Stocks opened the New Year on a positive note as the major averages closed with nice gains and the 3-1 positive advance/decline ratios were a good sign. The new high in the Spyder Trust (SPY) last week was confirmed by a new high in the S&P 500 A/D. The daily A/D lines did turn higher Tuesday but to signal a new rally phase we need to see several more days of strong market internals.
For many years I have lamented the financial media’s focus on year-end projections for the major averages. The gyrations in 2016 forced many Wall Street strategists to revise their outlooks throughout the year as I reviewed several weeks ago (How High Can The Market Forecasts Go?)
I am lucky that unlike many of these market professionals my job description does not require that I make a year end price forecast. The price targets I provide are based on chart formations and other hard data not on projected earnings or macro views of the economy. The pivot price projections focus on the yearly price ranges but not where stocks will end up at the end of the year.
The discussion last weekend on the yearly price projections for the Dow Industrials spurred many email requests for a more in-depth discussion. The chart of the Dow shows that the pivot analysis based on the 2015 price ranges did a good job of identifying the Dow’s price highs and lows for 2016.
The close on January 6, 2016 at 16, 906 was well below the Yearly Pivot at 17,048 and just nine days later the Yearly S1 support at 15,746 was violated with the Dow trading below it for two days. The actual low for the year at 15,450 (point 1) was 1.3% below the yearly S1 support. At the February 11th low (point 2) the Dow dropped briefly to 15,503 but one week later it closed at 16,413.
By early March, point 3, the Dow closed back above the yearly Pivot as it subsequently rallied 1000 points to reach a high of 18,167 on April 20th. This was just below the Yearly R1 resistance at 18,727. After the Brexit vote the Dow dropped to a low of 17,063 (point 4) but held just above the Yearly Pivot.
The Yearly R1 resistance at 18,727 was surpassed the week of the election (point 5) which made the next upside target at 20,029, the Yearly R2 resistance. The yearly high for the Dow at 19,987 was just 0.2% below the pivot R2 resistance.
For 2017, the pivot stands at 18,430 with the R1 resistance at 21,320 which is 7.9% higher than the 2016 close. The Yearly S1 Dow support at 16,873 is 24.6% lower.
The gains of the small cap iShares Russell 2000 (IWM) in 2016 were impressive. The chart shows that the January plunge took the IWM to $92.21 which was just below the Yearly S2 support at $92.39. It was not until early June, point 2, that the Yearly Pivot at $114.17 was overcome. On the sharp drop in late June IWM held above the May low.
The Yearly R1 resistance at $123.42 was exceeded in September but was not convincingly overcome despite several attempts. The pre-election market correction dropped IWM to $114.41 which was just above the Yearly Pivot at $114.17. The close on December 8th at $137.47 was well above the Yearly R2 resistance at $135.95.
The 2017 Yearly Pivot analysis for IWM is at $121.99 with the R1 resistance at $151.07 is 12% higher than the 2016 close. On the downside the Yearly S1 support at $105.73 is 21.6% lower. The completion of the monthly trading range that I discussed in How High Can The Market Forecasts Go? has long term targets at $159.91 with major support in the $126 area.
The pivot analysis can be done on any time frame but I focus on the monthly, quarterly and yearly analysis. I am currently working on a Trading Lesson that focuses on the yearly pivot analysis for the key market tracking ETFs and the major sector ETFs.
It will be sent out to subscribers of both the Viper ETF Report and the Viper Hot Stocks Report the week of January 9th. It will also be sent out to all new subscribers who will also receive the biweekly reports. Each service is just $34.95 per month and can be cancelled on line at any time.
For investors 2016 is likely to be the best Christmas in many years especially in light of how the year started out. The stock market’s perception of how stocks will benefit in the new Trump world has clearly caused a stampede into stocks. A several billion-dollar buy program hit the market last Wednesday afternoon which triggered one of strongest daily gains.
The focus has been on the Dow Industrials as a number of traders were wearing their Dow 20,000 hats on the NYSE floor last week. Until last week the Dow’s rally has been narrowly based as according to Paul Hickey from Bespoke ” The top five stocks account for 700 of the just under 1,300 gain” with Goldman Sachs (GS) contributing 400 points or almost 1/3 of the Dow’s gain.
With Caterpillar (CAT) the Dows best YTD gainer up over 47%, there are four Dow stocks, Nike (NKE), Cocas-Cola (KO), Pfizer (PFE) and Disney (DIS) are all still down for the year. Disney has regained much of its losses as it is now up over 12% this quarter.
The weekly chart of Goldman Sachs (GS) shows that it broke its weekly downtrend in August, line a, when it closed at $162.11. The weekly relative performance completed its bottom on October 14 (line 1) as the RS broke its downtrend (line a). This was confirmed by the move in the RS above resistance at line c. It is up 33% since the election.
The stock is now very close to its all time high of $247.92 from the end of October 2007. Now maybe the stock ‘s strength is based on the anticipation that deregulation will make GS even more profitable than it was in 2007. Of course it is also possible that the stock is rising because of the influx of Goldman executives into the new Trump administration. On a personal note I am not in favor turning the Treasury Department over to another Goldman employee as their past performance has been less than impressive.
Now either explanation could be bullish for the stock of Goldman Sachs but does that mean you should now jump into the stocks that have been leading the Trump rally? The powerful action last week (see Market Wrap) does favor even higher prices as we head into the end of the year but things may be different as we move into 2017.
In my many years observing and investing in the stock market I have found that getting into crowded trades has generally turned out badly. Instead those markets that are out of favor generally have a much better risk as well as reward profile.
The dismal performance of hedge funds who often pile into the same trade is an example of how this approach does often not work. Financial stocks make up about 12.8% of the S&P 500 while information technology makes up more that 21%. Health care makes up 14.7% and it could bottom in the coming weeks.
The beaten down consumer staples sector has a weighting of 9.9% but it is only up 4.8% YTD. Both the Technology Sector Select (XLK) and Consumer Staples Sector Select (XLP) have been recommended to Viper ETF traders.
Both were recommended with just a 5% initial risk while buying the SPDR S&P Regional Banking ETF (KRE) now would require a stop under the four-week lows and a risk of 11.5%. The Viper position in KRE, as discussed in last week’s trading lesson “Developing An Exit Strategy”, were sold a few weeks ago but even though I got out early I prefer selling into strength.
For those of you who are dying to jump into this market I would continue to recommend you favor those out of favor stocks or ETFs where the technical studies are turning positive. I would also caution you not to alter your regular risk management approach to investing or trading. When a portfolio takes a big hit after chasing a market it can have a long-term impact on performance. I also know that even the best laid plans of a new president are difficult, if not impossible to implement.
The S&P 500 has already exceeded most targets from Wall Street strategists as their average year-end target was 2146. It has certainly been a choppy year for the stock market despite the positive long-term readings from the advance/decline lines.
In an early June column I focused on the upside breakout in the monthly A/D line. It turned up in November and is on pace to make another new highs in December. The NYSE Composite is now just below the 2015 high, line a.
I concluded then that the “The technical evidence, despite the concerns over the economy and the weak jobs report, still favors even higher prices. Very few analysts or investors are looking for sharply higher stock prices in the 2nd half of the year but I think it is a real possibility. I would not be surprised to see the S&P 500 reach the 2200 level and 2300 is a real possibility.”
Even though a large number of reliable technical measures entered overbought territory a couple of weeks ago that has not stopped the market from moving even higher. A move in the Dow above 20,000 is a real possibility before Christmas but it will be more difficult for the S&P 500 to overcome the 2300 level.
Looking at the Wall Street strategists forecasts for 2017 the average target is at 2345 which is 3.9% above Friday’s close. In my view the S&P 500 is likely to trade as high as 2400 and as low as 2120 in 2017 but I have no idea where it will close.
The latest reading from AAII shows that 43.1% are now bullish which is down from 49.9% two weeks ago. It is still below the long-term average at 38.4% but has not yet hit extreme levels above 55%. The bearish % rose to 26.4% as it is up from a recent low of 22.1%.
It should not be a surprise that CNN’s Fear & Greed Index is at 86 indicating extreme greed which is up from 42 and fear territory just a month ago. The longer term chart shows that is peaked near 90 during the summer and then dropped to 20 just before the election
There were a large number of large hedge fund managers that were bearish at the end of the summer and so far not many have changed their position yet. In September I felt that their high profile negativity was bullish not bearish for stocks.
Many columnists used their negative outlook to support their own bearish forecasts as one commented that all of these big, smart traders couldn’t be wrong. I would be a more concerned if the perma bears, like Marc Faber or Peter Schiff, finally turned bullish on stocks.
The analysis of the small cap S&P 600 reveals that the 5-day MA of the % of stocks above their 50 day MA has risen to 81.90%. It is now very close to the April and July highs as it is one STD above the mean at 52.83%.
In contrast the same analysis of the Nasdaq 100 shows that only 57.7% are above the 50 day MA which is just above the mean at 53.6%. The 5-day MA peaked well above the 80% level earlier in the year. For stocks pickers and subscribers to the Viper Hot Stocks Report this means that there should be more good stocks to buy.
The strong economic data last week helped support the market’s bullish tone. Data on the service sector was strong last Monday as both the PMI Services Index and the ISM Non-Manufacturing Index are indicating strong growth.
Factory orders were up 2.7% in a mid week report but Friday’s sharp increase in the mid-month reading on Consumer Sentiment to 98 really cheered stock investors as we head into this week’s FOMC meeting.
The economic calendar is full this week as in addition to the FOMC announcement Wednesday we have the PPI, Retail Sales , Industrial Production and Business Inventories. They are followed on Thursday by the CPI, Philadelphia Business Survey, Empire State Manufacturing Survey and the Housing Market Index.
On Friday we get the latest data on Housing Starts and quadruple witching which is the expiration date that includes stock index futures, stock index options, stock options and single stock futures.
Interest Rates & Commodities
Both short and long-term yields continued their dramatic rise heading into the FOMC meeting. It is hard to quantify how much of the decline in bond prices has been in reaction to the hiking of rates this week. Certainly the change in rates seems to be pricing in a series of rate hikes in the year ahead. Bond traders may have bought the rumor but will they sell on the news?
The rise in the yield of the 30-Year T-Bond yield has been more relentless than I expected as it has moved well above the 3% level in the past four weeks. The downtrend from the 2011 and 2014 highs, line c, has now been broken. The next major resistance is in the 3.85-4.0% area, line b, with additional chart resistance above 4.5%, line a. Yields are well above the rising 20-week EMA at 2.683%.
The last equally sharp rise in yields occurred in 2012 as yields moved from 2.50% to 3.90%. A similar rise in yields now could take yields to the 3.50% area.
The February crude oil contract has soared from the early November lows and now looks ready to break out of its trading range, lines a and b. This has upside targets in the $60 area. The HPI formed a bullish divergence at the low, line d, that was confirmed by the break through major resistance at line c. It is acting stronger than prices and traders bought the energy ETFs on the November 29th drop.
For the second week in a row the gains last week were broadly based with 2451 advancing stocks and just 666 declining. Both the Dow and S&P 500 were up just over 3% while the Russell 2000 was up an impressive 5.6%. Even the previously lagging Dow Utilities were up over 2%.
In terms of sectors both the financial and technology stocks were up strong, up 4.6% and 4.3% respectively. Telecommunications, consumer goods, basic materials and consumer services were all up over 3% while health care gained just 0.64%.
The NYSE Composite finally overcame the resistance at 11,000 and is now just below the 2015 high at 11,254, line a. The NYSE has been lagging the other major averages and is now starting to catch up. The weekly NYSE A/D line shows a bullish zig-zag formation as it has turned up after testing its WMA.
The NYSE has closed above the daily starc+ band for the past three days and the daily A/D line is now well above its rising WMA. The McClellan oscillator turned down on Friday after making a marginal new high last week.
The red hot iShares Russell 2000 (IWM) had another good week though it did form a doji at monthly pivot resistance on Friday. The close was also above the daily starc+ band. The daily doji a week ago set up a good buy on Monday’s open for Viper ETF traders. There is extended monthly pivot resistance now at $146.
A daily close below $137.75 will trigger a daily doji sell signal but there is good support now at $134-$135 with the 20 day EMA at $131.81.
The daily and weekly A/D line analysis is positive on the SPY, QQQ and DIA as the Dow Industrials A/D line has finally overcome its major resistance.
What to do? As the major averages continue to power to the upside many who are underinvested in stocks wish they had more. I think the main danger now is that investors may jump into stocks once they see how poorly their bond funds have done this year. Even though it is not easy I think a patient approach will be rewarded as yields are likely to turn lower in the next month.
In April I suggested that “those who were not invested should consider a dollar cost averaging program where six equal investments were made over a period of time. Those non-active investors should consider a broadly diversified ETF like the Vanguard Total Stock Market ETF (VIT) or the Vanguard MSCI Europe (VGK).’
Though these ETFS are much higher now this I think is still the best approach for those not in the market. As I mentioned earlier there are still some ETFs that are still declining or have just bottomed and the risk on these ETFs is more reasonable.
Though it may be surprising there are a number of stocks that are trading near their yearly lows and just need a strong close on good volume to complete their weekly bottom formations. I am looking for stocks like this to recommend to the Viper Hot Stock clients.
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.”
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.
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%.
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.
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 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.
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
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.
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.
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.
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.
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.
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.
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.”
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.
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.
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.
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 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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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 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.
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
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.
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.
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.
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.
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.”
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.
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.
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.
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 firstname.lastname@example.org)
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.
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.
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.
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.
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.