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Charts Talk: Is Bullish Sentiment Now Low Enough?

Posted by on Feb 7, 2017

Charts Talk: Is Bullish Sentiment Now Low Enough?

The inability of the S&P 500 to surpass the late January highs and the tight trading ranges has caused an increase in bearishness among investors and traders.  The White House induced volatility has also not helped.

The change in outlook has been confirmed by the sentiment data from the American Association of Individual Investors as 46.2% were bullish the week of January 5th.  Three weeks later on January 26th the bullish % had fallen to 31.6% and it was at 32.8% last week.  This is a decline of 29% in the bullish % from the Trump rally highs.

The increased skepticism is also reflected by the increase in bearish commentary in the financial blogs and on the TV financial stations. The fundamentalist analyst has any number of measures to use that convinces them that stocks are too expensive.  A little research however will reveal that many of these analysts have been saying the same thing for many years.  They will eventually be right.

Some are warning that the market is looking as vulnerable now as it did during the summer of 2015 and in early 2106. The analysis of the number of stocks advancing versus those that are declining tells a different story. In a strong market more stocks are advancing then declining so the cumulative advance/decline line is rising.

As a market is topping, as it was in the summer of 2015, the advance/decline line will be making lower highs even though prices are still making higher highs.  In early July of 2015 the divergence was becoming more pronounced but stocks did not start to plunge until August.

The weekly chart of the Spyder Trust (SPY) shows that as it was making a new high the week of July 24, 2015 the S&P 500 A/D line was much lower (line 1). It was also below its declining WMA and five weeks later the stocks plunge culminated on August 24th.

  • As the Spyder Trust rebounded in the fall of 2015 the weekly A/D line made lower highs (line b) as it was weaker than prices. By the end of the year the A/D line had made even lower highs,
  • At the market low in February 2016 both the weekly and daily A/D lines formed higher lows. These bullish divergences along with low bullish sentiment and other bullish technical signs suggested a bottom was being formed. (Is There Blood In The Streets Yet?)
  • Since then the weekly A/D line has stayed above its WMA except for five weeks ahead of the election. It moved back above its WMA the week of November 11th.
  • The A/D line has continued to make new highs, line c, which is consistent with a strong market.

The daily A/D lines turn positive or negative ahead of the weekly analysis and in December the Nasdaq 100 A/D line broke its downtrend, line b.

  • Then on December 27th the A/D line made a new all time high (point 1) which signaled that is was going to be a market leader. It was the favorite pick for Viper ETF clients and is up 6.2% YTD.
  • The sharp drop in the A/D line at the end of the year held well above the prior low, forming the basis for the current uptrend, line c.
  • The Nasdaq 100 A/D line has continued to make higher highs in January and early February. It shows no signs yet of topping out.

Summary:  The Spyder Trust (SPY) completed its flag formation on January 25th which was supported by  a new high in the S&P 500 A/D line. The small cap Russell (IWM) is still in its trading range and it needs a close above $138.25 to signal that its uptrend has resumed.

This A/D line analysis is typical of the content of the trading lessons that are sent out to subscribers of the Viper ETF Report and the Viper Hot Stocks Report. Each service is just $34.95 per month and new subscribers get the five most recent trading lessons.

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The Week Ahead: The Reagan Markets

Posted by on Jan 21, 2017

The Week Ahead: The Reagan Markets

As the new president officially is sworn in the stock market is holding on to half of its early gains  as of 1:00 PM New York Time.  The background and experience of the president is much different than any other in modern history.

Many Republicans would like to compare him to President Reagan as they view it has the gold standard for Republican presidents. Other than their background in the entertainment industry there are many differences that they bring to the table. Nevertheless Reagan’s election did shake up the political landscape in 1980.

Some are hoping that the stock market will match the 113% gain the S&P 500 had during Reagan’s two terms.  It is likely many of you were not in the markets thirty-six years ago so I thought it might be informative to take a technical look at the Reagan markets.

Many things were different in the 1980s especially interest rates. The chart shows that 10 Year T-Note yields were in a gradual up trend in 1977 through 1979 but then surged in late 1979 from 9.34% to a high of 13.75% in February 1980. Because of increasing inflation Fed Chairman Paul Volcker had started to raise rates.   As the shaded period indicates the US economy officially entered a recession in January 1980.

Just four months later yields had dropped back to 9.63% in June as the economy improved and the recession ended,  But then rates started to rise once more.  As the 1980 election was taking place yields were back above 13% as they peaked in October 1981 at 15.75%.

The support on the yield chart going back to 1980, line a, was broken in November 1981 and yields quickly dropped back to 13%. It was the violation of this support, line b, in August 1982 that completed the top in yields and started the thirty-four year bull markets in bonds.  The recession was officially over in October 1982.

The S&P 500 closed before the election at 129.04 and sixteen days later it had a high of 141.96 which was a gain of 10%.  The S&P tried to rally in early 1891 but this rally failed and the S&P 500 continued to form lower highs.

The NYSE advance/decline line  moved above its WMA  in May 1980  and started a very strong uptrend. It peaked in September (point 1)  and when the S&P 500 was making a new high in November the A/D line formed a negative divergence at point 2 as it just rallied back to its flat WMA.  It subsequently dropped below the prior low which confirmed the negative divergence.

The A/D line moved back above its WMA in March but failed to move above the November a high which was a sign of weakness. The A/D line formed a lower high again in June (line a) before it started to drop sharply.  The drop below the key support (line b) came just before a three week rally, line 3, which set the stage for the sharp six week plunge.

The A/D line formed lower highs in 1982, line c, which was consistent with a bear market.  At the August 1982 low the S&P 500 has dropped 28%.

The NYSE A/D line moved above its WMA on August 20th and four weeks later it overcame the downtrend, line a, which confirmed the market bottom. The A/D stayed in a very bullish trend until July of 1983 as it gained 45% after the A/D line buy signal.

In October 1983 the A/D line formed a negative divergence as it failed to make a new high with prices, line b. This downtrend was not broken until early 1985 which was a strong signal that the market’s long correction was now over.

The new uptrend in the A/D line that connected the 1984 lows (line c) was not broken until early September of 1987. This negative signal occurred almost a month before the crash in October 1987. The A/D line had formed a significant bearish divergence before it broke support.

The weekly and daily A/D line analysis plays an important role in both my Viper ETF Report and the Viper Hot Stocks Report. It is used to help decide when to be a buyer or seller of both ETFs and stocks.

Many do not realize that according to the Federal Reserve on the Recession of 1981-1982 “Prior to the 2007-09 recession, the 1981-82 recession was the worst economic downturn in the United States since the Great Depression. ” It was of course exacerbated by the short recession in 1980.

One of the economic indicators that I follow very closely is the Conference Board’s Leading Economic Index. It has done a good job of topping out well ahead of a recession as this chart from dhort.com illustrates. It topped out fourteen months before the 1980 recession and 7 months before the 1981-1982 recession.  It is still rising as of December and the latest data is out on January 26th.

The Fed tightening prior to and after the 1980 election was in reaction to the very high inflation which had pushed the yield on the 10 year T-Note to 15%. In another very interesting chart from dhsort excellent site is this monthly inflation chart from 1872 to the present. The peaks after WWII and in 1980 do stand out as does the trend of low inflation than has been in place for many years.

Gold prices topped out in January of 1980 as the bubble burst after prices hit a high $873 and by Election Day it had already dropped $200 from its high. The close this January is likely to give us more insight as to whether gold has bottomed.

The Economy

It was another week of positive economic news as the year to year CPI to 2.1%. Crude oil prices were up for the fourth month in a row. Industrial Production was better than expected at 0.8% while the Housing Market Index which helped identify the bottom in the housing market over four years ago.

Last Thursday’s Housing Starts and the Philadelphia Fed Business Survey were also very strong which is consistent with an economy that continues to get better.  As I noted last week the Philly Fed Survey has been in a strong uptrend.

This week we have the flash PMI Manufacturing and Existing Homes Sales on Tuesday followed on Thursday by the Chicago Fed National Activity Index,  flash PMI Services and New Home Sales.  On Friday we have Durable goods, the advance reading for 4th quarter GDP and Consumer Sentiment.

In the second half of the Week Ahead I discuss the markets including the A/D analysis that indicates the intermediate term trend is positive with no signs of a major top. It will be released by noon NY Time on Saturday .

Check here on Forbes to get my full analysis of the market on Saturday as I will tell you what to look for in the week ahead.

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Transports: Topping Or Not?

Posted by on Jan 19, 2017

Transports: Topping Or Not?

The stock market was lower in early trading Tuesday which supported the view of some that the Trump rally was over.  By the close the Spyder Trust (SPY) was down just 0.35% and the NYSE advance/decline numbers were only slightly negative with 1354 up and 1657 down.

The daily A/D lines that were reviewed last week are still holding above support and have not moved into the corrective mode by dropping below the late December lows.  Furthermore the Nasdaq 100 A/D line closed very strong last Friday as it has accelerated to the upside (see chart)

The earnings for CSX Corp (CSX) after the close had many wondering whether the major rally in the Dow Transports was over. The iShares Dow Transportation (IYT) was down 1% on Monday but is up 14% over the past three months.  This is in contrast to the 7% gain in the Spyder Trust (SPY) but what is next technically for the Dow Transports?

The yearly pivot analysis, that was very accurate for the SPDR Dow Industrials and iShares Russell 2000 (IWM) shows that the yearly projected high for IYT is at $184.52 with the yearly pivot at $149.11.  The 2016 close was well above the 2016 pivot at $140.49.

The iShares Dow Transportation (IYT) is down over 4% from the December 9th high at $170.79.  The week ending January 6th IYT formed a doji and a weekly doji buy signal was triggered with last Friday’s close.

  • The quarterly pivot is at $158.56 with the rising 20 week EMA at $156.33 and the starc- band at $155.76.
  • The relative performance analysis (RS) reveals that IYT completed a bottom last fall versus the SPY indicating that it was a new market leader.
  • The weekly RS has pulled back from the December high but is still well above its WMA. It has converging support at lines b and c.
  • The weekly on-balance-volume (OBV) has held up very well after breaking through the major resistance, line d, in November.
  • The OBV is well above its rising WMA and shows no signs of a top.

The daily chart of iShares Dow Transportation (IYT) shows a fairly orderly pullback from the December highs with the flattening 20 day EMA at $164.01.

  • The recent low is at $161.58 with the 38.2% Fibonacci support from the October high at $159.54.
  • The monthly pivot support is at $159.52.
  • There is short-term resistance at $165.91 and a move above the last major swing high at $167.73 (see arrow) should confirm that the correction is over.
  • The daily RS (relative performance) is trying to bottom out but needs to move above last week’s high.
  • The daily OBV is holding above its WMA and the support at line e.
  • If it this daily support is broken and the OBV starts a new downtrend it will signal a deeper correction.

Summary:  The financial media is coming up with many reasons why the transportation sector will not benefit from Trump’s programs until later in the year.  The technical outlook favors being a buyer not a seller and a bottom could be confirmed in the next week. There is converging support in the $159.50 area.  I will be posting weekly charts of both the S&P 1500 Airlines and Railroads indices later on Twitter.

If you like this type of technical analysis you might consider my Viper ETF Report or the Viper Hot Stocks Report .  Both include regular Trading Lessons and are each $34.95 per month.

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Charts Talk In Spite Of Market’s Nervousness

Posted by on Jan 11, 2017

Charts Talk In Spite Of Market’s Nervousness

The stock market has been nervous this week as it has the earnings season, confirmation hearings and president Elect Trump’s long awaited press conference to put it on edge.  The daily gyrations in the stock market often mask what is taking place internally.

The Spyder Trust (SPY) was unchanged on Tuesday while the Dow Industrials were a bit lower and the NYSE Composite was a bit higher.  In contrast on the NYSE there were 1924 stocks advancing and just 1075 declining Tuesday which was a sign of internal strength.

So far in 2017 the Powershares QQQ Trust (QQQ) has gained 3.38% versus just a 1.77% gain in the Spyder Trust (SPY).  In 2016 the QQQ came quite close to its yearly pivot levels as the high at $121.52 was close to the initial yearly resistance at $122.06 and the low early in the year at $93.80 was above the year  S1 support at $91.28.

The Yearly Pivot Table shows the actual price ranges as well as the pivot projection for 2016.  For 2017 the pivot stands at $111.27 with the initial yearly pivot resistance at $128.73.  These will be the key levels to watch and if the QQQ should surpass the R1 resistance then the focus would be on the R2 resistance at $138.99.

The daily chart of Powershares QQQ Trust (QQQ) shows that it has been testing the daily starc+ band for the past few days as it is well above the strongly rising 20 day EMA at $120.25. The QQQ dropped below its EMA at the end of the year.

  • The Nasdaq 100 advance/decline  line made a new high on Tuesday as it slighly surpassed the December high.
  • The A/D line is above the rising WMA with more important support now at line b.
  • There are upside targets for the QQQ in the $125-$126 area.

The Spyder Trust (SPY) formed a doji on Tuesday which is a sign of indecision and is quite close to its 20 day EMA at $225.78. The daily starc- band is at $224.65 with more important support at $222.73, line c.

  • The S&P 500 A/D line moved above its WMA on November 8th (point 1)  and stayed above it until the latter part of December.
  • The S&P 500 A/D line has not yet made a new high in 2017 (point 2) so it has been diverging from the December high.
  • A decline in the A/D line below support at line d and the late December low is needed to confirm the divergence.
  • A daily close above $228 will signal a move to the $230-$232 area.

What to do?  The intermediate term analysis for stocks is still clearly positive as is the daily analysis. A correction back to good chart and retracement support would not be surprising in the next few weeks. The recent positive technical signs on the health care, biotech and transportation sectors indicated they are becoming market leaders.

A Trading Lesson that focuses on the yearly pivot analysis for the key market tracking ETFs and the major sector ETFs will be sent out to new and existing subscribers of both the Viper ETF Report and the Viper Hot Stocks Report at the end of the week.

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The Week Ahead: Too Many Stocks & Too Much Holiday Cheer?

Posted by on Dec 24, 2016

The Week Ahead: Too Many Stocks & Too Much Holiday Cheer?

The stock market was quiet ahead of the Christmas holiday which is not surprising as many investors and traders started their holiday early.  For the 2nd week in a row the Spyder Trust (SPY) has formed a doji which is a sign of indecision.

Clearly the enthusiasm over the Trump rally has waned over the past two weeks and the number of bearish articles has picked up. The concerns over the market’s health have again focused on the arguments that stocks are too expensive, sentiment is too bullish and the bull market is too old.

It is not surprising that some are starting to acknowledge some potholes on the yellow brick road. It seems as though some of the proposed cabinet members are behind schedule in the vetting process. Many believe that uncertainty has limited the economic recovery over the past few years so talk about increasing the nuclear arsenal and heightening tensions with China are not reassuring.

The better than expected 3.5% reading on 3rd quarter GDP did not give stocks much of a boost but the continued improvement fits in nicely with the bullish post-election scenario. Most economists are not that convinced as the Wall Street Journal’s survey of economists is looking for an average GDP growth of 2.2% in 2017 and 2.3% in 2018. They are looking for inflation to run at 2.2% and then 2.4% in  2018 with only a 19% chance of a recession.

The most popular reason that some feel stocks can’t go higher is based on the P/E ratio. Of course the debate on which P/E ratio is more accurate has not slowed down since October when I featured this chart comparing the views of Robert Shiller and Jeremy Siegel.

The post-election rally has triggered another dire warning from Nobel prize winner Shiller who warns that valuations are now near levels seen just before the 1929 crash.

As a market technician I do not focus on the P/E or other fundamental data as long as the bull market is still intact. The P/E worries will be right at some point but I believe the technical studies will warn of a bear market well ahead of the P/E ratios as they did in 2000 and 2007.

I do pay attention to the P/E of the key sectors and industry groups as those that are perceived to be cheap often have the best gains once the technical indicators give the signal. In my October 22nd column ” Market Insights From Past Election Years” I pointed out that for the Dow Jones Financial Sector ($DJUSFN)  ” 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.”

The updated chart illustrates the close on October 21st (line 1) as $DJUSFN dropped to a low of 436.78 just before the election  and closed on Friday at 507.43 as it is up over 16% from the low.  The DJUSFN has been testing its weekly starc+ band for much of the past six weeks so a pulback would not be surprising. The completion of its long term trading range has major upside targets in the 540-560 area which is 10% above current levels.

In last week’s in-depth report on S&P 500 Sectors & Industries Forward P/Es from Yardeni Research has the following forward P/E for the S&P 500 sectors. Three sectors stand out with forward P/E well below the 17.2 forward P/E of the S&P 500. The financials, health care and telecommunication sector have P/E’s that range from 13.7 to 14.4.

In the report they also provide the forward P/E ratios of the industry groups that make up each of these sectors. Those with the lowest P/E include life and health insurance (10.4), diversified financial services (10), biotechnology (11.8) and health care facilities (10.9).

These industry groups are more likely to be some of the favorites of money managers and funds as they look for bargains the New Year.

Though the health care sector still looks negative basis the weekly technical studies it has reached strong support. Some of these lower P/E industry groups may turn positive before their underlying sectors. These are likely to be some good buy candidates for Viper ETF clients.

The Economy

Last week’s data on Existing Home and New Home Sales suggests a positive 1st quarter for the homebuilders.  New Home Sales were up 5.2% while Existing Home Sales also beat expectations.

Despite the strong GDP report, Durable Goods were down 4.6% and the Chicago Fed National Activity Index came in weaker than expected. The Leading Indicators were unchanged in November  which is not yet indicating strong growth in the first half of 2017.

On Friday Consumer Sentiment came in strong at 98.2 which was a bit better than the consensus estimate. The Consumer Confidence is out on Tuesday and the long-term chart shows a clear uptrend.   Retail Sales are still holding in positive territory but it needs to move through the long term resistance at line a, to signal a major breakout.

Also on Tuesday we get the S&P Corelogic Case-Shiller Housing Price Index, the Richmond Fed Manufacturing Index and Dallas Fed Manufacturing Survey. On Wednesday we have the Pending Home Sales followed on Friday by the Chicago PMI.

Market Wrap

The Dow Industrials failed to surpass the widely watched 20,000 area though it did have an intra-day high at 19,987 on Tuesday. All of the major averages were higher led by a 054% gain in the small cap Russell 2000 and 0.46% gains in the Dow Industrials and Utilities. The S&P 500 was up 0.25% and advancing stocks led the decliners 1815 to 1289.  On Friday the volume was the lowest since the 2014 holiday.

The seasonal trend does favor higher prices next week as the S&P has gained over 1% during the last five days of the year since 1928. The NYSE Composite formed a doji last week and it is still below the resistance from the 2015 high, line a.

The NYSE A/D line broke through its resistance, line b, a few weeks ago which is a bullish sign. It does favor an eventual breakout above the 2015 highs. The weekly A/D line is holding above its WMA which is rising. The daily NYSE A/D line made a new high last week as it was stronger than prices.

The daily chart of the Spyder Trust (SPY) shows a short-term consolidation pattern that could be setting the stage for another push to the upside before the end of the year. The daily starc+ band is at $228.66 with monthly pivot resistance at $230.31.

The rising 20 day EMA is at $224 and there is a band of much stronger resistance, line a, in the $218-$220.50 area. The daily S&P 500 A/D also shows a short term trading range and if the rising 20 day EMA is violated there is stronger support at line c.

The Nasdaq 100 and Russell 2000 A/D lines are still acting positive as they are well above their rising WMAs.

What to do?   The technical readings and strong seasonal tendencies allow for another push to the upside as we head into the New Year. This could push the Spyder Trust (SPY) 2-3% higher and move the Dow Industrials well above the 20,000 level.

If the stock market does move to further new highs then it is likely more vulnerable as we start off the New Year. Many investors have likely held off selling because they hope for more favorable tax treatment in 2017. Also they may realize that they spent too much over the holidays and may have too many stocks.

Should the SPY reach the $230 level a drop back to $220-222 would not be surprising which would be a correction of 3-4%. Given the strong signals from the weekly and monthly A/D lines such a correction should be a buying opportunity for both traders and investors.

The recent surge in bullishness has made investors and traders less cautious. Some are buying stocks before they bottom or are holding on to stocks after they have topped out.  Not all stocks go up even in a strong market.

For example new short positions in MarketAxess Holdings (MKTX) at $162.26 were recommended in last Monday’s Viper Hot Stocks Report . This was based on the prior week’s close and doji sell signal along with the negative readings from the relative performance analysis. It closed down 8% for the week and after an oversold bounce it can still go lower.

This illustrates the importance of doing a careful technical review of any stock or ETF before you take a position. Once the market does correct or consolidate investors who are looking at the intermediate term should favor well-diversified ETFs that have a low expense ratios.

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