Archive for October, 2012

Risk Ratios Continue To Deteriorate

Wednesday, October 31st, 2012

Last Saturday’s video outlined numerous concerns we have regarding the market’s risk-reward profile. Two weeks ago we described bearish thresholds on the chart of the S&P 500 relative to Treasuries (TLT). The table below is an updated version of the table described in the video below. The orange “YES” boxes will become red flags for risk if they carry into the close this Friday.

Below is the video originally posted on October 20. The portions beginning at the 4:37 and 20:00 marks describe the table above.

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.




The S&P 500 still has meaningful support at 1,403 and 1,396. A break of those levels on a closing basis would add fuel to the bearish fire.

Odds Favor Lower Lows In Stocks

Sunday, October 28th, 2012

Stocks could rally above 1,396 on the S&P 500, but holding above 1440-1480 for an extended period may prove difficult (given what we know today).

Video contents - October 28:

  • S&P 500 path scenarios (29 seconds into video)
  • S&P 500 key support (05:25)
  • Breadth at spring 2012 market peak (06:25)
  • Current breadth vs. spring 2012 market peak (10:15)
  • Update: bond/stock ratio from last week’s video (12:51)
  • DeMark - Emerging markets vs. shorts (14:00)
  • DeMark - Long vs. short (20:07)
  • DeMark - Stocks vs. bonds (22:44)
  • DeMark - Stocks vs. VIX (24.42)

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.



DeMark charts and indicators are proprietary tools from Market Studies, LLC

Locked In Some China Gains

Friday, October 26th, 2012

Little evidence in hand concerning a flip back to risk-on. Consequently, we locked in a 7.95% gain on a portion of our China (FXI) holdings Friday. Recent tweets have some links and stats about Friday’s session. Will try to get a video out Saturday or Sunday. Kathy (an Auburn grad) and I are heading to AU vs. Texas A&M Saturday. Despite Auburn’s struggles, it should be fun.

Italian Yields Join “Be Careful” Asset Class List

Friday, October 26th, 2012

As of Friday morning at 7:30 EDT, we are close to “do or die” time for the bulls. This morning’s low in the S&P 500 futures ($ES) is 1,394. Important support sits at 1,389. If stocks can hold near support, the door remains cracked for a push back above 1,464 and possibly even 1,474 on the S&P 500 cash index ($SPX). The key word in the prior sentence is IF.

Early Friday, European bonds are joining the ever-growing list of “be careful” asset classes. Rising bond yields means increasing fear related to future writedowns or defaults, which is deflationary. Central banks are trying to create positive inflation.

The chart below is an intraday chart, meaning the breakout above the blue line could be “erased” prior to the close. As the chart sits now, it is concerning for the “risk-on” crowd. A bullish trend change in Italian yields tends to be bearish for stocks and commodities. To flip from a bearish trend in yields to a bullish trend, step one is to break a downward-sloping trendline (see black line). Step two is a higher low (made below the blue line). Step three is a higher high (above the blue line).

GDP is coming Friday at 8:30 EDT, which could alter the early bearish slant in risk markets.

Key Risk-On Support: Will It Hold?

Thursday, October 25th, 2012

Many markets remain near possible inflection points. Notice in the stock/bond ratio chart below, when the blue trendline held, stocks bottomed (see green arrows). The blue arrows show a similar set-up. If the trendline holds, it could be risk-on again. If the trendline is violated, risk assets will most likely take another leg down.

Bull/Bear Charts

Thursday, October 25th, 2012

Links to charts can be found on Twitter (@CiovaccoCapital). To view them, you do not need to know anything about Twitter.

Atlantic: Japan Could Spark Next Panic

Thursday, October 25th, 2012

Our long-term concerns related to excessive amounts of global debt are well documented in the video “The European Debt Crisis Explained” (over 250K views). Below are excerpts from an October Atlantic article, “The Next Panic”:

This summer, many government officials and private investors finally seemed to realize that the crisis in the euro zone was not some passing aberration, but rather a result of deep-¬seated political, economic, and financial problems that will take many years to resolve. The on-again, off-again euro turmoil has already proved immensely damaging to nearly all Europeans, and its negative impact is now being felt around the world. Most likely there is worse to come—and soon.

But the economic disasters of our time—which involve big banks in rich countries, call into question the viability of government debt, and seriously threaten the reach of even the most self-confident nations—will not end with the euro debacle.

Who could be next in line for a gut-wrenching loss of confidence in its growth prospects, its sovereign debt, and its banking system? Think about Japan.

So why is Japan’s government now one of the most indebted in the world, with a gross debt that’s 235.8 percent of GDP and a net debt (taking some government assets into account) that’s 135.2 percent of GDP? (In the euro zone, only Greece has government debt approaching the Japanese level.). Modern financial systems also permit governments to borrow large sums from investors, and as finance has evolved, that borrowing has become easier and cheaper. In the most-advanced countries, governments have increasingly taken advantage of expanding markets for short-maturity debt, whose principal is due soon after the loan is made. This has allowed them to borrow far more, and at cheaper rates, than they otherwise would have been able to do. Typically, these governments then take out new loans as the old ones come due, “rolling over” their debts.

Next Leg Down or Countertrend Pop Higher?

Wednesday, October 24th, 2012

Many risk-on vs. risk-off ratio charts used in CCM’s Market Models are sitting at important points. If risk markets can push higher, we could see a multiple-week rally similar to the S&P 500’s 47 point pop from April 10 to May 1, 2012. If risk markets are turned back near current levels, an acceleration of the current downtrend could take place similar to the 91 point decline in the S&P 500 that took place between May 7 and June 1, 2012.

The table below was originally covered at the 20:00 mark of Saturday’s video. As of Tuesday’s close, not one of the bearish BIG RED FLAGS is waving (YET). How the table below looks on Friday at 4 PM EDT should give us some excellent insight relative to the market’s next multiple-week move.

We have a decent cash position, some longs, and three hedges (SH, PSQ, and VXX). We can deal with either outcome (bullish or bearish). Fed statement today at 2:15 PM EDT.

Bearish Evidence Piling Up Against Stocks

Tuesday, October 23rd, 2012

The present day market has numerous similarities to the period just prior to a 10.5% drop in the S&P 500 that occurred last spring. In this article, we describe what we’ll be watching in the days ahead to manage risk and reward.

Slowing Growth, No Resolution in Spain

Below are the five fundamental drivers we outlined on September 24 that could spark a stock market correction:

  1. Spain may choose to delay a formal request for aid.
  2. An increasing demand for safe-haven assets.
  3. Global growth is slowing.
  4. Earnings may disappoint.
  5. The approaching ‘fiscal cliff’.

Four weeks later, the S&P 500 sits 40 points below the intraday high made on September 14. Over the last four weeks, little progress has been made in Spain, tepid global growth figures have continued to surface, earnings have been weak, and Washington has been “doing something close to nothing” in terms of the rapidly approaching fiscal cliff.

In the October 19 video below, we outline numerous things to watch in the coming days and weeks, including:

  • S&P 500 areas of possible support (see 02:25 mark)
  • The importance of weekly RSI (04:15)
  • What a correction looks like (04:38)
  • What the bullish Promised Land looks like (06:55)
  • What the bearish Promised Land looks like (08:55)
  • Probabilistic lines in the sand (19:45)

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.



The charts below look busy and complex. The concepts are easy to understand if we break the information down into smaller chunks. Experienced pros will tell you market breadth can provide early warning signs for investors. What is breadth signaling now? “Be careful.” The main portion of the chart below shows the percent of stocks in the S&P 500 above their 200-day moving average (MA). When a high percentage of stocks are above their 200-day, a rally has broad participation and tends to be healthy. When fewer and fewer stocks can hold above their 200-day, it is indicative of narrowing market breadth and a concerning development for the bulls. Point C below shows fewer and fewer stocks above their 200-day MAs last spring. Point A highlights the weak performance in the S&P 500 after breadth deteriorated. Point B shows RSI dropping below 50; RSI closed at 50 on Monday, which means another bearish alarm could occur this week. MACD, a widely used indicator, experienced a “bearish cross” above point D. Notice how stocks dropped below point A after the bearish MACD cross. In the present day, MACD is trying to complete a bearish cross again.

Just as market breadth is waving red flags, the performance of stocks relative to bonds closed Monday at a vulnerable level. The center of the chart below shows the ratio of stocks to bonds. When the ratio rises, stocks are in favor relative to bonds (a.k.a. risk-on). When the ratio falls, bonds are in demand relative to stocks (risk-off). The blue arrows at the top highlight waning bullish momentum. The red-dotted line represents an important bull-bear demarcation line. Notice when the stock/bond ratio dropped below the red line in 2011 (see A1) a sharp decline in stocks followed (see A2). The same bearish outcomes occurred in 2012 (see B1 and B2). Unfortunately for the bulls, the ratio is again staggering below the red line. If you are bullish, you would like to see the ratio break into the white space near point D. If you are a bear, you want a move below the blue support lines (toward point C).

Since the previous two charts are weekly charts, signals become more meaningful if they carry into the end of the week.

56% of Companies Miss On Revenue

In the long-run, corporate earnings are what drive stock prices. According to Bloomberg, thus far in earnings season revenue figures have been on the light.

Of the 127 companies in the benchmark index that have reported quarterly results since Oct. 9, 72 posted revenue that missed analyst estimates, while 55 exceeded them.

Hedges Still Attractive

We have not seen enough deterioration to make a full dash for the exits, but we have seen enough to have three hedges in place; VXX, a VIX-like ETF, PSQ (inverse technology), and SH (inverse S&P 500). If the CCM Market Models begin to stabilize and markets can hold near support, we will gladly remove our downside insurance. For now, we are content with a large cash position and some hedged long exposure.

Bearish Drop or Bullish Bounce?

Saturday, October 20th, 2012

Detailed analysis of current market begins at the 4:10 mark of the video.

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.