Could A Geometric Shape Save The Bulls?

April 1, 2015

Earnings Concerning For Bulls

In the markets, everything matters. Common sense tells us that stocks in the long run are tied to corporate earnings. Therefore, it is not particularly surprising that stocks have been going nowhere fast in recent months given the recent negative slant on earnings expectations. From CNBC:

Analysts are widely expecting S&P 500 companies to post their first year-over-year decline since the third quarter of 2012. U.S. markets struggled in the first quarter as investors worry over the impact of falling oil prices on overall earnings and the effect of a strong dollar on multinational companies, whose products are more expensive in foreign markets when the greenback firms up.

Bullish Door Not Closed Yet

With respect to earnings, the easy thing for investors to do is to extrapolate the recent bearish trend several months down the road. While earnings reports may meet bearish expectations, it is also possible that future guidance comes in above low expectations. Is there any support for the “things could turn out better than expected” scenario? Yes, one example comes from the easy to understand triangle formation shown on the weekly chart of the NYSE Composite Stock Index below.

Triangles Are A Reflection Of Conviction

Points A, B, C, and D in the chart below show a series of higher lows. The higher lows tell us that buying conviction has exceeded selling conviction at higher and higher levels in recent months. Another way to visualize the formation of the triangle is that dip buyers have been less and less patient since the October 2014 low. The higher lows are the good news for the bulls. The bad news is that based on numerous concerns, including earnings and the Fed, buying conviction has not been strong enough to exceed the “cap” (see orange line below).

What Does History Tell Us?

The formal name of the pattern above is an “ascending triangle”. According to Investopedia:

An ascending triangle is generally considered to be a continuation pattern, meaning that it is usually found amid a period of consolidation within an uptrend. Once the breakout occurs, buyers will aggressively send the price of the asset higher, usually on high volume. The most common price target is generally set to be equal to the entry price plus the vertical height of the triangle.

All patterns speak to probabilities, rather than certainties. Is it possible the bears seize the day in the coming weeks and stocks experience a correction? Sure, it is possible. Even if the bearish scenario plays out, the charts above can still assist us by giving us a reference point to spot a lower low.

A Bullish Bias, But Momentum A Big Concern

A reader of our recent posts may have a fair argument along the lines of “you clearly have a bullish bias”. The bias is the market’s and has nothing to do with our personal opinions at CCM. The following statement is factual…”the stock market has a bullish bias”. How do we know that? The hard data/facts still side with the bulls. The series of higher lows since the October 2014 low is observable…and it also leans bullish until the chart morphs into a series of lower lows and lower highs. While the weight of the evidence still sides with the bulls, a portion of the evidence is screaming “slowing momentum…be open to lower lows and a correction”. This video clip puts some additional context around some observable changes that would increase our concerns about the stock market.

Triangle image by pbemjestes via Flickr.

What Is Market Breadth Telling Us About Bear Market Risk?

March 31, 2015

Why Is Market Breadth Relevant?

According to Investopedia, market breadth is:

A mathematical formula that uses advancing and declining issues to calculate the amount of participation in the movement of the stock market. By evaluating how many stocks are increasing or decreasing in price…, breadth indicators can show whether overall market sentiment is bullish (positive market breadth) or bearish (negative market breadth). Investors can also use breadth indicators to evaluate the behavior of a particular industry or sector, or to analyze the magnitude of a rally or retreat.

Breadth’s Warning In 1999-2000

While “mathematical formula” can sound complex, common sense tells us that if more stocks are making new lows than stocks making new highs, the major stock market indexes are more vulnerable to a sell-off. For example, market breadth started waving yellow flags well before the S&P 500 peaked in March 2000. In the charts that follow, the breadth indicator is shown on top and the S&P 500 is shown on the bottom for reference purposes.

A Lower High In 2007

Was market breadth helpful before the waterfall declines in 2008? Yes, market breadth made a lower high as the S&P 500 made a higher high in October 2007 (see chart below). The lower high told us fewer and fewer stocks were participating in the push to new highs in late 2007.

2015: A Lower High In Breadth?

The chart below shows the same breadth indicator in 2015 (on the same timeframe with the same settings as the 2000 and 2007 charts above). Rather than siding with the bearish case for stocks, the recent higher high in breadth represents a “bullish divergence” relative to the lower high in the S&P 500 Index. The chart below is as of 10:58 am EDT on Tuesday, March 31, 2015.

What Is Breadth Telling Us?

Is market breadth the silver bullet of market timing? Absolutely not, which is why our market model uses numerous inputs to monitor the market’s risk-reward profile. The recent higher high in breadth tells us the odds of a new bear market in stocks kicking off in the coming weeks are lower than some may believe. However, a market correction scenario, where stocks drop and then push to new highs, cannot be taken off the probability table. One important distinction between a correction and a bear market is that a correction is followed by a higher high in stocks, a feature that does not come with the bear market package.

Ratios Align With Breadth

Is there other “keep an open mind about bullish outcomes” evidence that aligns with the read from market breadth? Yes, this video clip covers numerous risk ratios that have not rolled over in a “risk-off” manner. As always, if the evidence begins to side with the bears, it is important that we evaluate the hard data with an unbiased and open mind.

Stocks: Lessons From 1994

March 30, 2015

Consumer Spending Hits Soft Patch

Economic data, like the stock market, has been erratic in recent months. The “good data followed by weak data” pattern still seems to be in place. The U.S. economy recently posted the best quarterly results since 2006, but the latest read on consumer spending kept expectations in check by coming in below expectations. From Bloomberg:

“Consumer spending is looking soft here, some of it was the weather effect,” Tom Porcelli, chief U.S. economist at RBC Capital Markets LLC in New York, the top spending forecaster over the past two years, according to data compiled by Bloomberg. Consumption “will come back in the second quarter.”

Sideways Markets - The Bad News

Markets that trade within a range, or consolidate, are a reflection of a fairly even battle between economic bulls and economic bears. The tweet below from last week provides a familiar reference point for the stock market’s current run of consolidation.

Sideways markets are difficult and frustrating for stock investors; that is the bad news. The chart below shows a period in 1994 and 1995 when the S&P 500 made little-to-no progress for 12 months.

Sideways Markets - The Good News

The good news is the longer the period of uncertainty lasts, the higher the probability that a big move will follow. In the 1995 case, the big move was up. Investors that stuck to their discipline during the 12 months of frustration above were rewarded with a very impressive gain in the S&P 500 (see chart below).

Investment Implications - The Weight Of The Evidence

If you have a systematic approach to the markets, as we do with our market model, the importance of sticking to your discipline during frustrating periods cannot be overstated. This week’s stock market video acknowledges vulnerable momentum, but also highlights some key risk ratios that continue to side with the “keep an open mind about stock market upside” case.

After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.



As long as the S&P 500 can hold above 2,039, we will continue to be patient with a still-equity-heavy allocation. With a monthly labor report coming Friday, we will continue to monitor the hard data with a flexible and open mind.

Bullish Case vs. Bearish Case

March 27, 2015

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Risk Management Contingency Plans

March 26, 2015

As noted on March 24, the stock market has been in a volatile sideways pattern for nine months.

Our approach is concerned with being properly allocated for the next big move (7% to 30%), rather than the next small move within an ongoing series of whipsaws (2%-4%). Therefore, it is best to remain as patient as possible within the context of the model/rules until the market begins to more clearly tip its hand, either to the upside or downside.

Managing Based On Facts, Rather Than Fear

It is uncomfortable for all human beings when markets are weak. However, decisions based on fear or the desire to reduce short-term anxiety tend to hurt long-term performance. Significant damage to portfolios can occur during prolonged stock market corrections and bear markets. Significant damage does not occur in a few days or within a trading range (see last nine months).

Correction/Bear Not Possible Without A Lower Low

We know with 100% certainty that a three-month correction or three-year bear market cannot begin until the S&P 500 makes a lower closing low below 2039 (see chart below). Therefore, as long as the S&P 500 remains above 2039 (on a closing basis), some patience remains in order.

Click here for a larger version of the chart above.

Ugly Markets Can Rally

Q: Why should we remain patient? A: It is possible that the S&P 500 never closes below 2039 and instead rallies 20% in a bullish fashion. It is easy to take a weak market and extrapolate to the downside. It is much harder to remain prudent and patient. Under our system, there is no need to guess, forecast, or anticipate based on fear.

Rules Require Weekly Review

Regardless of where the S&P 500 is trading late in Friday’s session, our rules require that we check our allocations before the end of the week relative to the hard and observable evidence tracked by the market model. A Friday close below 2039 would most likely require some type of defensive action, but the facts will govern our actions.

The More Important Levels

As noted in a recent video (view clip), the pink, orange, and green lines (1988, 1980, & 1972 below) are the more important bull/bear lines of demarcation.

If and when action needs to be taken to protect our hard-earned capital, we will take action based on the rules, without hesitating. If the facts and rules call for patience, we will continue to be patient.

Most Recent Comments via Twitter

March 25, 2015

You can access them here (@CiovaccoCapital). You do not need to know anything about Twitter to view our comments or use the links to view charts.

Expect More Uncertainty Related To Fed

March 24, 2015

Fed Speaker Leaves Many Doors Open

In a speech Monday to the Economic Club of New York, Federal Reserve Vice Chairman Stanley Fisher tried to shift focus away from the first rate hike and toward the process of rate normalization. From Reuters:

Much of his speech to the Economic Club of New York focused on the period after rates rise from near zero, which Fischer said could be “June or September or some later date or some date in between.” Afterward, he said, the Fed would tighten or even loosen on a meeting-by-meeting basis based on economic data and unexpected geo-political risks. Explicit policy promises, he said, would play less of a role. “Whatever the state of the economy, the federal funds rate will be set at each FOMC meeting,” Fischer said of the policy-making Federal Open Market Committee.

Indecisiveness Remains

It is typical for markets to become a bit fussy when the Fed is on the verge of shifting policy. The stock market has been following the indecisive script. As shown in the chart below, the broad NYSE Composite Stock Index has been quite volatile and moving sideways for nine months.

Risk-Off or Risk-On?

As the Fed postures, market participants have been jumping back and forth relative to their preference for more-conservative fixed income instruments (TLT) and growth-oriented stocks (SPY). If I invested in TLT in July 2013 and you invested in SPY, there would be no winner as of March 2015 (see below).

Investment Implications – The Weight Of The Evidence

The wild swings between risk-on and risk-off are part of the interest rate cycle equation. Our approach is to implement a “less is more” strategy until the market calms down a bit. Less is more refers to making fewer adjustments to our allocations during binary periods of risk-on and risk-off. Our market model governs our allocations and at some point action is and will be required. For now, we continue to hold an equity-heavy allocation with some offsetting exposure to bonds and currencies. As noted in a March 23 article, the big picture does not align with “a bear market is imminent” scenario, which allows for some patience with growth-oriented positions.

Image of doors from Tim Green via Flickr.

Bear Market Risk – A Realistic Assessment

March 23, 2015

Bad Weather To Blame?

Recent economic numbers and earnings projections have come in on the soft side. If the rationale below holds water, we have nothing to worry about. From MarketWatch:

Once again, the U.S. economy appears to have slowed in the first quarter. And once again the fault has fallen on several major snowstorms and periods of frigid temperatures that afflicted much of the country in late January and February. That kept consumers away from retail stores during typically busy shopping hours and prevented builders from starting new construction projects, among other things.

Objective View Of Market Risk

There are many ways to attempt to quantify risk in the stock market. Regardless of whether or not you believe in technical analysis, we know one thing with 100% certainty…we cannot start a new bear market until stocks make a lower high and a lower low. For example, the weekly moving averages shown below made a discernible lower high (near point A) followed by a discernible lower low (near point B) when the S&P 500 was still trading over 1,400 (it eventually fell to 666).

How Does The Same Chart Look Today?

Instead of making a lower low, the same moving averages recently broke above a downward-sloping trendline (near point A below), made a higher high (point B), and last week posted another higher high (point C). Recent market action tells us the aggregate opinion of all market participants is much more favorable today than it was in late 2007.

A More Detailed Look

This week’s video looks at the stock market from numerous perspectives to assess risk and potential reward.

After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.



Investment Implications – The Weight Of The Evidence

Our market model will begin to reduce equity exposure when the hard data and observable evidence begins to deteriorate. The lower low in December 2007 is an example of observable bearish evidence. Based on the evidence in hand, we continue to hold an equity-heavy allocation. With inflation data, durable goods, and GDP coming later this week, we will observe with a flexible and open mind.

Bear image from SteFou! via Flickr.

Video Is Up - Bears To Be Left Behind?

March 20, 2015

You can find it here.

Rate Dialogue Is About Bubbles, Not Inflation

March 17, 2015

Is Inflation A Threat?

While the Federal Reserve likes to talk about the rising threat of inflation, global central bankers are more concerned about low inflation or deflation.

The Real Concern Is Asset Bubbles

Inflation can rise quickly if wages begin to gain traction, but the Fed’s real concern is about letting the stock market get too far ahead of the central bank’s zero-rate policy. Alan Greenspan helped usher in two booms and busts (dot-com and housing). Will Janet Yellen put bubble management at the top of her to do list? Only time will tell.

Key Levels For Fed Reaction

This week’s stock market video covers key market levels for equity risk, along with some surprising pockets of relative sector strength.

After you click play, use the button in the lower-right corner of the video player to view in full-screen mode. Hit Esc to exit full-screen mode.



Investment Implications – The Weight Of The Evidence

Prior to Wednesday’s Fed announcement, the bulls still had an edge over the bears, but weak momentum tells us to remain open to all outcomes after the FOMC statement is released.