Archive for January, 2013

Are Stocks Getting Ready To Correct?

Thursday, January 31st, 2013

Odds Favor Pullback vs. Ongoing Vertical Ascent

A common sense tenet of investing is assessing possible risk relative to the possible reward. As we have noted since January 24, the stock market’s risk/reward ratio has entered unfavorable territory. When markets correct, it is typical to “retrace or give back” 38.2% of the recent gains. As shown below, if the stock market experienced a typical “give back”, the S&P 500 could drop 63 points.

Since the November 2012 low, the S&P 500 has gained 166 points – a big move. From a risk/reward perspective, a fair question is “are the odds better for the S&P 500 to tack on another 63 points or do the odds favor the market giving back 63 points?” While we are not calling for a 63 point pullback, we believe the answer is the “63 point give back” is the higher probability outcome.

Cyclical Stocks Losing Momentum

According to the AMEX, the Morgan Stanley (MS) Cyclical Index:

“Is designed to measure the performance of economically sensitive industries within the U.S. economy and detect shifts in investor sentiment. The CYC Index comprises 30 stocks from over 25 industries, including automobiles, metals, papers, machinery, chemicals and transportation.”

When the MS Cyclical Index is outperforming the broader market, it reflects optimism about the economy. When the index begins to lose steam relative to the S&P 500, it is indicative of slowing bullish momentum about future economic outcomes. As we explain in detail at the 6:28 mark of the video below, the MS Cyclical Index has been hinting at a possible reversal relative to the broader market, which in turn is concerning for stock bulls.

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.

Video: Bears Have Support Close By

Video: Bears Have Support Close By

Below is an updated version of the MS Cyclical Index’s performance relative to the S&P 500. Recently, reversals within the blue trend channel (see A1 & B1) have been followed by weakness in the S&P 500 (see above A2 & B2). If the pattern holds, the turn down this week below C1 hints at some corrective action in the stock market.

Fear Index Says “Be Careful”

The VIX is also known as the Fear Index. When the S&P 500 is outperforming the VIX, “risk-on” tends to be in fashion. Conversely, when the VIX begins to outperform stocks, the odds of entering a “risk-off” or corrective phase increase. As shown below, the S&P 500 relative to the VIX recently broke above resistance in a manner consistent with “risk-on”. Since then, the breakout is beginning to look more like a “fake out”. As of Thursday morning, the VIX has beaten the S&P 500 by roughly 10% this week, which raises a yellow flag for stock bulls.

The Battle of Inflation vs. Deflation

Stock market corrections tend to coincide with increasing concerns about future economic growth. Prolonged periods of economic weakness are deflationary events since waning demand causes asset prices to fall. When investors are more concerned about inflation vs. deflation, the ratio of silver (SLV) to Treasuries (TLT) tends to rise. When investors are more concerned about economic weakness and deflation, the ratio below tends to fall (see chart below).

With the Fed running the printing presses at breakneck speed, fears of inflation have had the upper hand in recent weeks. If the chart above breaks out to the upside, our concerns about a stock market correction would lessen. If the ratio begins to fall into the “Deflation Fears” area above, our concerns about stock prices would increase.

What Goes Up Can Come Down – Fast

As we noted January 25, when markets begin to advance in a near-vertical manner, it becomes more and more difficult to manage risk. Charts that “go straight up” can also “come straight down”. If the NASDAQ breaks below the blue support lines shown below, a fairly quick drop back toward 3060 could be in the cards. Markets tend to fill “white space” on charts once bullish momentum deteriorates.

After noting an improving risk/reward profile on November 19, 2012, we began buying back stocks. Last week, as the risk/reward profile was becoming increasingly less favorable we booked profits in small-caps (IWM), transportation (IYT), mid-caps (MDY), emerging markets (EEM), technology (QQQ), and the broad market (SPY). The market can quickly erase gains that have taken months to accrue. By converting the gains to cash, they cannot be taken away by the market. Thus, with profits booked we are in better control relative to our next moves. If the market corrects, we can redeploy our profits at lower levels. If the market begins behaving in a more favorable manner, we can always buy back in when the risk/reward ratio is more favorable.

Could stocks continue to march higher in a straight line? Absolutely, positively yes, but it is not likely. We are not calling a top; just trying to invest prudently and protect our gains.

Most Recent Comments & Charts Via Twitter

Wednesday, January 30th, 2013

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.

Bears Have Support Close By

Monday, January 28th, 2013

The odds of a stock market reversal remain elevated. Similar markets have produced results with a bearish slant historically. Video contains traditional, intermarket, and DeMark analysis.

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.

Video: Bullish Divergences For Stocks

Video: Ciovacco Capital MRM

The Steeper The Slope…The Higher The Risk

Friday, January 25th, 2013

As markets begin to advance in a near-vertical manner, it becomes more and more difficult to manage risk. Charts that “go straight up” can also “come straight down”.

The bulls are still in control, but when they finally lose control, gains in this type of environment can evaporate quickly.

Stocks may well advance further, but if they do without taking a breather, the risks of a sharp and rapid “give back” will only increase next week. Another reason for booking gains this week was that our holdings (IWM, IYT, MDY, etc.) tended to be in the higher beta category (more volatile). If we are to have exposure in this environment, we would prefer to do via lower beta options (SPLV is one of many examples).

Most Recent Comments & Charts Via Twitter: 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.

Odds of Stock Pullback Increasing

Thursday, January 24th, 2013

With the S&P 500 up seven points on Thursday, numerous signs are emerging that point to increasing odds of some corrective action in stocks:

  1. Short-term charts are overbought.
  2. The VIX is attracting some interest.
  3. All four CCM Market Models have hit “Tired Bull” levels.
  4. Utilities and healthcare are attracting interest.
  5. Since the November low, the S&P 500 has tacked on over 150 points.

We started buying on November 19 - we have been locking in gains over the last three sessions. The market can quickly erase gains that have taken months to accrue. If we convert the gains to cash, they can not be taken away by the market. Thus, with profits booked we are in better control relative to our next moves. If the market corrects, we can redeploy our profits at lower levels. If the market begins behaving in a more favorable manner, we can always buy back in when the risk-reward ratio is more favorable.

Could stocks continue to march higher in a straight line? Absolutely, positively yes, but it is not likely. We are not calling a top; just trying to invest prudently and protect our gains.

Most Recent Comments & Charts Via Twitter

Wednesday, January 23rd, 2013

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.

Still Bullish, But Vulnerable to Bad News

Sunday, January 20th, 2013

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.

Video: Bullish Divergences For Stocks

Video: Ciovacco Capital MRM

Video Coming - Charts SAT on Twitter - GO FALCONS

Saturday, January 19th, 2013

Markets looked vulnerable during Friday’s session. The bears had a crack in the door, but they did not walk through it - impressive close for bulls. More comments and charts on Twitter (@CiovaccoCapital) - you do not need to be “on” Twitter, like Twitter, or know anything about Twitter to read posts and use links.

Falcons Still Marching Toward Super Bowl

Kathy and I are headed to the NFC Championship Game Sunday. The Georgia Dome is a short walk from CCM via Centennial Olympic Park. I still have not fully recovered from the Falcons heartbreaking playoff loss to the Cowboys in 1980. The Falcons were ahead 27-17 with less then five minutes to play. When the Seahawks took the lead last weekend, I had that same horrible feeling I had in 1980 as a kid. But 33 years later in 2013, it went our way.

Most Recent Comments & Charts Via Twitter

Friday, January 18th, 2013

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.

Some Short-Term Concerns Remain For Stocks

Thursday, January 17th, 2013

The VIX is telling us to keep an open mind about a reversal in stocks. The ratio below has not cleared resistance yet. We will enter Friday’s session ready to book profits if conditions warrant.

The ratio below is attempting to break out in a bullish manner for stocks relative to bonds, but the breakout needs to hold into Friday’s close. The charts shown here are described in more detail in this post.