Archive for the ‘Stocks - U.S.’ Category

Have Stocks Made An Important Bottom?

Friday, October 2nd, 2015

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Why Stocks Could Remain Volatile Until Late In Q4

Thursday, October 1st, 2015

We Just Had A Rare Waterfall Plunge

Those close to the markets know stocks had a very difficult time between the close on August 19 and August 25. In fact, between those dates, the maximum drop in the broad NYSE Composite Stock Index was 11.02%. Given the severity of the plunge, history says we should be open to more volatility, even under bullish scenarios.

How Long Could It Take To Settle Down?

The charts below show the volatility following three of the most notable waterfall declines lasted for an average of 110 calendar days. The 2015 waterfall plunge began on August 20; 110 days from August 20, 2015 is December 8, 2015. Therefore, it may be premature to think we are close to “smooth sailing into year end”.

1987: 97 Days

Stocks had a successful retest of the October 1987 low in early December 1987, but that was not the end of the wild ride. The S&P 500 plunged 8% in early 1988, before calming down and establishing a profitable trend.

Flash Crash Myth

The 2010 “flash crash” is often referred to as a one-day black swan event. That is not really how it played out in the real world. Did those who bought the flash crash intraday low have nothing but smooth sailing in the subsequent days and weeks? Hardly, stocks did not calm down for 119 calendar days after the flash crash.

2011: 115 Days

Was it smooth sailing after the successful retest of the lows in October 2011? Hardly, even after the October 4 intraday reversal the S&P 500 experienced one more “here we go again” plunge of 10%. The wild swings finally started to calm down around November 25, 2011. Notice when the volatility was close to ending: (a) price had recently moved back above the moving averages (not so in 2015), (b) price was near the moving averages (not so in 2015), and the moving averages were close together and flat (not so in 2015).

What Else Can We Learn From The Charts Above?

A detailed answer to the question above can be found in a September 17 article. If you plan to click through using the previous link, make a mental note of the “white space” between price and the moving averages in 2015 (see chart below). Also note, in the historical charts above, volatility tended to calm down when price was close to the moving averages (or above the moving averages) and the slopes of the moving averages were closer to being flat, rather than having steep negative slopes (as we do now).

Historical Overlays: A Form Of Forecasting

Could 2015 play out exactly like 2011? Anything is possible, but years of experience says multiple-month market analogies rarely, if ever, carry through to the predicted conclusion. Under our approach, with price and the hard data as our guides, we do not need to cloud the waters with historical overlays and predictions. If 2015 plays out exactly like 2011, then price and the data will not miss it. If 2015 plays out in an entirely different manner vs. 2011, then price and the hard data will not miss it.

Does This Change Our Approach?

The answer to the question above is “not at all”. As noted during the big rally in stocks on Wednesday via several tweets:

Waterfall image from Douglas Scortegagna via Flickr.

Summary Tweets: Today’s Sharp Rally

Wednesday, September 30th, 2015

Note: Unlike when viewed on Twitter, the tweets below have the images above the text.

Tweets begin at 6:54 am Wednesday and end at 4:20 pm EDT. If you prefer to view them on Twitter, click here to view all tweets.

Most Recent Comments And Charts On Twitter

Tuesday, September 29th, 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.

Retest Of The Lows Is Taking Place Now

Monday, September 28th, 2015

No Improvement So Far

Given the severity of the selloff in stocks in late August, it was not surprising to see the subsequent rally attempts fail. As we noted numerous times in recent weeks, including September 3 and September 17, bottoms tend to be a process.

Retests Take Many Forms

The expression “retest of the lows” covers numerous market scenarios, including the historical cases shown below when a higher low was made. A retest can stay above the recent low, hit the recent low, or exceed the recent low. The key is we need to see evidence of a sustainable turn on our timeframe; something that has not happened over the past few weeks.

Does The Big Picture Support An Imminent Low?

This week’s video looks at reasonable downside targets for the S&P 500 (SPY), which helps put some more context around the “retest” subject.

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Few New Hints On Monday

There was very little in Monday’s session that said “today is the final low”. For example, the VIX “fear index” held on to most of Monday’s gains into the close. The chart of the VIX below has shown some renewed improvement in recent days.

The S&P 500 (VOO) also closed near the session low, with long-term Treasuries (TLT) closing near the session high, which is a “fear” look, rather than an “imminent and sustainable bottom” look. Monday’s volume on SPY was above average (in contrast to many recent green days when SPY volume was below average).

Retest Is Not A Prediction

Experience says it remains important to keep an open mind about all outcomes (bullish and bearish). The term retest can bring some bias to the table if we are not careful.

Investment Implications – The Weight Of The Evidence

Could stocks post a green day Tuesday? Sure, green days occur all the time during downtrends. We want to see evidence of a sustainable turn. That evidence can begin to surface at anytime, but under our approach we need to see it rather than anticipate it. Therefore, we continue to maintain a defensive-oriented allocation.

Reasonable S&P 500 Downside Targets

Saturday, September 26th, 2015

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Most Recent Comments Via Twitter

Friday, September 25th, 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.

Are The Strongest S&P Sectors Favoring The Bulls?

Wednesday, September 23rd, 2015

‘Everything Is Not Rolling Over’

You may have heard the argument that the stock market looks better than many believe, based on the fact that several key sectors have not rolled over yet. For example, while the slope of the S&P 500’s 200-day moving average is clearly negative, using the same gauge several market sectors look a bit better. The charts below show the 200-day moving averages for healthcare (XLV), consumer discretionary (XLY), technology (QQQ), and consumer staples (XLP).

Adding Price Into Equation

While the 200-days in isolation shown above look better than the S&P 500’s 200-day, if we add price back into the mix, things start to look more concerning. Consumer discretionary stocks have managed to reclaim their 200-day, which is a positive development. However, the 200-day remains very close by and the slope of the 200-day shows a very indecisive long-term trend (read vulnerable).

Tech stocks rallied back to their 200-day and thus far have failed to recapture the “long-term trend” demarcation line. It is not uncommon for markets to rally back to their 200-day during a correction or bear market, and then fail. Bulls want QQQ to recapture and hold above the 200-day, which may happen, but it has not yet.

Consumer staples have a similar “bounce” look. Price is below a downward-sloping (bearish) 200-day moving average. Can it improve in the coming days? Sure it can, but we need to see it.

The song remains the same with healthcare. A sharp plunge below the 200-day followed by a bounce back to the 200-day. The chart below in its present form is not an encouraging look for stock market bulls.

How Do The “Leaders” Look From A Weekly Perspective?

Regular followers know we use a set of weekly moving averages to monitor the general state of trends. How do the S&P 500’s strongest sectors look from this perspective? The answer is not good.

While there is nothing magical about the 200-day or the weekly moving averages used above, they can help us better understand an ETF’s risk/reward profile as described in this video clip using the S&P 500 in a bearish period (2008) and a bullish period (2009).

How Can We Use All This?

Under our approach, we need to see evidence of relevant improvement, which differs from a normal bounce or countertrend within the context of an ongoing downtrend. It is difficult to look at the weekly charts of the S&P 500’s strongest sectors and say “that looks like it is improving”. Ugly markets and ugly charts can begin to improve meaningfully at anytime. Therefore, we remain open to all outcomes, including bullish outcomes. The markets will guide us if we are willing to listen with a flexible, unbiased, and open mind.

Are Stocks Hinting At Bigger Problems?

Tuesday, September 22nd, 2015

The Fed Has Tried Both Sides

Last Thursday, the Federal Reserve did not raise interest rates. While the “no rate increase” scenario is typically favorable for stocks, the S&P 500 was unable to hold onto the post Fed statement gains. In fact, rather than rising after the Fed statement, the S&P 500 has seen a big drop in recent sessions (see chart below).

Let’s See How The Other Side Looks

In what appears to be a bit of a panic response from the Fed, after Friday’s big selloff in stocks, several Fed officials came forward making the case for increasing interest rates. Did the market cheer the Fed flip? No, the initial reaction was positive, but like last week, the gains were quickly given back (see below).

How Does The Bigger Picture Look?

While markets can begin to improve at any time, the facts we have in hand are not particularly encouraging for stock market bulls. This week’s video shows why stocks may be set up for another big leg down.

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Have Things Improved This Week?

After Tuesday’s session, the S&P 500 was down 15 points this week, meaning it is difficult for improvement to occur on weekly charts. If we use the image below to compare the end of the 2011 correction and the 2009 bear market low to the present day, we can see the stock market bulls have some work to do.

If you want to get some insight into the three “looks” above, see Comparing 2015 To Past Market Bottoms

Improvement Can Begin At Anytime

2011 is an excellent example of a vulnerable market that began to improve quickly after a low was made. The charts looked ugly on October 3, 2011, but improved dramatically in the weeks that followed the October 4 intraday reversal. With Janet Yellen speaking Thursday, it is important for us to monitor the charts with a flexible, unbiased, and open mind.

Most Recent Comments Via Twitter

Tuesday, September 22nd, 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.