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The Week Ahead: Buy, Sell Or Hold?

Posted by on Nov 19, 2016

The Week Ahead:  Buy, Sell Or Hold?

The summer ended with a long list of big name investors who shared their dire forecasts for the global stock markets. Some were looking for a 10-15% correction but others were looking for much more.  Individual investors were also skeptical about the stock market as according to AAII just 23.6% were bullish on November 3rd while over 42% were neutral.

In last Thursday’s survey 46.65% are now bullish while the neutral camp has dropped to 26.77%. The bearish % is at 26.6% as it has only dropped 8% from before the election.  The bullish % reading is the highest since February 19th 2015.

According to AAII  “There isn’t a clear trend as to how the market has performed following unusually large two-week increases in bullish sentiment. The median six-month gain for the 13 periods when there was a larger two-week increase in optimism was 5.9%. Though above the historical median for all periods, the number is skewed upwards by a 34.5% gain following the two-week, 26.1 percentage-point increase in optimism on March 19, 2009.”

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The bullish % is still well below extreme levels as the highest reading during this bull market was 63.3% on December 23, 2010 (point 1). The S&P 500 did see a 6% drop in February and then peaked in May which was a 9% gain from the December 23rd close.

As the chart indicates the bullish % rose to 57.9% on November 13, 2014 (point 2) and then the S&P 500 continued to grind higher until May of 2015 as it gained 4.5%. In my experience a high reading in the bullish % is not a sell signal as the market rally can continue for some time.

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Maybe this is the start of the stock market’s euphoric stage that is typically the last stage of a bull market as was pointed out in the famous quote from John Templeton .  I commented in August (What’s Missing From This Bull Market?) that historically major tops such as those in 1929 and 2000 have been accompanied by more investor participation and euphoria.

The public participation in the stock market is still quite low which is also not normal for a bull market top. Maybe this is starting to change as $44.6 billion has moved into equity ETFs since the election. A good part of the funding has likely come from the bond market as the dramatic rise in yield and drop in prices has panicked many investors. Barron’s reported that the 4% decline in Bloomberg Barclays Global Aggregate Index was “the biggest two-week loss in more than a quarter-century.”

It has been a tough eight days for those trying to buy the index tracking ETFs or the financial sectors as there has been little in the way of a pullback to buy. I think that those who jumped into the market late last week may have to take some heat as I think there will be a better risk entry point in the weeks ahead.

I place considerable emphasis on the entry price for all ETF or stock positions as I discussed in a recent article “Finding The Best Entry Levels”. I have found that too many investors and traders get caught up in the emotion of the market especially when it is moving relentlessly higher and therefore they end up buying too high. Then when the market corrects they are often stopped out before the overall uptrend resumes.

I found that a combination of the relative performance and the on-balance-volume (OBV) can do a superior job of alerting investors to those ETFs or stocks have the best profit potential when the risk is still manageable.  In early October when the SPDR KVW Regional Banking Index (KRE) was recommended to both investors and traders the risk on the position was 4.8%.

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This Viper ETF recommendation was based on the positive weekly studies and the daily studies (line 1) had also just turned positive. KRE had closed the prior day at $42.27 and my buy level at $41.90 which was hit the next day.

I recommended that traders sell their position last Monday as KRE had closed well above its daily star+ band. It had also closed the prior week above its weekly starc+ band which indicated it was now in a high-risk buy area.

On Friday it closed at $51.50 which was above my exit price for traders but investors are still long. The starc  bands help me decide whether to buy, sell or hold. This does not mean that KRE cannot still move higher but it does indicate that the inevitable correction may be very sharp.

In last week’s chart of the E-Mini S&P futures I pointed out that the overnight drop in the futures on the market’s surprise reaction to a Trump victory took the futures below the weekly starc- band. This is a fairly rare occurrence and indicated that at the lows the S&P futures were in a high-risk sell but a low risk buy area.

These bands are interpreted totally differently than the Bollinger Bands. When a market has rallied up to the daily starc+ band after completing a technical bottom they tell me to wait for a few days as the market is likely to either consolidate or correct.  Often in a sustained uptrend prices will not reach the weekly starc+ band for some time which makes it more likely that I will hold onto a position as long as the technical studies stay positive.

By looking at the monthly, weekly and daily starc bands you can often identify important price extremes.  In August and September 2011 gold futures closed above the weekly starc+ bands for two consecutive months and it had also exceeded the weekly starc+ bands for three weeks in August. The gold futures peaked at 1923 in early September which was the start of a multi-year decline.

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There is still a number of industry group and sector ETFs that have just bottomed or they are in the process of bottoming so there are still ETF opportunities. There are also a number of stocks that look attractive. Texas Instruments (TXN) is a Viper Hot Stocks pick that just broke out of its weekly trading range (see arrow) with Friday’s close. The weekly RS and OBV stayed positive as TXN moved sideways and then the OBV broke out to the upside a few weeks ago.

The Economy

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The stock market rally has been fueled by hopes of what they think President Trump will do to make the economy get even stronger. This interesting chart from S&P Capital IQ shows what the stock market has done under various president s going back to Truman.  On this table the performance under President Ford is likely to be the biggest surprise to many.

The economic data last week suggested that the economy was already getting stronger.  The Empire State Manufacturing Survey, Philadelphia Fed Business Outlook Survey and even the Kansas City Fed Manufacturing Index are suggesting continued improvement in manufacturing. This trend needs to continue over the next few months.

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The Retail Sales came in at 0.8% and September was revised up to 1.0%. The yearly rate has broken its two year downtrend, line a, which is a positive sign. Thursday’s Housing Starts report indicated a 25.5% surge which was the best reading since August 2007.

Friday’s report on the index of leading economic indicators (LEI) showed a modest 0.1% gain. But more importantly it is still in a positive trend and as I have pointed out in the past it has a good record of topping out well ahead of the start of a recession.

There is a fair amount of economic data in this holiday-shortened week with the Chicago Fed National Activity Index on Monday followed on Tuesday by the Richmond Fed Manufacturing Index and Existing Home Sales.  The Durable Good Orders Wednesday are followed by the flash PMI Manufacturing Index, New Home Sales and Consumer Sentiment.

The markets are closed on Thanksgiving and will close early on Friday when we get the flash reading on PMI Services.

Interest Rates & Commodities

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The yield on the 10 Year T-Note continued to surge last week rising from 2.117% to close at 2.335% as the downtrend from the 2014 and 2015 highs, line a,  has been broken.  The next resistance is at 2.489% which was the 2015 high and then in the 2.600% area.

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The January Crude Oil contract triggered a daily doji buy signal on Tuesday (point 1) but so far it has not been able to close well above the 20 day EMA at $46.71. There is good support now at $44-$44.50 and then at the doji low of $42.95. The daily OBV is still below its WMA and has formed slightly lower lows. The HPI has formed a bullish divergence, line c, which is consistent with a market bottom.  The HPI could correct still back to its WMA one more time as part of the bottoming process.

Market Wrap

The small cap stock and Dow Transports led the market higher again last week as the Russell 2000 was up 2.6% and the Dow Transports gained 3.2%. The Dow Industrials were up just 0.1% while the S&P 500 had a 0.80 % gain.  The Nasdaq Composite was up 1.6% as it made a marginal new high on Friday.

The weekly market internals were positive with 1982 stocks advancing and 1149 declining. The telecommunication stocks led the market gaining 3%, followed by a 2.2% gain in the oil & gas stocks and just under 2% in both consumer services and financials.

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The Spyder Trust (SPY) is very close to making a new all time high but it does look likely in the next few weeks. The daily starc+ band and quarterly pivot resistance stands at $222.06. The 20-day EMA is rising strongly but is well below the market at $215.40. The daily starc- band is now at $213.90 and it was tested  on four consecutive days just  before the election. The support at $208.38, line a, is now the key level to watch.

The weekly S&P 500 A/D line has moved above its WMA but is still well below the September high. It needs much stronger A/D numbers to confirm a new market high. The divergence will not be a problem as long as the A/D support at line b, is not broken. The weekly on-balance-volume (OBV) has moved above its WMA but has not yet made new highs.

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The NYSE Composite has been lagging the other major averages but has now broken its downtrend, line a. It is still well below the September highs and the resistance at 10,800-900. The rising 20 day EMA at 10,607 now represents good support.

The daily and weekly NYSE A/D lines are the weakest of those that I follow. The short-term downtrend, line c, was tested last week but has not been overcome.  The WMA is trying to turn higher but the A/D line needs to surpass the important resistance at line b, to confirm that the correction is over.

There were signs last week that the decline in the tech sector was over so I recommended that Viper ETFs traders add to their longs in the PowerShares QQQ Trust (QQQ) and to buy the Technology Sector Select (XLK) near Monday’s lows.

The Nasdaq 100 A/D line did break its near term downtrend last week suggesting that the worst of the correction is over.  A near term pullback is still possible this week. A strong move in the QQQ above $118.40 is needed to confirm that the correction is over.

The Russell 2000 A/D line is still rising sharply and is now very close to confirming the new all time highs. It is overdue for a pullback which may come in the holiday-shortened week when the volume is light.

What to do?  Plunging bond prices and soaring stocks dominated the action again last week but a near term reversal is still likely in the next week or two. It should present a buying opportunity but the starc band analysis does not favor buying the strong market sectors at current levels.

This is now becoming a more popular view but trading during Thanksgiving week is often quite choppy so it is definitely not a time to make an emotional trades. I suggest you consider incorporating the starc bands into your analysis as they will help you determine whether to buy, sell or hold.

The A/D lines on the SPY, QQQ and IWM have all moved out of the corrective mode but those on the NYSE and DIA have not. Though there are no signs of trouble from the strong daily A/D lines but the lagging action of the weekly A/D lines does require close monitoring in the weeks ahead.

The Dow Industrials do look a bit more vulnerable on a pullback as DIA formed a doji last week at the weekly starc+ band. This could provide an opportunity for short-term traders. For Viper ETF clients I am looking for a rotation into those sectors which have not rallied like the financial stocks since the election.

This could be a better week for stock traders as Viper Hot Stock traders have several open buy orders in stocks that need a low volume pullback in order to reach buying levels where the risk can be better managed.

If you are interested in my market analysis during the week and want specific recommendation you might consider one of my services. Each is only $34.95 per month and includes regular trading lessons along with the twice a week reports. New subscribers also receive four of the most recent trading lesson and subscriptions can be cancelled anytime on line.

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The Week Ahead: A Trick or Treat Market?

Posted by on Oct 30, 2016

The Week Ahead: A Trick or Treat Market?

Just after noon on Friday it seemed as though stocks were going to finish the week slightly lower for the week but then the news from the FBI regarding new emails rocked the market. The S&P futures dropped 20 points in just over an hour. Though the market recouped much of these losses the tone of the market definitely changed.

Investors are wondering whether the start of the new month will mark the start of a new more friendly market or whether the end of October is setting the stage for more investor pain. In last week’s column I looked at the last three-election year markets (Market Insights From Past Election Years) and concluded that the price action was the most similar to 2012 when there was a sharp post election decline.

Let’s look at some of the positive and negative factors that are likely to impact stocks for the last two months of the year.

The Positives

According to the Investopedia  Sell in May and Go  Away  ” Since 1950, the Dow Jones Industrial Average has had an average return of only 0.3% during the May-October period, compared with an average gain of 7.5% during the November-April period.”

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Looking at the seasonal pattern for the Spyder Trust (SPY) going back to 1988 reveals that it typically bottoms in early October (line 1) and tops in late May (line 2). The weekly chart shows a short-term flag formation that requires a weekly close above $216.70 for an upside breakout and a close below $211.24 for a downside break. The weekly chart shows major support line a, is at $207.60 with the rising 40 week MA at $206.80.

The bullish sentiment for the stock market is still quite low with just 24.8% bullish according to the AAII survey of independent investors. The level of bullishness is close to levels normally seen at market lows.

As I noted at the February lows (Is There Blood In The Streets Yet?) “According to AAII the bullish% dropped 8.3% in the latest survey to 19.2% bullish just above the 17.9% reading from mid-January .”  At the bear market low on March 5, 2009 only 18.9% were bullish.

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The analysis of the number of the S&P 500 stocks above their 50-day MA shows that the 5 day MA is at 34% which is well below the mean at 56%. The trend of the MA is still down, line a and at the October 2015 and January lows the MA stropped below 16%.  These low levels when accompanied by bullish signals from the market internals created low risk buy signals for Viper ETF subscribers.

The surprisingly strong advance reading of 2.9 for 3rd quarter GDP is an encouraging sign and is consistent with the improvement in some of the other economic data. The manufacturing sector could still do either way and needs to see significant improvement in the coming months.

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The strengthening economy is consistent with the sharp rise in yields from the July lows. The 38.2% resistance at 1.791% from the June 2015 high at 2.489% has been overcome. The 50% resistance is at 1.924% with the downtrend (line a) and the 61.8% resistance at 2.056%. There is additional resistance from the 2014 and 2015 highs, line b, at 2.258%.

This earnings season so far has been better than forecast which is what I have been expecting  since the summer months. A positive earnings quarter should help encourage more investors that stocks are worth the risk.

Though many investors fear higher rates there is clear evidence that gradually rising rates are good for stocks. The weekly MACD is rising and has moved further into positive territory with no signs yet of topping out. The daily MACD does show a loss of upside momentum. As money moves out of the dropping bond market some of the money should move into stocks.

The recent demand of inflation-protected bonds suggests that many are now more worried about the potential for higher inflation. A gradual increase in the very low inflation rate does allow employers to pay more as companies can charge more for their goods. Low and rising inflation is also typically a positive for the stock market.

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The monthly chart of the NYSE and the NYSE A/D line (One Indicator Stock Traders Must Follow) has both positive and negative indications for the months ahead. The monthly A/D line made a new high in September and looks ready to turn lower this month. It is still well above its rising WMA. In 2007 the monthly A/D line peaked in May and then diverged from prices as the major averages were making their highs.  It is also a positive that the weekly A/D line has also not formed any bearish divergences.

The Negatives

The monthly chart of the NYSE Composite shows that it formed a doji in August and a close Monday under 10,619 (the doji low) will trigger a doji sell signal. The last doji sell signal occurred in June 2015 as stocks did not drop sharply until August.

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The weekly chart of Spyder Trust (SPY) shows an eight-week flag formation and a close below $211.21 would project a move to the $204-$206 area. There is quarterly pivot support at $209.04 and a band of weekly support, line a, in the $207.72 area. The 38.2% Fibonacci retracement support from the January 2016 low is at $203.11 which is 4.4% below Friday’s close.

The weekly Nasdaq 100 A/D lines and Russell 2000 A/D lines are also now below their WMAs. The weekly relative performance analysis indicates that the Nasdaq 100 is still leading the market higher and therefore on a deeper correction it should not correct as much as the S&P 500.

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The 38.2% support for the NYSE Composite is at 10,149 with the more important 50% support at 9916. The most recent peak in the number of NYSE stocks making new highs was in June and has since formed lower highs, line b.

A contraction of new highs is not always a negative sign unless it is accompanied by an increase in new lows which just started to turn higher last Thursday and Friday. If this trend continues it will be consistent with a further market drop.

The development of divergences between the number of new lows and new highs is more effective at market bottoms as I pointed out at the February lows (see chart). This coincided with bullish signals from the market internals that set up some good buying opportunities for Viper Hot Stock traders.

Crude oil has been under pressure for the past eight days as the December crude is now close to the 38.2% support at $48.13. There is more important support in the $45.62-$46.87 area. The weekly indicators have turned down but the OBV confirmed prices and is well above its rising WMA. The HPI has not yet made new yearly highs but is positive and still above its support.  The daily studies on crude oil are negative do allow for a further correction.  A more serious decline in crude oil could put additional pressure on the stock market.

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The daily analysis on many of the inverse ETFs has turned positive with last week’s action. The weekly chart of Direxion Daily Small Cap Bear (TZA) shows that there is major resistance in the $35 area. It was recommended to aggressive Viper ETF traders initially on October 12th. Traders closed out half the position late last week for a 8.8% profit.

The weekly OBV on TZA has just moved above its WMA but does not show a major bottom formation.  The daily OBV does look much stronger and shows no signs yet of topping out.  For short-term traders I will be looking for new entry points in other inverse ETFs on a market bounce.

The bullish daily action in the inverse ETFs is also a negative for the overall market.  There are still a number of ETFs that are outperforming the market as the financial sector is still clearly a market leader.  On a deeper correction it is the relative performance analysis that will identify which sector ETFs are likely to be the best buys once the market tops out.

What to do?  The failure of the market to continue higher for two weeks in a row has kept the daily A/D lines in the corrective mode. This is a sign that the market correction is likely not over and that stronger support is likely to be tested. It would take several days of very strong market internals to reverse last week’s deterioration.

This means that Halloween is more likely to be a Trick than a Treat as the odds of a sharper correction in November are now higher.  There are no signs of a major top or the start of a new bear market so this means a deeper correction should still be a buying opportunity.   It would now take a move to new highs before weekly bearish divergences could form.

Over the near term a more defensive posture is warranted but a drop to the 2080-2100 area in the S&P 500 should be a good buying opportunity for those not in the stock market.  On a sharp 1% decline  I still favor a low fee,  broadly diversified ETF.

There are still a number a market leading stocks like Facebook (FB) and Vantiv Inc. (VNTV)  that Viper Hot Stocks traders are holding on the long side. There are an equal number of new buy and sells in this week’s scan but I will be focusing on new short positions.

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The Week Ahead: Market Insights From Past Election Years

Posted by on Oct 22, 2016

The Week Ahead: Market Insights From Past Election Years

The earnings season got started with a bang last week as Netflix (NFXL) reported a 36.5% increase in year-over-year revenues and added 3.6 million subscribers. After closing Monday at $99.80 it opened Tuesday at $116.63 and continued to move higher all week closing at $127.50

The big banks also beat Wall Street’s expectations as strong trading revenue boosted stocks in Goldman Sachs (GS), Bank of America (BA), JP Morgan Chase (JPM) and Citigroup (C). For several years market skeptics have argued that the market could not go up without the financial stocks but this may now be removed from the wall of worry.

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The chart of the DJ US Financial Sector (DJUSFN) shows that it has been holding above the 20 week EMA for the past month. A weekly close above the resistance at 460, line a, would be a significant upside breakout and signal a move to the 500 area.

The weekly OBV has turned up from support at line c, but is still below its WMA.  The weekly relative performance broke its downtrend (line d) in August and then pulled back to its WMA. The way the RS line has turned up from its WMA consistent with a market leader.

Viper ETF subscribers are already long the SPDR S&P Regional Banking ETF (KRE) and will look to be a more aggressive buyer in the financial sector once the A/D lines move out of the corrective mode.

Many Wall Street strategists are not looking for stocks to move higher through the end of the year (Yearly Forecasts – Fact or Fiction) and the recent high cash level of fund manager’s also suggests a high level of bearishness.

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According to Bloomberg the BofA Merrill Lynch October Fund Manager Survey the cash levels are the highest since November 2001 .  According to Michael Hartnett, chief investment strategist at BofA, “This month’s cash levels indicate that investors are bearish, with fears of an EU breakup, a bond crash and Republicans winning the White House jangling nerves.”

The chart shows that the cash levels have been rising for several years. At the market high in 2007 the cash levels were below 3.5%. At the correction lows in 2010 and 2011 the cash levels were also low which did not allow for aggressive buying by fund managers at low prices.

Last week’s AAII survey reveals the individual investor is also not bullish as the % dropped 1.7% to 23.7%. The bearish % rose 4.1% to 37.8%. At important lows the bullish % can drop below 20% and we are not far away from these levels.

The financial media has been focused lately on what stocks may or may not do well whether Clinton or Trump wins. I think this may already be factored into stock prices but the fears could cause further selling in the weeks ahead.

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But what did the technical studies look in the last quarter of the past three election years. In 2004 the NYSE Composite gained 10.3% in the 4th quarter. The NYSE A/D line (One Indicator Stock Traders Must Follow) moved above and below its WMA in October 2004 before breaking out to the upside on October 29th (line 1). The NYSE A/D line was in the acceleration mode until early December as the NYSE Composite gained 6%.

In 2008 the NYSE A/D line resumed its downtrend on September 8th as it had completed a daily top in June as the A/D lines had been diverging from prices over the past year, consistent with a bear market.  The A/D line made new lows in October before rebounding into Election Day before it again began to drop.

The NYSE A/D line made another new low was made in November and even though the NYSE did rebound late in the year it was still down 23.5 % in the last quarter of 2008. The weekly A/D line did not complete its bottom until the spring of 2009.

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In 2012, the NYSE Composite was in a trading range for six weeks between mid-September and Election Day on November 6th. The day after the election the NYSE started dropping as it lost 5.6% in just 8 trading days.

Just seven days after the market’s low the A/D line moved through its downtrend (line a) as it had earlier moved back above its WMA. The A/D held above its WMA until late in the year when the market dropped over concerns about the fiscal cliff.  By the start of 2013 the A/D line had made another new high.

In the 4th quarter of 2012 the NYSE Composite gained 2.3% but from the November 16th lows it was up 7.6%.  Of course 2013 was the best year of the bull market as the Spyder Trust (SPY) was up 32.3%. The current market looks the most like 2012 in my opinion but that does not mean we have to see a post election drop before stocks can move higher.  As discussed in the Market Wrap section the first step should be a turn in the A/D lines.

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One tool I use to evaluate whether the market is overbought or oversold is to look at the 5 day MA of the number of stocks in a market average that are below  or above their 50 day moving averages. This chart looks at the status of the Nasdaq 100 as the moving average (red line) turned up last week after dropping almost to one standard deviation below the mean at 56%.  A move back above the mean and the downtrend, line a, would be positive.

The same analysis on the S&P 500 suggests it is even more oversold as its MA has turned up from below 30%. The current reading at 31% is well below the mean at 56% so once the market bottoms out there should be plenty of attractive stock picks.

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I will be looking for stocks like Facebook, Inc. (FB) which has been a market leader since mid-July when original longs were established by Viper Hot Stock traders.  As the market was drifting lower last week, FB staged a breakout of its trading range (lines a and b). The daily RS line has soared confirming it was a market leader. The weekly and daily OBV are also positive.

The Economy

The week started off on a sour note as the Empire State Manufacturing Survey came in at -6.8 which is the third negative monthly reading in a row. The Industrial Production was flat at 0.1%. Consumer prices rose the expected 0.3% in September and remember a bit higher inflation can be positive for the economy. The Housing Market Index on Tuesday was strong at 63.

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Housing Starts Wednesday were pretty much unchanged while the next day’s Existing Home Sales surged 3.2% in September. The Philadelphia Fed Survey on Thursday was better than expected at 9.7 which appears to break the downtrend, line a.  Further strength in the next few months is needed to support the view that the economy is improving.

The Leading Economic Index rose 0.2% in September which reversed the decline in August. It continues to demonstrate that there is no recession on the horizon.

There is a full economic calendar this week with the Chicago National Activity Index Monday along with the flash reading on the PMI Manufacturing Index. The S&P Corelogic Case-Shillar Housing Price Index is out on Tuesday, Consumer Confidence and the Richmond Fed Manufacturing Index.

The flash reading on the PMI Services Index comes out on Wednesday and  New Home Sales followed by Durable goods along with the Pending Home Sales Index on Thursday. On Friday we get the advance reading on the 3rd quarter GDP, Employment Cost Index and Consumer Sentiment.

Interest Rates & Commodities

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The focus of the commodity markets and interest rates last week was on the dollar as it had its third strong week in a row. The chart of the dollar index shows a solid uptrend (line b) with the  starc+ band now at 99.48.

There is long-term resistance going back to 2015 at 100.85, line a. This is 2.2% above current levels as the dollar index has gained almost 5% from the August lows. The OBV and HPI are both positive but the OBV is now as strong as it was in 2014 and is well below the 2015 high.

The sharp rally in crude oil prices has once again caught many money managers on the wrong side as they have been forced to cover their short positions. For the December contract there is strong resistance in the $52 area with the 20-day EMA at $49.86. The intermediate trend is still looking strong though a pullback would not be surprising.

Gold prices have tried to stabilize despite the stronger dollar. Both the weekly and daily technical indicators are negative and show no signs yet of a bottom.

Market Wrap

There were minor changes in the major averages last week as the selling was counteracted by strong earnings from companies like American Express (AXP) and Microsoft (MSFT).  The Dow industrials were up 0.04% while the S&P 500 gained 0.38% and the Dow Utilities continued to rebound up 0.49%.

More significant was the 0.86% gain in the PowerShares QQQ Trust (QQQ) which tracks the Nasdaq 100 and the 0.47% higher close in the small cap Russell 2000.  The weekly advance/decline numbers were positive with 1968 up and 1151 down. This reverses the negative readings of the past two weeks.

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The range in the NYSE Composite last week was tight with short term resistance now at last Thursday’s high of 10,626 with more important in the 10,750-800 area. There is major resistance at 10,900, line a, with the weekly starc+ band at 10,980. The support from the prior week at 10,425 is now more important.

The weekly advance/decline line has bounced from its WMA and a positive close this week will strongly suggest that the correction is over.  The A/D line made a new high in September. The weekly OBV has turned up from support at line b but is still below its WMA.

The daily and weekly S&P 500 A/D line are still below their WMA but the PowerShares QQQ Trust (QQQ) is acting much better. On a move above the recent high at $119.48 the weekly starc+ band is at $122.85. The rising 20-week EMA is at $114.74 with the September low at $113.35 (line a) now represents even more important support.

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The weekly Nasdaq 100 A/D line has turned up but is still barely below its WMA. The A/D line has further support now at line c. The weekly on-balance-volume (OBV) looks even stronger as it moved through the long term downtrend, line d, on September 23rd and turned up last week.

The iShares Russell 2000 (IWM) dropped down to test the $120 level but then closed near the day’s high.  This means a strong close above the $125.53 area would project a move to the $130 area.

What to do?  The market has been very resilient in the past week and the action in the technology  stocks has been especially impressive. The higher weekly close as I noted last time does suggest that the worst of the selling may be over.

A day of very strong A/D numbers this week and the absence of any heavy selling could move the daily studies back to neutral. Several strong days could turn the analysis positive. By Election Day the A/D lines could move into the strongly trending mode when would warrant more aggressive buying like in the spring.

Those who are not in the stock market should look to one of the broadly diversified ETFs that have low fees.  If we do see another 1% daily drop in the major averages it should be a buying opportunity. It would take a daily close in the S&P 500 below 2126 to trigger more aggressive selling that could take it below 2100.

As I noted earlier the charts of 2012 seem to be the most similar to the current situation which means that stocks could rally sharply into year-end. This could take the S&P 500 well above the 2200 area. Viper ETF investors are long the market tracking ETFs as well as some sector ETFs. We will likely be adding new trading positions this week.

There are an equal number of new buys and sells in from my weekly scan of the Nasdaq 100 and IBD Top 50 stocks after Friday’s close.  New short positions were added last week but with last week’s action I will be looking for new market leaders, like Facebook (FB) to recommend to Viper Hot Stocks traders on Monday.

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The Week Ahead: Monthly Signal Keeps Investors On Right Track

Posted by on Oct 3, 2016

The Week Ahead: Monthly Signal Keeps Investors On Right Track

Despite the market angst over the FOMC meeting and comments from the Big Bears since August that the stock market had to crash the major averages survived another month. Heading into the last day of the month the S&P 500 was just 2% below its all time high yet according to AAII only 24% of individual investors were bullish.

In addition to the last day of the month it is also the end of the 3rd quarter. Active managers are likely to again underperform their benchmarks for another quarter.  Earlier in the year a Financial Times article revealed that “98.9 per cent of US equity funds underperformed over the past 10 years, 97 per cent of emerging market funds and 97.8 per cent of global equity funds.”

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Looking at those funds sold in various Euro zone countries the message is the same as their chart indicates. Almost 100% of a actively managed equity funds sold in the Netherlands have failed to outperform their benchmarks over the past five years.

It has also likely not been an easy year for most individual investors in the US as the market plunged for the first six weeks of the year as the Spyder Trust (SPY) had a low of $178.33 on February 11th.  At the time only 19.2% were bullish in the AAII survey and over 48% were bearish. From the February low the SPY is now up over 21%.

Though there were signs in February “Is There Blood In The Streets Yet?” from a number of technical studies that the worst of the selling was over but still each month there was something else for investors to worry about.  This was the proverbial  “Wall of Worry” that is often the focus of the headline driven financial media that in my view does a good job of keeping investors out of the market.

The recent trend of weak earnings seasons has been used each quarter as a reason stocks can’t go higher and if it is a slow news week the TV media trots out those perennial bears who warn of a market bubble.  In April I pointed out “Why Bubble Fears Are Bullish For Stocks”  and each month I have tried to debunk the latest additions to the wall of worry.

It has clearly been a year of wide market swings as evidenced by the post Brexit vote drop as well the 400-point plunge on September 9th.  After the February lows it was the continued improvement of the A/D line in March that provided further evidence that the intermediate trend was positive.

On April 1st the S&P 500 A/D line moved above the 2015 highs which provided a strong signal that the stock market’s next major move would be higher, not lower. At the end of May there was another significant technical development as the monthly NYSE A/D line closed well above the monthly high from 2015 (line d). It has always been a very good indicator of the market’s health. At the end of May 2003 the A/D line moved to a new high signaling that the bear market from the 2000 high was clearly over.

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The monthly A/D line peaked in May 2007 (point 1) and at the October 2007 highs it formed lower highs, point 2. The weekly and daily A/D lines also formed negative divergences which confirmed a bull market top. The monthly A/D line dropped below its WMA in December 2007 (line a) and did not crossed back above its WMA until May 2009.

By the end of 2009 the A/D line had surpassed the 2007 high confirming a new bull market. The ability of the monthly and weekly A/D lines in make new highs in 2010 through 2015 was a clear sign the bull market was still intact despite all of the market commentary to the contrary.

The monthly A/D line peaked in May 2015 and dropped below its WMA at the end of August, flipped above it in October and then back below it in January 2016. This is why the subsequent move to new all time highs last spring was so significant.

So what does this mean for the last quarter of the year?  The monthly NYSE A/D line is still well above its WMAs. It is important that the WMA is still clearly rising and it would take several months before it could violate the WMA.   (For more see the Market Wrap section)

The fact that the S&P 500 has been higher in every quarter of 2016 further increases the odds of a positive close in the 4th quarter. According to a CNBC article “of the 19 years in which the market rose in the first, second and third quarters, a negative fourth quarter only followed five times.”  This adds to the overall positive trend for the 4th quarter as stocks were positive 73% of the time.

For investors I have stressed that you should focus on the longer-term data and use the quarterly pivots for weekly trend analysis. Each week and month I review the technical studies as well as the relationship of the Friday close of the ETFs or stocks to their quarterly pivot. Those that close above their quarterly pivot have a positive intermediate term trend.

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The SPDR S&P Oil & Gas (XOP) has been a favorite of the Viper ETF Report for most of the year as there have been several profitable swings.  The weekly relative performance broke its downtrend, line b, in early March and just bounced off its WMA.  The OBV turned positive at the same time breaking its downtrend (line c).  It has stayed above its WMA ever since.

The OBV made a new high last week and XOP has been above its quarterly pivot since the start of the 2nd quarter. Additional long positions were added on the recent pullback and a close above $40.44 will give much higher targets.  The Herrick Payoff Index (HPI) on crude oil completed its bottom on Thursday as I Tweeted a chart on Friday. The recent students of the HPI class have appreciated how it has helped trade the swings in XOP.

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Even thought the averages have seen some wide swings there have been a number of stocks that have been steadily outperforming the S&P 500.  Once that showed up in the weekly scan for Viper Hot Stocks in early August was Electronic Arts (EA). It gained another 1.3% on Friday and the daily RS as well as the on-balance-volume (OBV) show very positive daily as well as weekly trends.

Though many advise avoiding stocks because of their high P/E or too high market averages there continue to be a number of stocks that have just completed their bottom formation.  In the over 150 stocks that I scan for my Monday stock  recommendations  I look for stocks that are either in solid weekly up trends that have corrected back to support or have completed weekly bottom formations.  These are also the methods that I teach in my individual training sessions.  (If you are interested email us at wentworthresearch@gmail.com)

The Economy

Though there was plenty of economic data last week but stock market seemed to pay little attention as traders were focused on the macro issues they felt were driving prices higher.   The final 2nd quarter GDP came in as expected but Thursday’s market decline was fueled over concerns about the viability of Deutsche Bank AG.

The focus this week will be on the monthly jobs report which means another round of debate on what the Fed may do on rates. The manufacturing data was better than expected last week as the Dallas Fed Manufacturing Survey and Friday’s Chicago PMI were both better than expected. This week we have the ISM and PMI Manufacturing indices on Monday.

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The stock market did seem encouraged by last Tuesday’s Consumer Confidence which was strong at 104.1 much better than the consensus estimate of 98.8.  As the chart shows this reading has exceeded the 2013 highs, line a, and caused a breakout on the charts. Friday’s Consumer Sentiment was a bit better that expected and the last half of the month bodes well for October.

On the housing front New Home Sales were down from August but there were some positive signs as  Econoday concluded that “This is a very positive report which underscores the accelerating strength of the new home market.” Pending Home Sales were weak and the S&P Corelogic Case-Shillar Housing Price Index was flat.

This Wednesday we get new data on the services sector with the PMI Services and ISM Non-Manufacturing Index. Both were weaker than expected last month so they are likely to be examined more closely this week.

Market Wrap

Few were expecting the S&P 500 to gain 3.5% and the Nasdaq Composite 9.7%  in the 3rd quarter. The outlook of most analysts and traders at the start of the quarter was not that positive. For the week the Dow Transports led the way, gaining 1.8% as the iShares Dow Transportation (IYT) has been recently favored on the long side by the Viper ETF Report.  The A/D numbers for the week were slightly negative with 1487 stocks advancing and 1638 declining. More stocks did make new weekly highs which is a plus.

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In 2015 the weekly A/D line formed a negative divergence in May, line b, and then dropped below its WMA in June. This weakness kept me from buying stocks and as I pointed out in early July  “Greece Isn’t The Real Problem” it was the weak technical outlook not the concerns over Greece’s debt that investors should focus on.  Stocks finally collapsed in August.

On February 26th (line 1) the weekly A/D line moved above its WMA and one week later  it overcame the  bearish divergence resistance at line b.  In 2015 it was eight weeks after the April high that the NYSE A/D finally dropped below its WMA. This would require several consecutive weeks of very negative A/D ratios.

The NYSE composite has been testing its weekly support at line a.  A weekly close above 10,818 will project a move above 11,000 with additional targets in the 11,200-500 area. For the new quarter the pivot stands at 10,644 and a weekly close below 10,487 would be a sign of weakness.

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The Spyder Trust (SPY) did manage to close the week higher despite selling early in the week. As I commented in Monday’s five-page report to clients “the market’s internal strength indicates additional weakness early this week should be followed by higher prices”.  The upside reversal late Tuesday and strong close Wednesday suggested the pullback as over as SPY held the support in the $213-$214 area.

The sharp drop last Thursday clouded the short term outlook  as SPY now needs a close above $217.53 to signal a test of the $220 area, line a.  The completion of the trading range (lines a and b)  has upside targets in the $223-$225 area.

The S&P 500 A/D line made a new high on September 22nd and is holding above its WMA. It has important support at line c.  The daily OBV is trying to break its downtrend as it has been acting weaker than prices while the weekly is acting stronger.

The Powershares QQQ Trust (QQQ) and the iShares Russell 2000 (IWM) have the strongest  relative performance and should lead the S&P 500 higher.

What to do?    My analysis still suggests the mid-September breakout of the trading ranges in the A/D lines does favor a further market rally as we start off the new quarter. Even though the outlook for stocks doing in the end of the year remains positive you should be prepared for more sharp down days.

Alcoa (AA) releases its earnings on October 10th and I still expect the earnings season to be much better than expected. With a stock market that is already in a positive trend good earnings should be supportive.  As I mentioned last time I still like the technology, biotech and small cap stocks.

Once the A/D lines start another strong rally phase I will likely look to some of the leveraged long ETFs for Viper ETF traders as they are already long the IWM and QQQ as well as other ETFs.

After Friday’s close there are 24 Nasdaq 100/IBD Top 50 stocks that have generated new buy signals and just 10 with new sell signals. There are also some new weekly doji  buy and sell signals.  For each of these stocks I look at the monthly, weekly and daily charts to find new recommendations for Viper Hot Stocks traders on Monday.

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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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