicators.

Interest Rates & Commodities

The yield on the 10 Year T-Note dropped last week and it looks as though the rebound from the early July low weekly close at 1.366% could be over. A weekly close back below 1.458% will signal a drop back towards the recent lows.

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The strong 6.4% gain in crude oil last week is a strong indication that the correction is over. The weekly close above the previous week’s doji high and the 20-week EMA are both positive signs.  A weekly close above the resistance in the $52 area, line a, will complete a significant bottom formation.

The weekly on-balance-volume (OBV) has moved strongly back above its WMA and is not far below the June highs. It is acting stronger than prices. The Herrick Payoff Index (HPI) which uses volume, open interest and prices broke its downtrend, line c, in March and then moved above the zero line. The HPI has turned up after its recent pullback and has strong support at line d.

Gold and the gold miners surged after the jobs report but failed to hold the gains at the end of the week. The Market Vectors Gold Miners (GDX)  continues to act better than the SPDR Gold Trust (GLD) but the technical studies still indicate that this correction may not be over yet.

Market Wrap

The Nasdaq Composite, S&P 500 and Dow Industrials all had new closing highs on Thursday  but overall the stock market closed the week mixed. The Dow Industrials and S&P 500 were just barely higher while the Dow Transports were down 0.75%. The Dow Utilities and the Nasdaq Composite were up slightly while the small cap Russell 2000 was down a fraction. The market internals were just slightly higher with 1681 advancing stocks and 1431 declining.

The oil & gas stocks were up 1.25% followed by a 0.74% gain in consumer service. The consumer goods, technology and industrial stocks were slightly higher. The materials stocks lost 1.2% followed by a 0.8% decline in health care and a 0.6% loss in the financial stocks.

In last week’s Viper Hot Stocks scan of Nasdaq 100 and IBD top 50 stocks revealed many more new weekly sells than buys.  Though my analysis of the advance/decline lines has not yet generated any warnings of a correction the increase in weekly sell signals meant that subscribers should be positioned on both the short and long side of the market.

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The weekly chart of the NYSE Composite shows a narrow range last week after testing the good support zone the previous week.  Once above the 11,000 level the weekly starc+ band is at 11.247. The weekly NYSE A/D line made another new high last week and is still holding well above its rising WMA.

My NYSE A/D line analysis gave a bullish signal for stocks after the February low (see chart) and since then the NYSE Composite has gained almost 14%. The new multi-year highs in the A/D line does favor further gains in the NYSE Composite by the end of the year.

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On the daily chart of the Spyder Trust (SPY) the upside reversal on August 4th (see arrow) was a sign that SPY was ready to resume its uptrend. It has been holding above its 20 day EMA at $217.37 all week. The quarterly pivot resistance is at $220.75 with the daily starc+ band at $221.01.

There is initial support now at $214.25 with further at $213, line a. There is more important support in the $210 area with the quarterly pivot (QP) at $206.88. A weekly close under this level would weaken the intermediate term trend.

A new trading lesson on quarterly pivot analysis was sent out to all Viper Report subscribers on Friday. It discusses how this methodology can keep you in the major trends. (It will also be sent out to all new subscribers to the Viper ETF Report or Viper Hot Stocks reports)

In terms of the relative performance analysis the weakest of the four market tracking ETFs is the SPDR Dow Industrials (DIA) while the PowerShares QQQ Trust (QQQ) and iShares Russell 2000 (IWM) are acting much better.

What to do?  My analysis still suggests that the Spyder Trust (SPY) will test the $220 area but a day or so of very strong (3-1) positive A/D numbers is needed to indicate a move to the $222-$224 area. I still am recommending to subscribers that they scale out of long ETF positions in the SPY, DIA and IWM on strength as our stops have been raised as the market moved higher.

There has been further decrease in bearish sentiment but it may take a close above 2200 in the S&P 500 to convince more traders of the market’s strength. For the past few weeks I have been recommending that now is a good time to weed out any market laggards from your portfolio. Those who have procrastinated should take the time this week to review your portfolio as there should be a better buying opportunity in next month or so.

The next correction could last a few weeks and it should provide a good opportunity for investors to add to their long positions. If the SPY is able to reach the $220 level then the correction could take it back to $213.50 if not the $210 area.

Those who are under invested in stocks should develop a plan to invest on the next correction as I do expect higher prices by year-end as they could rally 10% once the correction is over.

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The Week Ahead: Is Macro Really Wacko?

Posted by on Aug 6, 2016

The Week Ahead: Is Macro Really Wacko?

The eight down days in the  Dow Industrials since the July 20th high was enough to cause many analysts to question the validity of the rally from the late June lows. Their focus had turned to the historically weak performance of stocks in August.

According to AAII the bullish % of individual investors has declined for four weeks in a row. A Seeking Alpha survey before Friday’s job report indicated that only 3.5% were looking for big gains in employment while 27.9% were expecting a “downside surprise after June’s blowout number”.

Needless to say the 255,000 surge in nonfarm payrolls caught many by surprise as those who ventured on the short side scrambled to cover their positions. The major averages gapped higher on the opening Monday and several were quickly at new highs.

Another push higher in the stock market is likely to add to the pains of the hedge fund industry. Since my July 2014 article  “The Week Ahead: One Bubble Starting to Burst?” I have felt that the hedge fund bubble was bursting. As noted in a May CNN article it looks like the industry is now facing up to this reality.

As they noted “A barometer of hedge fund performance, called the HFRI Fund Weighted Composite Index, has generated an annualized gain of just 1.7% over the past five years. Compared to that, the S&P 500’s average annualized return for the same period was 11%.”

The majority of the hedge funds apparently rely on fundamental analysis to guide their investment decisions though some claim to use technical analysis for their timing. The current bull market may turn out to be the best argument in favor of technical analysis.  The fundamental opinion was very negative at the correction lows in 2010, 2011, 2012 as well as February and it was the action of the A/D lines that signaled it was now the time to fight the tide and buy.

The one hedge fund strategy I have had the most problem with in the past ten years is the so-called macro strategy where positions, long or short, are taken based on the manager’s analysis of the economic and political views of various countries. There are no hard rules for this analysis as more often it comes down to their opinion which in my view is often based on sometimes-dubious data.

One analyst I know stayed out of stocks for most of the bull market because of his concerns over China. I should point that there are several macro analysts who I think are very smart and insightful but it is the timing of their investments that I often question.

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It should come as no surprise that these funds have not performed well since 2012 according to BarclayHedge. I have added in the performance for the Spyder Trust (SPY) from Morningstar so that it can be compared to the Barclay Global Macro Index.

The table shows that so far this year the SPY is up 7.61% while the Macro Index is down 0.14%.  Only in 2015 did the macro funds do better as they had a 2.28% gain versus 1.25% by the SPY. In most other years the SPY has been much stronger as it was up 32.31% in 2013 versus only a 4.81% gain in the Macro Index.

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Many of the big name college endowment funds also invest in hedge funds and they have had a couple of rough years as this chart from Bloomberg indicates. Several Universities are starting to pull out of their hedge fund positions and a July study by Credit Suisse Group AG revealed that “Eighty-four percent of investors in hedge funds pulled money in the first half of the year”.

I am doubtful that the interrelationship between the global stocks markets and their economies will ever again be clear enough for a macro strategy to be consistently profitable. In any case I would urge investors to adopt a technical approach to their investing and to avoid investing based on a macro economic view.

The strong close on Friday should move more of the reluctant market bears into the bull camp. In  last week’s column I thought that the new highs in the S&P 500, that were forecast by the A/D analysis in May, was starting to convince investors that the bull market was alive and well.

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For the past two weeks I had avoided adding to long positions that were established just before June jobs report. At the start of last week there were signs that the correction was close to over and I made new buy recommendations for Viper ETF traders.

On Tuesday the NYSE Composite dropped into my support zone which suggested the worst of the selling could be over. The NYSE A/D line moved back above its WMA last Wednesday and Friday’s gap higher turned the momentum clearly positive. The strong move in the A/D line above its WMA is consistent with the resumption of the uptrend.

Last week was full of earnings reports and while there were a number of high profile losers there were also some very nice winners as over the past few weeks there have been a number of stocks that were just starting to join the market’s rally.

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Kate Spade & Co. (KATE) was one of the week’s big losers as it dropped 18.7% as its 2nd quarter earnings were very weak. The technical outlook for KATE had been negative since June 3rd (line 1). It had been acting weaker than the S&P 500  since early in 2015 as the relative performance has been in a downtrend, line a. The RS dropped below its WMA in early June which was a sign of weakness. The OBV was also very weak and the stock’s rebound in 2016 failed at the 38.2% Fibonacci retracement resistance.

Cerner Corporation (CERN) was a different story as it appeared on the weekly Viper Hot Stocks buy list in early July (line 2) and was recommended on July 5th. The move in the RS line above its downtrend, line c, indicated that CERN was becoming a market leader. The weekly on-balance-volume (OBV) had broken out to the upside in late June as resistance (line d) was overcome. Before its earning last week traders took profits on 50% of the position and are giving the rest of the position some room on the upside.

The Economy

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Many economists and the investors are changing their opinion on the economy after the monthly jobs report. The very weak report in May unfortunately frightened some investors out of the stock market just before it turned around.  The data from the past two months has clearly broken the downtrend which makes the next several months important. It is always dangerous to place too much emphasis on any one data point.

Last week started off with the PMI manufacturing Index and ISM Manufacturing Index which came in at 52.9 and 52.6 as both are still well above the 50 level. Construction Spending was weaker than expected at -0.6%.

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On Wednesday the ISM Non-Manufacturing Index and the PMI Service Index came in at 55.5 and 51.4 respectively as these two readings on the service sector continue to diverge. The long-term chart of the ISM Non-Manufacturing Index (from dshort.com) shows that the 6-month moving average (blue line) peaked in 2004 and declined for several years, line a, before plunging at the start of the last recession. There is now important support at line b which if broken would be a warning sign for the economy. Factory Orders on Thursday were negative for the second month in a row.

The economic calendar is light this week with Productivity and Costs on Tuesday followed by Import and Export Prices on Thursday. On Friday we have Retail Sales, PPI, Business Inventories and Consumer Sentiment.

Interest Rates & Commodities

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In reaction to the much stronger than expected jobs report the yield on the 10 Year t-Note jumped but is still below the downtrend, line a, in the 1.664% area. A daily close above the June high at $1.750% will keep the uptrend in yields intact. The daily MACD turned positive on July 13th and has again turned higher after pulling back. A move in the MACD above the resistance at line c, will reinforce the uptrend in yields.

Crude oil dropped below the $40 level last week before it rebounded. The daily studies, like the Herrick Payoff Index, have turned positive but the OBV is still negative. There is next key support for the October contract is in the $39 area. It is likely to take a few weeks before a bottom was confirmed by the weekly analysis.

Gold and the gold miners dropped last week but the burst of upside momentum the previous week suggested that the worst of the selling may be over. The short-term outlook does allow for further weakness and the extent of the selling will be watched closely. A test of the recent lows is possible.

Market Wrap

The strong rally Friday was enough to erase the weekly losses in most of the major averages. The Dow Industrials were up 0.60% while the S&P 500 gained 0.43%. The Nasdaq Composite led the way as it was up 1.1% and made a new all time high along with the S&P 500.  The weekly Advance/Decline numbers were positive and were quite strong on Friday.

There are still few signs of extreme investor optimism as data from the Investment Company Institute reveal that $70 billion has flowed out of equity funds this year while $137 billion has moved into bond funds. According to AAII only 29.8% of individual investors are bullish.

There is now a long list of well-known billionaire investment experts that are bearish on stocks and one well-known media analysts turned bearish last Wednesday. This follows his similar bearish calls at other recent lows and as I mentioned in an early June commentary ” Look Before You Leap” it is important that you look at an expert’s past recommendations before you take their views too seriously.

Technology Stocks led the market higher gaining 1.6% and Friday’s sharp gains pushed the financial stocks up 1.2% for the week. Oil and gas as well as health care managed very slight gains. Biotech was strong as one of the Viper ETF top picks, the SPDR S&P Biotech (XBI) was up 3.4%.

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All of the major advance/decline lines except the Dow Industrials did make new highs last week. The weekly A/D lines like the S&P 500 are still making new highs and are bullish. The next resistance for the SpyderTrust (SPY) is in the $220 area with the weekly starc+ band and upper trading channel (line a) are in the $223-$224 area.

The weekly A/D line is still well above support at line c, and its rising WMA. The bullish divergence in the A/D line was instrumental in my February buy signal (Is There Blood In The Streets Yet?) The weekly OBV has turned up from the breakout level, line d, and still looks positive.

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The iShares Russell 2000 (IWM) was up 1.4% on Friday as it had a classic pullback last week. The drop on Tuesday took IWM to the 20 day EMA but it held well above the support at line a.  The breakout above this level in July was a very bullish sign and this former resistance is now good support. The Russell 2000 A/D line also dropped back to its support (line b) last week before turning higher. It made a new high on Friday.

What to do?  Though I could not rule out a sharper correction last weekend I did think the “SPY is likely closer to a short-term low.”  The strong close Friday needs some follow through this week to confirm a resumption of the uptrend. The Spyder Trust (SPY) should test the $220 area and a rally to $222-$224 is clearly possible.

My view has been that this rally will be accompanied by an increase in bullish sentiment which is likely set the stage for a deeper correction as the bullish camp becomes a bit more crowded. The next correction could last a few weeks and it should provide a good opportunity for investors to add to their long positions.

As I suggested last week now is a good time to review your portfolio holdings to see if there are any holdings that are lagging the overall market. Using the relative performance is the best tool in my opinion and any cash you raise can be put back into the market this fall.

For traders following the Viper ETF Report I will be watching the rally closely as I will start to scale out of longs as the market moves higher. Regular reports are sent out twice a week but when needed special alerts are sometimes sent out during the market day. Several new long positions in specialized ETFS were established on last week’s pullback

If you are a stock trader I typically make 1-3 new recommendations each week on either the long or short side in the Viper Hot Stocks Report. It is also updated twice a week and each service is only $34.99  per month. The subscriptions can be cancelled on line at any time.

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