The one-day market decline on the long awaited Fed rate hike was well supported even though the potential plan for three hikes in 2017 rattled a few investors. The market bulls are still clearly in charge with the financial media beating the drums with a fervor that has not been seen in some time.
Even though there is no reason to doubt the market’s rally right now anytime the financial press chants “no reason to sell” I do get nervous. Typically it would take a 3-5 day decline to change the tune of the headline driven financial press but without a correction the bullish commentary still dominates.
Clearly the market sentiment has seen a dramatic shift. In my column published last August “What’s Missing From This Bull Market?” I focused on the fact that throughout the bull market there had not been a period of investor euphoria. This goes back to the famous quote from legendary investor John Templeton that bull markets “die on euphoria.”
The psychology of a market cycle is nicely illustrated in the chart above and typically the euphoric phase is accompanied by greater individual participation in the stock market. The most recent data suggests that a large percentage is still not invested in stocks but the interest has clearly increased.
According to AAII the most recent survey of individual investors 44.7% are now bullish but only 23% were bullish before the election. The bearish % stands at 32.3% and is well above the extreme low in the 20% area. The professionals have also become much less bearish as the very high cash levels have dropped significantly in the past month.
It should be no surprise that the forecasts from the major Wall Street strategists have seen a major turn. Seasoned investors but not all columnists realize that these forecasts often go through dramtic changes during the year.
Frankly these forecasts do not play any role in my outlook and I often use them as a contrary indicator. In August I commented that “The new high in the major averages and leading action of the advance/decline lines has still not convinced everyone of the positive market outlook as Goldman Sachs advised their clients on August 1st to “avoid all stocks for the next three months”. They are also sticking with their year-end target for the S&P 500 at 2100 which is 3.7% below current levels.”
This table from the Wall Street Journal reveals their forecasts for 2017 and the high end at 2400 for the S&P 500 would imply just a 6.6% rise from current levels. If you want to learn more about the accuracy of their forecast I would suggest you read this excellent New York Times article by Jeff Sommer. In reviewing the strategist’s forecasts he quotes independent statistician Salil Mehta “It’s not easy to be as bad as they are.”
The post election rally is not unprecedented as the Wall Street Journal pointed out (Stocks’ Biggest Postelection Rally Ever) there have been “five other instances in which the Dow jumped at least 5% in a five-week period following a presidential election.”
The most recent example occurred in 1996 as the Dow Industrials rallied from 6081 on November 5th to a high of 6606 on November 26th which was a gain of 8.6%. This was followed by a fourteen-day correction of 6% before the Dow again turned higher.
By March 1997 the Dow had reached a high of 7158 which was a gain of 17.7% since the election. After dropping 11.7% in the next five weeks the Dow bottomed in April before rallying another 32% before it topped in August. From the close on Election Day to the close on August 6, 1997 the Dow rallied 35.8%.
It should be pointed out that in September 1997 the Dow had already broken out of an eight-month trading range, lines a and b. The upside target from this trading range was at 6600 which was exceeded in January.
As the Dow approaches 20,000 there have been some articles discussing upside targets for the Dow at 40,000. This view was promoted in 2000 in books by Harry Dent and David Elias as both suggested the Dow could go that high. Harry is known for his outside the box forecasts as he has incorrectly forecast several dramatic rallies and declines since 2000 in his many very popular books.
On CNBC last week, as well as on many other platforms, John Spallanzani from GFI discussed why the Dow could hit 40,000 in the next five years. It is the Republican control of both Congress and the Presidency that leads to this bullish forecast as the Dow is expected to gain 15% a year until it reaches 40,000.
The more important question for investors is whether they can benefit from these long-term forecasts? I would argue that they do more harm than good as I have found that too many investors and traders focus on the potential reward of every investment and not the risk.
Also the poor performance of hedge funds has reinforced my long held view that for most individuals basing your investment on a macro view of the global economy and markets is not a good idea. It is also the reason that I do not support those who want to force the Federal Reserve to stick to a pre-determined economic plan as opposed to adapting to the economy the Fed is facing. Each recession and economic recovery are different and cannot be defined by set rules.
Investors and even traders should concentrate on determining whether the economy is expanding or contracting as well as whether the S&P 500 is in a bull or bear market. As long as the economy is expanding and stocks are in a bull market investors should be in the stock market.
Since the spring of 2009 my stock market outlook has remained positive as my unique analysis of the advance/decline data has shown no negative signs as it did in 2007. During the same period my analysis of the economy has never indicated that we have dropped back into a recession. As many may recall in in 2010 and 2011 there were periods when many felt that a recession was inevitable.
In terms of price targets I only discuss price targets that are based on the charts or technical analysis. The current weekly chart of the Dow Industrials shows that the trading range, lines b and c, was completed in July. Using the width of this trading range one obtains an upside target for the Dow at 21,332, line a.
The similar trading range in the S&P 500, lines c and d, has upside targets at 2456. This is 8.5% above Friday’s close which is not an unreasonable target in 2017. The longer-term monthly chart shows the eighteen year trading range (lines a and b) that was completed in May 2013, point 1.
When there is an increase in bearish sentiment, as there was last summer, I have told investors to focus on the bullish nature of this breakout. The upper boundary of this range was 1576 and the lower end was at 666. Therefore the width of the formation was 910 points. This added to the breakout level of 1576 results in an upside target for the S&P 500 at 2486. It is likely significant that these two target levels derived from two different ranges are so close together.
The iShares Russell 2000 (IWM) is up 17.6% since the election as the markets are convinced that the small cap stocks will benefit the most from the Trump presidency. The monthly chart shows that a broad trading range, lines b and c, developed in 2015 and 2016.
The November close at $131.61 completed the trading range and Viper ETF traders bought on December 5th at $131.95. The completion of the monthly range has long-term targets at $159.91, line a, which is over 17% above current levels.
The monthly Russell A/D line broke through its resistance, line d, last summer. The A/D line made a new high in November and is on pace to make another new high in December. The weekly and daily A/D lines are also in solid up trends and show not clear signs yet of even a short-term top.
This analysis does not mean the Dow will not reach 40,000 but if it does there should be meaningful corrections along the way. This chart from dshort.com shows the eight meaningful corrections since the bear market low in 2009. During the market euphoria that occurred from the 1996 election until March 2000 high there were a number of market corrections including the 22% drop in 1998.
It will be important for investors to use technical analysis including relative performance and on-balance-volume (OBV) to target those ETFs and stocks that are leading the market higher. Over the past few weeks there has been a rotation into sectors that had been lagging the market.
There was a flood of economic data on Wednesday along with the FOMC announcement. The headline Retail Sales number came in below expectations at 0.1% as a drop in auto sales had a big impact. Industrial Production and Business Inventories were also lower than the consensus estimates.
The Philadelphia Fed Survey came in strong at 21.5 which was well above the consensus estimate of 10. The chart had formed higher lows over the past year, line a, prior to the recent surge. In the report “Manufacturers were much more optimistic about growth over the next six months.” The Empire State Manufacturing Survey was also strong and the flash PMI Manufacturing Index increased over the past month.
Builders are also quite bullish despite the increase in mortgage rates as the Housing Market Index rose to 70 from 63 the prior month. The volatile Housing Starts Friday dropped 18.7% in November but this is typically a wide-ranging data series.
On Monday we get the flash reading on PMI Services followed on Wednesday by the Existing Home Sales Index. The main data is on Thursday with Durable Goods, GDP, the Chicago Fed National Activity Index and Leading Indicators. Friday we have the New Home Sales and Consumer Sentiment reports.
Interest Rates & Commodities
The yield on the 10 Year T-Note continued to surge last week, closing at 2.597%. The next widely watched target is in the 3.00% area. Bonds are very oversold and the rise in yields has stretched the rubber band tight.
Crude oil closed higher but off Monday’s highs. The HPI did make a new high for the year. While several CNBC pundits say crude oil can’t overcome the $56 level the technical outlook suggest it can. Anytime someone in the financial media uses never or always I become skeptical.
Gold was crushed in reaction to the stronger dollar and looks ready to test the late 2015 lows.
The major averages made their highs Tuesday but most other than the Dow Industrials closed the week lower. The Dow Transports, which had led the market higher, closed down 2.5% followed by a 1.7% drop in the Russell 2000. The S&P 500 was down a fraction while the Dow Utilities were up 1.8%. For the first time in many weeks the declining stocks led the advancing ones by a 2-1 margin.
The weekly chart of the Spyder Trust (SPY) shows that a doji was formed last week. The doji low was $224.05 so a close this Friday below this level will trigger a doji sell signal. The chart shows a well-defined trading channel, lines a and b, as the SPY came close to the weekly starc+ band last week. It now stands at $228.94.
There is minor support now at 222.84 and the rising 20-day EMA with more important in the $220.50-$221 area. The 38.2% Fibonacci retracement support from the November 4th low is at $219.38. The weekly S&P 500 A/D line has turned lower but is well above its now rising WMA. There is major support at line c, which was former resistance.
The NYSE Composite came close to the 2015 high at 11,254 (line a) before it turned lower. The 20 day EMA and lower starc- band are now in the 11,000 area with further support at 11,908 which is 2% before Friday’s close.
The NYSE A/D line pulled back to its WMA on Wednesday before it turned higher. A drop below the WMA and the support at line c would make a more complex correction likely. A convincing drop below the early December lows would be a sign of more weakness. The weekly A/D line did make a new high with the close on 12/9.
What to do? The lower close last week increases the odds that we will see an overdue pullback. Many of the averages do not have to drop much before they reach good support. I would expect that even if there is not much of a pullback the sector rotation will occur.
There are a number of ETFs that have not participated in the post-election rally and they are now closer to more important support. Several of the more defensive sectors bottomed a few weeks ago and did perform well this week.
Those who are not in the market should start a dollar cost averaging program is the market continues to correct or starts to move sideways. Look for a well-diversified ETF that has a low expense ratio.
Viper ETF clients are long a number of different sector ETFs and have open orders to by several on a further pullback before the end of the year.
The Viper Hot Stocks Report recommends both long and short stock positions based on the weekly scans as well as the monthly indicators. There were an equal number of new buy and sell signals after last week which will be examined for new recommendations.
Each service is only $34.95 per month and includes regular trading lessons as well as the twice a week reports. New subscribers receive four of the most recent trading lessons and subscriptions can be cancelled anytime online.
As the euphoria in the stock market continues to build with each new high in the major averages . The extent of the rally and the fund flows suggest that some investors are now investing with little regard to risk.
Some of the professional media analysts were not exhibiting much caution even though a guest analyst suggested waiting to buy the the financial stocks like the regional banks. In the short period since the election it seems that many have thrown caution to the wind with a few analysts using those most dangerous words “this time is different.”
The rally has focused on the Russell 2000 and the financial sector. The last fifteen-day winning streak in the Russell 2000 occurred in February 1996, According to the Wall Street Journal the Russell 2000 was 2.4% higher after the long winning run in 1996 and was up 8.7% in the next three months. The gain in February 1996 was 6.1% much less than the current 12.7% gain.
The starc band analysis has had a good record of alerting investors and traders to price extremes in stocks, ETFs and commodities. The bands were developed by the late Manning Stoller who was a colleague for many years and he had great market insights.
These bands are based on adding or subtracting two times the average true range (ATR) from a moving average. Manning had determined that using 2 ATR would incorporate 92% of the price activity but if 3 ATR were used about 99% of the price activity would stay inside the bands.
When prices are above the stac+ band prices are in a high-risk buy or a low risk sell area. If prices are below the starc- band they are in a high-risk sell area or a low risk buy area. These bands are used extensively in both the Viper ETF Report and Viper Hot Stocks Report to indentify high or low risk buy or sell areas as well as to determine profit-taking levels.
Three weeks ago the Russell 2000 Index closed at the weekly starc+ band and for the past two week’s it has closed well above the 2XATR band (point 3). With Friday’s close at 1342 it is now just 1.3% below the 3XATR band (in blue) at 1360.
Since 2001 the 2XATR starc+ band has only been tested and exceeded one other time which was in May through early June of 2003. After the 2XATR was first reached (point 1) it was tested for the next two weeks before a 3.7% correction that lasted one week.
This was followed by a 14.7% rally that lasted three week as the 3XATR starc+ band was reached at point 2. The Russell 2000 traded sideways to lower for the next four weeks as it corrected over 6% before the uptrend resumed.
Clearly the Russell and the iShares Russell 2000 (IWM) are now in a high-risk buy area as using a stop under the 20 week EMA at $122.36 would mean a risk of 9%. The current analysis indicates that a 3-5% correction is very likely before the end of the year but it still may come from higher levels.
In the October 22nd column “Market Insights From Past Election Years” I discussed the bullish action of the DJ US Financial Sector (DJUSFN) and noted that “the RS line has turned up from its WMA consistent with a market leader.” The key level to watch was the resistance at 460 which was surpassed with the close at 472.13 on Friday November 11th.
For the past three weeks DJUSFN has closed above its weekly starc+ band as it has gained over 8% since 10/22. The last time this measure of the financial sector closed above its weekly starc+ band was in May of 2013 and six weeks later it had corrected over 7%.
The bank stocks have been one of the top performing financial industry groups since the election as the Dow Jones US Bank Index (DJUSBK) it is up 16.1%. The long term monthly chart shows that it is now trading above the monthly starc+ band and has reached long term resistance, line a, that goes back to 2000-2003.
The SPDR KBW Regional Banking ETF (KRE) has gained almost 19% since the election as it has closed above the weekly starc+ band for the past three weeks and is now just below the monthly starc+ band. The Viper ETF Investors sold their position last week at $51.86 for over a 23% profit.
The KRE closed a bit higher Friday at $52.30 and could even reach the $53-$54 area before there is a meaningful correction. It is likely to be even higher in next six months so I will be looking for a 3-5% correction as a new buying opportunity.
So should investors and traders view risk differently in the new Trump fueled market? I would argue that investors should consistently apply the same risk management approach even in unusually bullish or bearish times. It is important that the focus is on the risk not the reward of any investment or trade. If you are a patient and do not invest or trade emotionally you are less likely to buy the high and should have a lower risk.
The bullish sentiment has continued to expand as 49.9% are now bullish up 3.2% from the prior week while the bearish % has fallen 4.5% to just 22.1%. The chart shows that the bullish % has moved one full standard deviation above the mean but as I noted last weekend this is still not at an extreme level of bullishness and it often tops out well ahead of prices.
In general it was a good week for economic data as the Chicago Fed National Activity Index was still negative but did improve sharply from last month. Existing Home Sales were up 2% and Durable Goods jumped an impressive 4.8%. New home Sales were down 1.9% in October but up 17.8% on a yearly basis.
Consumer Sentiment also has rebounded to 93.8% which is up from last month’s reading of 91.6. This has broken the near term downtrend which is an encouraging sign. The flash reading on PMI Services also held firm from the prior month.
This week we have the Dallas Fed Manufacturing Survey with the 3rd quarter preliminary reading on GDP. The Consumer Sentiment is also out on Tuesday along with the S&P Corelogic Case-Shiller Housing Price Index.
On Wednesday we have the ADP Employment Report, Chicago PMI and the Pending Home Sales Index. Just ahead of the jobs report on Friday we have the ISM Manufacturing Index, the PMI Manufacturing Index, Construction Spending and the regular Thursday jobless claims.
It was another banner week for the stock market and finally the A/D numbers matched the strength of the averages as 2454 stocks were up and just 662 down. The Russell 2000, Dow Transportations and Dow Utilities all gained over 2%.
Basic materials were up 2.9% for the week, followed by 2.4% in the industrials, 2.3% for oil & gas and consumer services were 2.1% higher. The energy stocks held up well in Friday’s short session while crude oil reversed sharply and triggered a daily doji sell signal to close the week lower.
The NYSE Composite finally overcame the resistance at 10,750-800 with the weekly starc+ band at 11,023. There is quarterly pivot resistance at 11,239 with daily support and the 20-day EMA at 10,682. The weekly A/D line has now clearly moved above its WMA but is still below the September high. The daily A/D line (not shown) has broken the downtrend from the September highs.
The Spyder Trust (SPY) was up 1.38% last week and is now just below the weekly starc+ band at $223.52. The quarterly pivot resistance stands at $226.82. There is minor support at $220 with the rising 20 day EMA at $217.67.
Both the weekly and daily S&P 500 A/D lines have moved above the September highs which confirmed the price action. Last week the A/D line had just moved above its WMA which made this week’s close more important. The weekly OBV is very close to making a new high.
The Russell 2000 A/D line has moved well above the previous all time highs and has confirmed the price action. Neither the Nasdaq 100 or Dow Industrial A/D line has made new highs but they are above their weekly and daily WMAs.
What to do? Bond yields continued to rise last week as the yield on the 10 year T-Note rose to 2.372%, closing well above the weekly starc+ band for the third week in a row. Clearly the bond market has already priced in a December Fed rate hike and even more. A fair amount of the new money going into equity ETFs is coming from the bond market.
Though the market did not complete a short-term top last week which I thought was likely but a risk-focused approach is still best. For those on the sidelines it is hard to watch the market move higher and higher without chasing it. The market correction is likely to be even sharper if stocks move higher again this week. Those who are underinvested should look to start buying on the first sharp down day
There are still some ETFs that are just starting to join the party and I will have some new buy orders for Viper ETF clients on Monday.
The weekend scan for Viper Hot Stock traders revealed eleven stocks with new buy signals and as always I will also be reviewing last week’s scan to see if any stocks have moved to attractive buy levels.
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.
It is doubtful that anyone will forget last week for many years to come. The political and financial ramifications will have an impact for the next four years or more. Though it is way too early to guess what will happen it is doubtful than pollster will be one of the top ten career choices for new college graduates.
It was certainly perplexing week for the market but last week’s action is should influence stocks for the rest of the year. The corrective patterns in the A/D lines as we started the week suggested the bounce before the election did not mean that the correction was over but the post-election action has changed that view.
The futures markets conviction over a Clinton victory ended about 8:00-8:15 EDT as after trading as high as 2152.50 it closed at 2140.25. The selling was relentless for the next four hours as the S&P futures bottomed out at 12:15 AM as the S&P futures hit a low of 2028.50. At the lows the S&P futures were down 107 points or over 5%. Just over four hour later the futures were back above the 2100 level.
The fact that the selling was absorbed by the futures market overnight was a blessing for investors but not all traders. Those were long inverse ETFs or put options did not have the opportunity to reap the same gains as futures traders. If the futures had even been down 40-60 points when stocks opened at 9:30 AM Wednesday morning it would have been ugly.
It is likely that panic selling would have occurred as many widely held ETFs would have opened sharply lower taking many investors out of their positions near a short-term market low. This is why I feel investors really did dodge a bullet on last Wednesday’s open.
It could have been as bad as August 24th of 2015 when the Dow Industrials dropped 1000 points in early trading. The chart above from an SEC Report shows that the S&P futures were down slightly over 5% as the stock market opened. In just five minutes the futures were trading almost 7.5% lower and the SPY was trading down 7%.
The SPY had dropped 5.6% the previous week so the sharply lower opening added to investor’s pain but 10 minutes after the lows the losses had been cut in half. From the low on Monday August 24th at $177.63 the SPY rebounded to close the week at $194.03 as it was up slightly for the week.
It was not until early October (A Surprising Turn In Stocks This Week?) that the market internals indicated that a bottom was in place and that a buying opportunity was at hand. There are some ways that once can identify a panic low and one of my favorite techniques is to use the starc bands.
This weekly chart of the continuous E-mini S&P 500 contract reveals that since 2014 prices have only dropped below the starc- band five times. The long tail (the bar under the candle body) is an indication of demand at lower levels. In early February of 2014 (point 1) the futures had a low of 1732 on Wednesday and then closed the week at 1793 as the NYSE A/D line moved above its WMA.
There was a similar price extreme in the middle of October 2014 (point 2). In this instance the S&P futures dropped in part to a panic in the bond market. The futures had a low of 1813 on Wednesday October 15th before the futures rallied nicely to close the week higher at 1880. Three days later the daily NYSE A/D line turned positive as it broke through its downtrend (October 17th Buy Signals Get Stronger).
The weekly starc- band was also slightly broken in January of this year (point 4). The weekly bar also shows a long tail as the S&P futures bottomed on Wednesday January 20th before also closing the week higher. These lows were slightly broken in February but the starc- band was not reached. The market internals and sentiment signaled on February 23rd that a bottom was in place.
Of course just because the futures drop below the weekly starc- bands does not mean that the market must have completed a bottom. As discussed in the Market Wrap section even though some work needs to be new buy signals are looking more likely.
The powerful gains last week confirmed the bullish outlook for two ETFs that were recently recommended to Viper ETF clients. The SPDR KBW Regional Banking (KRE) was up 15% this week as the RS analysis turned positive in early October (line b) signaling it was a market leader. Both the RS and on-balance-volume (OBV) have surged higher and have confirmed the recent highs.
Vanguard Financial ETF (VFH) also rallied sharply this week from $49.52 to just above $55. The RS completed its bottom on October 19th as the resistance at line c, was surpassed. The daily OBV has been lagging but the weekly OBV is acting very strong.
Both of these ETFs as well as others are trading above their starc+ bands and this makes a pullback or some consolidation likely in the next week. There are several sectors that appear to be have bottomed and a pullback next week should be a buying opportunity.
The main economic data last week was Consumer Sentiment as the mid-month reading rose to 91.6 which was up nicely from last month’s reading of 87.2%.
The calendar this week starts with Retail Sales, Empire State manufacturing Survey and Business Inventories on Tuesday. This will be followed by the PPI, Industrials Production and the Housing Market Index.
On Thursday we have the Consumer Price Index, Housing Starts and the Philadelphia Business Outlook Survey. The week concludes with the Leading Indicators and the Kansas City Manufacturing Index.
Interest Rates & Commodities
The rise in interest rates was even more dramatic than the stock market rally as the yield on the 10 -Year T-Note rose from 1.783% to 2.117%. The rally has been much stronger than I expected as I thought it would stall in the 1.90-2.00% area. Given this rise in yields a Fed rate rise in December appears to have already been approved by the bond market.
The yield has closed well above both the daily and weekly starc+ bands which is a sign that the rise in yields is likely to stall in the coming weeks. On the monthly yield chart I have highlighted the most recent sharp rise in yields that occurred in the summer of 2013.
In 2013 yields rose from 1.675 in April to a high of 3.026% in December 2013. The monthly chart shows next resistance in the 2.35% to 2.47% area and the long-term downtrend, line a. A pullback in yields to the 2.00% area would not be surprising before the end of the year.
The gold market has gotten much attention recently as there are signs that inflation is picking up. The SPDR Gold Trust (GLD) rallied up to the resistance in the $125 area (line a) in early November before prices turned lower. Prices are now close to the 50% retracement support at $115.55 with the more important 61.8% support at $111.86.
Crude oil prices have remained under pressure and while the daily indicators are negative they have a chance to turn positive this week. This could be enough to complete the daily bottom formations in the energy ETFs.
Even though the major averages posted impressive gains, 10.2% for the small cap Russell 2000 and 5.4% for the Dow Industrials the weekly A/D numbers were disappointing. There were 1781 advancing stocks and 1355 declining last week. It was another strong week for the Dow Transports as they gained 6.2% which was quite a bit better than the 3.8% gain in the S&P 500.
The financial stocks led the market higher gaining 7.8% and they were closely followed by a 7% gain in the industrial stocks. The Clinton defeat also spurred a sharp rally in the health care sector as it was up 6.1%.
According to AII the number of bullish investors surged last week to 38.9% a rise of 15.3%. Most of these came from the neutral camp as the bearish % dropped just 5% to 29.3%. The widely watched Fear & Greed Index which was at 14 last week (extreme fear) closed neutral at 48.
The daily advance/decline lines are not yet in agreement over the recent rally. The NYSE Composite closed back above its quarterly pivot as did the SPY, QQQ, DIA and IWM. This reversed the negative signals from the past few weeks.
The A/D lines look the strongest on the iShares Russell 2000 (IWM) as it closed at new all time highs and well above the September highs, line a. The IWM closed well above its daily starc+ band with the weekly now at $128.27. There is quarterly pivot resistance at $129.29 and then $134.37. The rising 20 day EMA is at $120.61.
The daily Russell A/D line has surged above its downtrend, line b, and is now in an uptrend. The A/D line is still well below the September highs. The Russell 2000 A/D line is the only weekly A/D line that has moved above its WMA. The daily and weekly OBV are now both positive but neither has made a new high with prices.
The Spyder Trust (SPY) approached the previous highs at $218.51, line a, but was unable to break through last week. There is initial support now at $214.32 and the quarterly pivot with the rising 20-day EMA at $213.30. The lower boundary of the recent trading range, line b, is now at $211.30.
The S&P 500 A/D line has moved well above its WMA but is still below the downtrend line c, which needs to be overcome to signal that the correction is over. The daily A/D line is above its WMA but the weekly is not. The daily OBV just reached its downtrend, line d. The weekly OBV (not shown) has reversed back above its WMA which is positive.
The big tech stocks declined last week as they were sold over concerns they would underperform in a Trump administration. They were also likely sold to raise cash to buy the financial and industrial stocks. I do not expect this to last as there are number of tech stocks that have shown up on the weekly Viper Hot Stocks buy list.
What to do? The sharper correction I thought was possible last week was over in just a few hours. It continues to be a tough market for those on the short side as only nimble futures traders were able to bank outstanding gains on the market’s sharp drop. Viper ETF traders were stopped out of their positions in the Direxion Daily Small Cap (TZA) for over an 8% profit before the election. Those who had bought the ProShares UltraShort S&P500 (SDS) later were stopped out with a 0.8% loss.
The sharp drop in the bond market last week likely has some bond market investors worried and this is likely to continue as yields move even higher. The Vanguard Total Bond Market Index Adm (VBTLX) has over $161 billion in assets and it lost 2% last week. Other bond funds with a longer maturity likely did even worse and this could provide an unpleasant surprise in some year-end statements.
The daily technical studies have improved more quickly than I thought was possible. Even though all the A/D lines have not moved out of the corrective mode I think this is looking more likely. However as the market moves higher it will be important that the technical studies start to lead prices higher.
It does look as there will be some good trading opportunities in the last six weeks of the year in both ETFs and stocks.
Viper ETF clients are long a number of different sector ETFs and have open orders to by several on a pullback which could occur this week.
The Viper Hot Stocks Report recommends both long and short stock positions based on the weekly scans as well as the monthly indicators. There were a large number of new buy signals after last week so I will be looking to cover remaining short positions and add more long positions.
Each service is only $34.95 per month and includes regular trading lessons as well as the twice a week reports. New subscribers receive four of the most recent trading lesson and subscriptions can be cancelled anytime on line.
The stock market moved sideways for most of last week with the heaviest selling on Wednesday. Finally on Friday we got Janet Yellen’s long awaited comments from Jackson Hole where she said “the case for raising rates has strengthened in recent months.”
This did little to change the already low expectations for a rate hike in September but then Fed Vice Chairman Stanley Fischer hinted on CNBC that a rate hike was still possible next month. The S&P futures reversed course on his comments as the futures dropped 20 points.
This increases the focus on the September 20-21 FOMC meeting which makes it more likely that it will be tough three weeks for investors and traders. It does not help that we are entering a seasonally weak period where an increase in market noise can play a larger role.
The recent tight ranges and low volume does make the market more vulnerable to wide swings. This low volatility is evident on this Bloomberg chart as there has been only one day with a 0.80% range since mid-July. In the article they commented that “the market is locked in its tightest trading range since the end of 1965.” ( I took a look at the chart of the time period and the S&P 500 peaked out early in 1966 and then dropped over 20%)
The volatility is likely to be different in September as on Friday the S&P futures dropped below the lows of the past fourteen days. The stock market rallied Friday afternoon and the Spyder Trust (SPY) closed just barely above the doji low of two weeks ago. Therefore a weekly doji sell signal was not triggered but it could be next week if SPY closes below $217.23. As I discuss in the Market Wrap section the A/D lines have not yet moved into the corrective mode.
Many are wondering if we do get a market correction in the next few weeks how far might the S&P 500 or SPY fall? The fact that the 20-week EMA at $213.32 is still rising strongly is a healthy sign. It does not rule out a drop below the EMA as part of a correction in the major trend. It would take more time and a deeper correction before the SPY could complete a major top. The 20-week EMA is now 1.8% below Friday’s close.
The weekly S&P 500 A/D line has been flattening out after rising strongly since February (section b). It also could correct back to its WMA but it shows no hint yet of topping out. The A/D line is still clearly on the February buy signal. The recent action shows some similarities to early 2013 (chart on right) as there was also a strong six-month rally before there was a meaningful correction. From early January through the middle of June 2013 the SPY stayed above its strongly rising EMA.
In 2013 the SPY corrected for five weeks as it dropped below the 20 week EMA for two weeks before the market again turned higher. The selling in the stock market increased in late June (point d) after Fed Chairman Ben Bernanke commented that the bond-buying program could be stopped by the end of the year. This pullback turned out to be a great buying opportunity.
The weekly A/D line was also very strong in 2013 as it stayed well above its sharply rising WMA (section c). The A/D line turned down the week SPY made its high and over the next five weeks it dropped close to its rising WMA. The weekly OBV did not break down during the correction as it only moved slightly below its WMA. From the high to the low the SPY declined 6.4%.
The SPY currently has weekly support from early June at $211-$212 with further at $209 to $210. A decline equal to what occurred in 2013 would take the SPY to the $205.60-$207 area.
The comments from Fischer and other Fed officials will stimulate more debate next week and in the past few years these periods have often increased the investor uncertainty and have dampened their enthusiasm for stocks. According to AAII individual investors became more cautious last week as the bullish % dropped 6.1% to 29.4% and 29.6% are bearish.
For the past month I have suggested that investors trim the weak stocks , ETFs or funds from their portfolios. This process will be much more difficult if the market does correct further. I would also suggest that investors tune out the financial TV media until after the next FOMC meeting. My concern is that the endless Fed banter will cause some to change their investment plan at just the wrong time.
Maybe I am alone in being irritated with and frustrated by the endless parade of analysts discussing if the FOMC will act or whether they should. There are quite a few traders who seem to have a strong opinion that the Fed should raise rates now. Apparently they think they know what is best for the economy even though many real economists are not that sure.
There are also quite a few elected representatives who want the Federal Reserve to follow set rules in the future. Anyone who studies the economic history going back to the early 1900’s realizes that no two recessions are really the same. One cannot recover from a recession by following set rules and clearly the severity of the last recession caused more structural damage than any economic downturn since the Great Recession. It is not surprising that Janet Yellen is now considering a change in the Fed’s inflation guidelines.
Last week I discussed the feared bond market bubble where I stressed my view that if interest rates do turn higher there should be plenty of warning from the technical studies. Though the month is not over yet it does seem as though rates will close higher in August. As I noted last week the weekly MACD is positive but the monthly MACD still looks weak. The monthly downtrend, line b, is well above the market at 2.00%, line a.
The yield on the 10 Year Yield note rose from 2.00% to 3.00% between May and December of 2013 2013. This turn was signaled technically at the end of May as the weekly yield chart completed a reverse head and shoulders bottom formation by moving through resistance at line a. The positive MACD in 2013 was in agreement with the weekly analysis.
Through the daily and weekly monitoring of the bond market and the key ETFs there should be clear evidence when the bond market turns the corner.
The technical outlook for the Dax Index has improved over the past few weeks as the downtrend from the 2015 highs, line a, has been decisively broken. This was consistent with improving economic data from the Euro zone countries. This suggests that if these markets do correct with the US market the Dax could pull back to the 20 week EMA in the 10,000 area which may create a good buying opportunity.
The expected market correction should create some good opportunities in both the index tracking ETFs as well as some of the key sectors. The weekly chart of the DJ US Technology Index looks especially interesting. The recent weekly dojis near the weekly starc+ bands does favor a pullback over the near term. However it is more important that the major resistance at line a, was overcome in July. It is now important support.
The breakout was confirmed by a move in the on-balance-volume (OBV) through the long-term downtrend, line b. The relative performance has also completed its weekly bottom formation as the resistance at line c was overcome. For Viper ETF investors and traders this should create some new buying opportunities.
Over the past few weeks my scans of the Nasdaq 100 and IBD top 50 stocks have revealed a majority of new sell signals. Subscribers of the Viper Hot Stocks Report are now holding a majority of short positions but a correction should create some excellent buying opportunities in those stocks which have become the new market leaders.
Last week’s Chicago Fed National Activity Index was stronger than expected while the Richmond Fed Manufacturing Index was weaker. The manufacturing sector continues to be a concern as the flash reading on the PMI Manufacturing at 52.1 was a bit weaker than expected. The focus this week will be on Wednesday’s Chicago PMI as well as Thursday’s ISM and PMI Manufacturing indices.
New Home Sales were very strong last week but due to low inventories the Existing Home Sales were down. This week we get the S&P Case-Shiller Housing Price Index on Tuesday and the Pending Home Sales Index on Wednesday.
Last week’s Durable goods report showed a healthy 4.4% increase but the preliminary reading on 2nd quarter GDP came in at 1.1% which was weaker than the advance reading. The chart of GDP does show a concerning downward trend in the yearly data while some of the Feds own models forecast a more healthy GDP in the 3rd quarter. Consumer Sentiment at 89.8 was weaker than the expected 90.7 but the internal numbers did reflect optimism over the job outlook.
As this week progresses the focus will be on Friday’s jobs report as economist speculate that an increase of 200,00 jobs or more will increase the odds of a rate hike by the Fed.
Interest Rates & Commodities
Crude oil rebounded on Friday but still closed the week lower. In Friday’s technical review of the crude oil market “Another Wrong-Way Crude Oil Trade” I demonstrated how technical analysis, unlike the fundamentals, can give you a unique perspective on crude oil.
The careful monitoring of the open interest (the number of futures contract outstanding) through the Herrick Payoff Index can help you determine when you should be buying or selling. The daily studies from Friday’s article did improve with Friday’s higher close.
The gold miners were hit hard last week as the gold futures dropped $20. This makes a further decline likely but the gold miners are likely to drop further with next good support for GDX in the $24 area.
The Dow Utilities and Transports led the market lower last week as they dropped 2.4% and 1.3% respectively. The S&P 500 lost just under 0.70% while the small cap Russell 2000 was up slightly for the week. There were 1413 stocks advancing and 1701 declining with about the same number of new weekly highs as the prior week.
Only the financial stocks were higher last week as they managed a 0.38% gain while the technology and industrial stocks were a bit lower. Consumer goods were down 0.63% while the consumer services lost 1.18%. The furor over Mylan and the cost of their EpiPens hit the health care stocks as they were down 1.58%.
In an interesting Barron’s article Mark Hulbert pointed out that Hulbert Nasdaq Newsletter Sentiment Index stands at 80.6% and he commented that it was “higher than the highest level to which the HNNSI rose at the tops of the last four bull markets.”
After the market dropped on the Brexit vote it hit a low of -55.56% which turned out to be an excellent buying opportunity. I think a 2-3% drop in the Nasdaq would lower these numbers significantly.
The daily chart of the NYSE composite shows the wider range on Friday but it is still above the support, line a, in the 10,600-700 area. A break below this level could signal a decline to the quarterly pivot in the 10,350 area. A strong close above 10,900 is needed to return the focus on the upside.
The NYSE A/D line has dropped back to its still rising WMA but is still above it. A decisive break is needed to suggest a deeper correction with more important support at the August low, line b. The McClellan oscillator has been declining since mid-July and is already slightly oversold at -104.
One of the bright spots is the iShares Russell 2000 (IWM) as it bounced from the 20 day EMA on Friday. It is still in the upward sloping trading channel, lines a and b. The daily starc+ band and near term resistance is in the $125-$126 area.
There is good support initially in the $121 area with further at $119 which was the August low. The Russell 2000 A/D line made a new high early last week as it is still well above its rising WMA and the support at line c. The A/D line has additional support at the August low with major at line c. The OBV is testing its WMA but is still barely positive.
The daily relative performance analysis indicates that the IWM and the PowerShares QQQ Trust (QQQ) are both acting stronger than the S&P 500. The QQQ has first strong support in the $114 area which if broken could signal a drop to the $110-$111 area.
What to do? The increase in the market’s ranges last week may be warning of a further decline but the A/D lines have not moved into the corrective mode. Still the market risk seems high given the low volatility, concerns over a possible rate hike and a job report on Friday.
I continue to recommend that investors actively look at their portfolio to see if they have any weak holdings. If the market does start to correct those weak holdings are likely to decline more than the overall market.
For investors since a 5% decline is possible in the SPY you will need to decide whether you want to ride out a correction or sell on strength and look to re-buy lower. Though September could be a rough month there is likely to be a great buying opportunity for a stock market rally into early 2017 as there are no signs of a recession.
If you like Tom’s analysis and want specific entry/exit advice on ETFs you might consider the Viper ETF Report which is just $34.95 per month and can be cancelled at any time..
Most experienced commodity traders know that crude oil is one of the more volatile commodity markets where the gains as well as the risks are high. Having followed the crude oil market for thirty years I am still amazed how many try to trade this market based on fundamental analysis. Over the years through my past crude oil training sessions in Singapore and London I have made a number of converts.
This week the new head of one of the oldest commodity trading firms recommended shorting crude oil at $50-$55 according to Bloomberg based on bearish fundamentals. Those who follow the crude oil market may remember the negative headlines on crude oil as prices dropped in early 2016. The decline was based on the perceived weak demand, concerns over the economy and a rising trend in oil rig counts.
This data is the focus of the major financial news networks. In early January as crude oil prices were collapsing a Barclay’s commodity analyst commented to CNN that “The fundamental situation for oil markets is much worse than previously thought.” The sharp slide was due in part to small speculators dumping long positions. As was also the case during the July decline many jumped on the short side of the market based on these bearish forecasts.
Just a week later on January 21st I pointed out in “Time To Squeeze The Short Oil Speculators?” my analysis of the open interest (the number of crude oil contracts outstanding) suggested those on the short side were about to get squeezed. As it turned out crude oil made its low on January 20th.
Though many have maintained an overall bearish outlook on crude oil prices in 2016, the energy ETFs like the Energy Select Sector SPDR Fund (XLE) and SPDR S&P Oil & Gas Exploration & Production ETF (XOP) have outperformed the Spyder Trust (SPY) YTD by 10-15%.
As crude oil dropped below $40 in early August several analysts were calling for a drop to $35 or lower based on their negative fundamental analysis. On August 3rd, Zacks Equity Research even advised shorting oil and the energy ETFs (Oil in Bear Territory: Short Oil & Energy ETFs)
As was the case in January the technical outlook was much different in early August. A look at the weekly analysis will illustrate why the $50-$55 level is so important.
- The weekly chart shows the doji low in early August and the key resistance in the $51 area, line a.
- A weekly close above this level would complete a reverse head and shoulders bottom formation as the August low may represent the left shoulder.
- The upside target from this formation is in the $75-$80 area.
- The Herrick Payoff Index (HPI) which uses volume, open interest and prices has been diverging from prices since 2015, line d.
- The HPI also formed a short-term divergence early in the year that was confirmed by the move above its WMA and the downtrend, line c.
- On the July drop the HPI dropped back below the zero line but moved back into positive territory just after the August lows.
The daily chart of the October crude oil contract shows the thirteen day rally from $40 to $49.36 which thoroughly confused the media and likely added to the mounting hedge fund losses.
- The daily HPI crossed back above its WMA on August 4th which was two days after the low.
- The downtrend in the HPI, line e, was broken as crude consolidated for two days before it accelerated to the upside.
- The HPI has just pulled back to its WMA suggesting that the recent pullback may already be over.
- The plot of the open interest shows an increase of almost 150,000 contracts from July 22nd to August 11th.
- The open interest has now dropped below the July lows, line f, as many of those new short positions have likely been forced to cover.
What to do? There were signs on Thursday August 18th that crude oil and the energy ETFs were close to a short term top. In the Viper ETF Report I follow the Energy Select Sector SPDR Fund (XLE), SPDR S&P Oil & Gas Exploration & Production ETF (XOP), Vanguard Energy ETF (VDE), the VanEck Vectors Oil Services ETF (OIH) and United States Oil Fund (USO).
In addition to my analysis of crude oil I use the relative performance of these ETFs to the Spyder Trust (SPY) along with the on-balance-volume (OBV) to determine when to buy and sell. Traders were long XOP from July 28th and took short term profits a week ago.
The bearish fundamental outlook and the recent shorting advice should be enough to push crude oil prices above key resistance and complete the major bottom formation. For serious crude oil traders I do a three hour class on using the HPI if you are interested email me at firstname.lastname@example.org for more information.
The eight-day $120 rally in gold in reaction to the Brexit vote cleaned out those who remained on the short side and caused a new flood of buying as the long side of the gold market became even more crowded
As I pointed out on July 9th “The latest data from the CFTC shows that the long positions of money managers have made another new high even though margins were recently raised. In my experience this is a dangerous combination and I continue to think the long side is risky now.”
In trading Wednesday gold futures are down $14but many are confident the rally from the early 2016 lows is not over yet. The December Comex gold contract has dropped $60 per ounce from the July 7th high as even the events in Turkey could not interrupt the decline.
In over 30 years of analyzing the commodity markets I have paid particular attention to the open interest in order to identify both long and short-term turning points. This open interest analysis in January “Time To Squeeze The Short Oil Speculators?” indicated that the four-month slide in crude oil prices was likely to reverse. Crude oil completed its bottom just a few weeks later.
The number of long gold contracts held by money managers only dropped 3% in the latest period as their long position represents 33.4% of the open interest. Since late 2015 the number of long contracts held by money managers has surged 220,000 contracts. This suggests that more longs will be liquidated before the bullish sentiment has been significantly reduced.
So what do the monthly, weekly and daily charts say about the outlook for gold futures?
The monthly chart of gold futures shows that the futures formed a doji in December 2015 and then triggered a buy signal with the January close. (Chart is updated through 7/19)
- The monthly downtrend from the 2011 and 2012 highs has now been reached.
- Currently the gold futures are trading near the month’s low so the July close will need to be viewed in terms of the monthly open at $1324 to see if another doji has formed.
- There is monthly support at $1220 which corresponds to the 20 month EMA.
- Since prices are currently slightly higher for the month the OBV is slightly above its WMA but it has been weak on the rally.
- The Herrick Payoff Index (HPI), which uses volume, open interest and prices is showing the best strength since 2009.
- The HPI moved above the zero line at the end of February, point 1 and is still clearly positive.
- The WMA of the HPI could move above its WMA in July for the first time since late 2013.
The weekly chart shows last week’s reversal as the close was well below the prior week’s low. There is first good support in the $1295-$1305 area with the quarterly pivot at $1294. (Chart is updated through 7/19)
- The rising 20-week EMA is at $1272 with the uptrend in the $1240 area.
- The weekly starc- band and the quarterly pivot support are in the $1230 area.
- The weekly OBV only moved above its WMA four weeks ago as it made new lows in late May even though prices were moving higher.
- The OBV is still well below its long-term downtrend, line d, that goes back to early 2015.
- The weekly HPI moved above its WMA and the zero line at the end of January which was bullish.
- The HPI has been lagging prices since early June as it has formed a significant bearish divergence, line e.
- A decline in the HPI below the previous low and the zero line will confirm the negative divergence.
The daily chart of the December 2016 Comex gold contract is updated through Tuesday July 19, 2016. Therefore it does not reflect the $14 drop on Wednesday as December gold is currently trading below $1326.
- The daily starc- band is at $1299 while the 38.2% Fibonacci support from the December 2015 low is at $1256.50. The daily uptrend, line a, is in the $1250 area.
- The 50% support is at $1217.40 and it should hold on a correction as it is likely to terminate between the 38.2% and 50% support levels.
- The daily OBV has formed lower highs since last October as it has diverged from prices.
- The OBV dropped below its WMA on July 12th and this weakness was confirmed by the break of the uptrend, line c, late last week.
- The daily HPI formed a negative divergence, line d, at the recent highs.
- The violation of the support at line d generated a further sell signal.
- There is initial resistance now in the $1235-$1240 area.
What it Means: As the charts indicate the monthly, weekly and daily technical studies looked negative before the drop on Wednesday. Vipers ETF client have been on the sidelines as I became skeptical of the rally in June. I do think that the current correction is likely to be an excellent buying opportunity consistent with the bullish monthly indicators. I will be monitoring the weekly and daily technical studies for signs of a turn.
The Market Vectors Gold Miners (GDX) is down over 4% at $28.40 early Wednesday and has first strong chart and retracement support in the $23.50-$25 area. The SPDR Gold Trust (GLD) is down over 1% at $125.82 and has next good support in the $123-$124 area. The 38.2% support at $119.19 may be tested on the decline.
Those who are long have a tough decision as to whether you should sell now or try to ride out the correction. I would expect the decline to last a few more weeks at least. It typically takes some time to reverse such high bullish sentiment.