Are The Bulls & Bears About To Resolve Their Standoff?

April 17, 2015

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Most Recent Comments Via Twitter

April 16, 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.

Can The Bulls March Through Earnings?

April 13, 2015

Earnings Guidance

The stock market will be looking for clues about the strength of the U.S. economy when several big name companies report earnings this week.

Monday: Pep Boys (PBY)

Tuesday: CSX (CSX), Fastenal (FAST), Intel (INTC), JB Hunt (JBHT), Johnson & Johnson (JNJ), JP Morgan Chase (JPM), Wells Fargo (WFC)

Wednesday: Bank of America (BAC), Delta Air Lines (DAL), Netflix (NFLX), U.S. Bancorp (USB)

Thursday: American Express (AXP), Goldman Sachs (GS), Schlumberger (SLB), UnitedHealth (UNH)

Friday: General Electric (GE)

Are Cracks Starting To Appear?

If the market anticipates that earnings will usher in a new bear market, we would expect to see structural problems starting to form in the bullish foundation. This week’s stock market video looks for cracks in trends, the VIX, and market breadth.

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Investment Implications – The Weight Of The Evidence

Earnings will offer the latest read on the health of the U.S. economy. If guidance comes in below already low expectations, we may be forced into a more defensive posture. Given what we know as of Monday’s close, an equity-heavy allocation remains prudent. If the S&P closes below 2,039 later this week, our concerns would increase.

Binoculars image from Jeramey Jannene via Flickr

Stocks: Are Cracks Starting To Appear?

April 10, 2015

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Most Recent Comments Via Twitter

April 9, 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.

How Far Could Stocks Fall After Friday’s Ugly Labor Report?

April 4, 2015

Report Released On Market Holiday

In a bizarre holiday reporting scenario, the most anticipated economic report on Wall Street was released on Good Friday at 8:30 am.

Futures Took Hit

While the stock market was closed, the S&P 500 futures traded for 45 minutes after the ugly jobs data was moved into the public’s field of vision. The knee-jerk reaction was not pretty; the futures dropped over 19 points and closed near the session low.

A Preview Of Monday’s Open

For those scoring at home, the labor miss on Friday was significant. From CNBC:

March’s report of just 126,000 nonfarm payrolls—about 120,000 less than expected—signals the potential for a rocky start to trading Monday. The stock market was closed for Good Friday, but in morning trading, Dow futures dropped 165 points after the report.

This week’s stock market video may help lower anxiety levels concerning a logical question - will the stock market blow through support levels after Monday’s opening bell?

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Fed Speaker Monday

It is always possible that bad news gets interpreted as good news if the Fed decides to throw the market a bone or two. To complicate matters for investors and traders, New York Fed President William Dudley is the first Fed speaker of the week when he discusses the economy in Newark Monday morning. The market will also be reading Wednesday’s Fed minutes closely looking for new clues about the timing of the first rate hike.

Why Was Bad News Bad News On Friday?

If bad news was always interpreted as good news, we never would have had a financial crisis (2007-2009). At some point, the big picture gets concerning enough that the bad news becomes more important than any good news the Fed can deliver. If we think in hypothetical extremes to illustrate the point, assume the economy morphs into a recession over the next few quarters…the market may begin to say:

“The Fed is out of traditional bullets and the economy and corporate earnings are in big trouble.”

How will we know when we have reached the “bad news is bad news” point of no return? Answer: When market-friendly comments from the Fed fail to stem market declines. While the market will decide when that point has been reached, our guess is we are not there yet, meaning if Fed President Dudley wants to talk up the stock market on Monday, he will be successful. When market-friendly Fed talk fails to have its desired effect, then risk-management takes a big step forward on the priority list.

Will The Labor Report Take Down The Bulls?

April 3, 2015

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YouTube Processing Is Slow

April 2, 2015

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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.