Archive for April, 2012

Spanish Yields Steady After Weak Data

Monday, April 30th, 2012

The situation in Spain remains fragile. From CNN:

NEW YORK (CNNMoney) — Spain has fallen into its second recession since 2009 as its economy shrank for the second consecutive quarter, according to a government report Monday.There are now a dozen European nations that have had their economies shrink for two consecutive quarters, a condition that generally equates to a recession.

The silver lining is Spanish 10-year yields have dropped 0.22% this morning. While the equity markets are down in Europe, the aversion to risk has been somewhat muted given we had a downgrade of Spanish debt on Thursday evening and the weak economic data this morning.

Short-term, the market looks a little tired, but as shown below:

  1. The slopes of the 50-day MA (blue), 20-day EMA (red), and 40-day EMA are all positive (near green arrow).
  2. The S&P 500 closed above all three moving averages on Friday (blue arrow).

All things being equal, the chart above paints a positive intermediate-term picture.

Market Internals Mixed

Friday, April 27th, 2012

The numbers below can move rather quickly before the close, but as of post-lunch on Friday, the green box looks good and the orange box looks so-so.

Breadth, VIX, And Trends Give Slight Edge To Bulls

Friday, April 27th, 2012

On April 26, we mentioned the chart of the VIX “Fear Index” (VXX) relative to the S&P 500 (SPY) represented a good way to monitor risk in an environment with some conflicting signals. An updated version of the chart, as of Thursday’s close, is shown below. The bulls made some progress with the blue upward-sloping trendline being violated, which shows decreasing levels of fear relative to the willingness to take on risk (see red arrow).

Obviously, Friday’s GDP report can flip the chart above one way or another, but another bullish signal was given on Thursday. Near the blue arrow above, notice that RSI (Relative Strength Index) made a lower low and closed below 50. The lower low represents a short-term bearish divergence for the VIX relative to the S&P 500 (bullish for risk). The divergence increases the odds of continued VIX weakness.

We originally posted the chart below on April 23. If you look closely, price moved to/slightly above the trendline below 1,400 on Thursday. There is some white space above the chart, which could be filled by price.

Just as the odds of rain increase when skies shift from clear to cloudy, a bullish turn in market breadth increases the odds of a sustainable bullish turn in stocks. Keep in mind, cloudy skies do not guarantee rain. The chart below is an intermediate-term measure of market breadth (the Summation Index). Market breadth refers to the percentage of stocks participating in an advance. Broad participation leans bullish. On Wednesday and Thursday, the Summation Index moved higher – it had been declining for several weeks. The green arrows show where market breadth started to improve. The S&P 500 is shown at the bottom of the chart.

Commodities continue to lag stocks, which is not surprising in a deleveraging environment (a.k.a. debt reduction/less trading on margin). If you are a silver or gold bug, the chart below has yet to show much in the way of hope. The performance of silver (SLV) relative to the S&P 500 (SPY) has a bearish/downward-sloping 9-month exponential moving average (EMA) and a still ugly looking MACD, which measures momentum (see red arrows).

Spain Downgraded After Close

Thursday, April 26th, 2012

Obviously, this is not good news. From Bloomberg:

Spain’s sovereign credit rating was cut to BBB+ from A by Standard & Poor’s on concern the nation will have to provide further fiscal support to the banking sector as the economy contracts.

Sentiment, Checklist Favor Bulls

Thursday, April 26th, 2012

We noted on April 25 that roughly 60% of the “we would like to see” boxes had been checked relative to increasing the odds of a sustainable turn in the markets. Today’s trade thus far has added quite a bit of green to the table below. The table is based on the S&P 500 Index’s daily chart. We can’t emphasize enough the use of the term “odds” related to the table below. Green guarantees nothing but it does decrease the odds of significantly lower lows in the days ahead.

As most readers know, investor sentiment can be a contrarian indicator, especially when it reaches extremes. The blurb below from the Wall Street Journal is good news if you are long stocks:

Bullish sentiment among individual investors fell 3.5 percentage points to 27.6%, according to the latest survey from the American Association of Individual Investors. This indicator — which measures investor expectations that stock prices will rise over the next six months — is at its lowest level since the end of September, just before stocks bottomed from the summer meltdown. This is the fourth straight week bullish sentiment has dropped below its historical average of 39%, AAII says.

Simple Ways To Monitor Current Market

Thursday, April 26th, 2012

A good way to sum up the conflicting signals that the markets are giving from a short-term perspective is to look at our comments from Wednesday. Before the market opened, we posted charts that had a bullish slant. At 2:30 p.m. EDT, we said the session was weaker than it appeared.

As we reviewed the markets before the open on Thursday, a mixed picture was still the basic theme. The charts and markets below represent a good way to monitor which way the uncertainty may break in the short-to-intermediate-term. The longer-term picture still looks positive, which means we still would be looking for good entry points should the markets experience additional weakness over the next five to ten trading days.

An excellent way to monitor risk-on vs. risk-off is to review the performance of the “Fear Index” or VIX relative to the S&P 500. The VIX represents risk-off and the S&P 500 risk-on. The red arrow at the top of the chart below shows the momentum of the fear-based trade is weakening, which leans bullish for stocks. Below the green arrow, we see a lower high in the ratio and a 10-day moving average that has rolled over – these also lean toward the bullish camp for stocks. The purple arrow shows the intersection of support lines. These lines offer a good way to monitor the battle of the bulls and bears. Finally, the blue arrow also shows waning upside momentum for the fear trade relative to the risk trade.

Real Estate Investment Trusts (REITS) have recently broken to the upside (see blue arrow below). Bullish momentum is trying to stabilize (purple arrow), as measured by MACD. MACD is bullish when the black line is above the red line, as it is below. REITS also appear to have held near the upward-sloping pink trendline (green arrows). The mixed picture comes in with the rate of change (ROC) near the red arrow. A falling ROC is not what you want to see during a bullish breakout. ROC can be a laggard, so the bulls would like to see it turn up soon. If REITS can hold their breakout, it obviously favors the risk-on camp. Conversely, if the breakout fails, it sends up a warning flare for risk assets.

The weekly chart of small caps below also paints an uncertain picture in the short-term. The most potentially bullish feature of the chart below is a candlestick pattern known as “bullish engulfing”. The pattern is formed when the far right candlestick “engulfs” the preceding candlestick. The preceding candlestick also shows an indecisive market with the small body and long “tails”. Since this is a weekly chart, what matters is how those last two candles look at the end of the week, not as of the close on Wednesday. Another bullish element is the upward-sloping 22-week moving average (thin blue line). The green arrows show how price reacted after a bullish turn in the 22-week. The potentially bearish aspect of the small cap chart is the bearish MACD cross that is trying to form. It matters where MACD finishes the week, not that it looks weak now.

Commodities help us monitor the all-important battle between the fear of inflation and the fear of deflation, which is similar to risk-on vs. risk-off. The commodity ETF, DBC, is trying to hold near a logical point in a trend channel (see purple arrow below). A momentum shift is also potentially in the works as measured by MACD (blue arrow). Notice the black MACD line remains below the red line in a bearish manner (for now at least). The MACD in the chart below is a good way to monitor market risk in general.

Oil and gas exploration stocks (XOP) also have a bullish engulfing pattern trying to form on the weekly chart relative to the S&P 500 (see green arrow below). The blue upward-sloping trendlines represent long-term areas of potential support. Like the commodity chart above, the chart below is a good way to monitor the big picture in the short-to-intermediate-term.

Moving back to the mixed picture theme, you typically would expect emerging markets to exhibit some strength if commodities are turning up in a bullish manner. The chart below shows the performance of emerging markets (EEM) relative to the S&P 500. The purple arrow highlights numerous moving averages with bearish/negative slopes. The red arrow shows a bearish MACD cross could be imminent. Regardless of how the global markets behave going forward, unless the chart below improves, the United States still appears more attractive than emerging markets. Being a weekly chart, what matters is how it looks Friday at 4:01 p.m. EDT.

Markets Not All That Impressive Today

Wednesday, April 25th, 2012

The following comments are as of 2:40 p.m. when the S&P 500 was up 14.93 points. They are subject to change based on how we close today.

You would think it would be easy to find attractive buy candidates across numerous asset classes today. Unfortunately, that is not the case. Our ETF screens currently rank SPY (S&P 500) 28th (out of 136), which means “more attractive” options are ranked between 1 and 27. When you look at the charts of ETFs 1 through 27, they have somewhat of a tepid look.

We made a small addition to our allocations on April 17. The S&P 500 closed at 1390.78 on that day. Today’s high is 1391. In addition to more conviction in the charts, a close above 1390 would be a welcome sign.

Just as the nominal value of the S&P 500 has made little progress recently, our technical checklist to monitor improving odds of a lasting turn still only sits at 60% (see below).

We are inclined to make no moves today. If we do see some improvement late in the day, any buys would be small relative to the size of our accounts. The big picture looks positive but this turn still has some work to do.

Are The Markets At A Logical Bottom?

Wednesday, April 25th, 2012

As we mentioned Tuesday, the reaction to Wednesday’s Fed statement is important to the market’s intermediate-term direction. However, Apple’s (AAPL) strong earnings have provided investors with a reason to step up to the buyer’s plate. From Bloomberg:

Apple Inc. (AAPL) profit almost doubled last quarter, reflecting robust demand for the iPhone in China and purchases of a new version of the iPad, allaying the growth concerns that sliced shares 12 percent in two weeks.

Since Europe continues to be the possible “fun sponge” for the bullish party, and Germany tends to pay the uncomfortable European clean-up tabs, the German DAX Index has served as a good proxy for the tolerance for risk assets. Germany has had a strong start to trading on Wednesday. Later in this article, we review the longer-term technical backdrop for the German stock market.

Picking market tops and bottoms is difficult at best. It is better to think in terms of a probabilistic bottom or top. One way to help discern if it is probable for a market to move higher is to look at long-, intermediate-, and short-term trendlines on both an absolute and relative basis.

When reviewing the charts below ask yourself, “Does this market seem to be at a logical point where a reversal could take place?” If the answer is “yes”, then we become more open to a possible buying opportunity. A few weeks ago we identified 1,363 as a possible point of inflection for stocks. The S&P 500 has been testing 1,363 for two weeks. On April 10, the S&P 500 closed at 1,358, which thus far has represented the lowest close during the current pullback. While we want to see some real conviction from buyers, the chart below seems to have a reasonable probability of producing a reversal to the upside.

Even if the chart above fails to produce a sustainable bullish reversal, it is still useful since a clear break of 1,363 would send up warning flares. The markets have been weak from numerous perspectives in recent weeks. We will be looking for more than a dead cat bounce at 1,363. A bullish turn in intermediate-term market breadth, as measured by the Summation Index, would take us past dead cat bounce territory. The Summation Index has yet to turn up as of Tuesday’s close.

Another good way to answer the question of a logical reversal point is to examine recent market leaders. Two market leaders since the October low have been financials (XLF) and homebuilders. The chart below shows the performance of financials relative to the S&P 500. Financials held at the upward-sloping pink trendlines in December, February, and March. Also notice XLF:SPY is testing the breakout point from early March. If the retest is successful, it would be a good sign for all risk assets. Conversely, if the retest fails, it would be a fairly significant yellow flag for global stocks.

The same concepts described for financials above also apply to homebuilders (XHB) below. Logical points of probable reversal exist on the relative chart below (XHB:SPY) and the absolute chart (XHB) that follows. We own financials, which are highly correlated to homebuilders.

The S&P 500 ETF (SPY) closed near the lower end of a trend channel on Tuesday. Like all the charts presented here, we can gain valuable information if SPY holds above or moves below $137.00.

Whenever you are reviewing charts with trendlines that have been drawn manually by a human being, you have to factor in author bias, meaning the author can see what they want to see. Understanding that caveat, the weekly and monthly charts of the German DAX Index below seem to be at probable or fairly logical points of long-term support.

While things were looking shaky earlier this week, we noted the CCM Market Risk Model had not retreated to a point that was overly concerning relative to historical norms (as of Monday’s close). With the Fed on tap and a weak durable goods report, we need the market to check off more of the technical boxes described on April 17. However, the charts above tells us to be open to another push higher in risk assets should some sustainable conviction surface from buyers.

Fed Statement To Set Market’s Tone

Tuesday, April 24th, 2012

The markets advanced early Tuesday after a report on home sales exceeded forecasts. On the earnings front, AT&T (T) and 3M (MMM) came in above consensus. With an important Fed statement and a durable goods report coming on Wednesday, we will be monitoring our market models, support, and moving averages closely.

After the recent rise in Spanish and Italian bond yields, it is possible the market is expecting too much from Wednesday’s Fed statement. From a bullish perspective, any hint of additional Fed asset purchases in the central bank’s statement could give a tired market a bullish injection.

The support table below is one of the ways we are tracking the market’s downside risk should the Fed disappoint. The levels shown come from two DeMark indicators, Setup Trend (TDST) and Propulsion (PROP). All things being equal, we would prefer to see the ETFs in the table remain above both of the potential forms of support. Red boxes show ETFs that were below the given level as of Tuesday morning. Green levels show ETFs that were above the given level as of Tuesday morning. On average, the ETFs remained 0.16% above TDST support and 0.95% above the PROP support.

In the table above, a bearish break of the PROP “support” levels could be followed by increasing momentum to the downside. ETFs that remain above the PROP levels will tend to maintain a bullish bias from a momentum perspective. DeMark indicators are proprietary tools offered by Market Studies, LLC.

When we study markets, we tend to classify them as bullish, neutral, or bearish. A “bullish correction” is one that remains relatively tame or is relatively short in duration. As shown in the table below, the median CCM 80-20 Correction Index (80-20) reading at the end of a “bullish correction” was 34. The 80-20 closed Monday at 37. None of our models have moved from bullish to neutral territory yet, which means some patience remained in order as of Monday’s close.

Should the values in the table above begin to breach neutral territory, it would increase the odds of a more substantial pullback. The CCM Asset Allocation model currently has a 67% exposure to risk, which respects the possibility of further downside while acknowledging all three major indexes remain above their 200-day moving averages (in red below).

Not too many bad things can happen when the slope of the S&P 500’s 50-day moving average remains positive (shown in blue above). If the 50-day does turn over in a negative manner, it will send another “be careful” message to investors.

CCM Model EOD Estimates

Monday, April 23rd, 2012

While some of our models use data that is available only after the close (EOD/end-of-day), we can make decent intraday estimates. Using estimates for the CCM BMSI, 80-20, and Market Risk Model, we anticipate our end-of-day recommended allocation to risk will drop to somewhere in the neighborhood of 62%, which is still above our current exposure.

We would be more apt to take an incremental step away from risk if the following levels are taken out on a closing basis:

  1. Semiconductors $SOX: 396.60
  2. Financials XLF: 14.92
  3. S&P 500 Index: 1,357
  4. S&P Futures: 1,357