Equities Just Taking A Breath or a Market Top?

Posted on May 23, 2013 by Andrew Thrasher — 1 Comment ↓

It’s amazing how fast sentiment can change. Yesterday morning my twitter feed was full of bulls kicking the bears in the grown but once they came back from lunch those same instigators had put on their bear suits and where calling for mass panic. Amazing.

The move in equities has been described as parabolic and Fed-induced. But I must ask – who cares? We have/had an uptrend and that’s what matters. We can monitor market internals to get an idea of how healthy the move has been and how long in the tooth it may be.

But now that we’ve had what looks like the second down day in a row people are freaking out. So is this just equities taking a breather or have we put in a market top?

First lets look at the move that’s taken place. No one will argue its been unusual for equities to march this high this fast. In fact, going back to 1998, we have only seen equities this extended four previous times. The chart below shows the S&P 500 ($SPX) in relation to it’s upper and lower Bollinger Bands on a weekly basis. Three of the past four instances we have been this far above the upper band has led to a correction, with 2004 being the exception. So yes, it seems it would be healthy for the market to experience some type of down move or consolidation but we can’t be naive in assuming that because we are high in the clouds that the plane must crash.

Looking at the short-term view of momentum, we are already oversold based on certain metrics. I wouldn’t be surprised if traders view this recent bout of weakness as a buy-able dip. That’s what they have done with each of the drops we’ve experienced so far this year and muscle memory is likely to still be fresh.

It’s not my job to make predictions, it’s much easier to let the tape lead the way and allow price action to dictate my reactions. However, if I were to make a prognostication then my guess would be that buyers step in and take us to a fresh high. Not saying it happens today or tomorrow (although it could!) but that bulls take another whack at keeping risky assets in play. This could give us the opportunity to put in some negative divergences and see some of the ‘risk on’ components of the market stumble in relative performance.

Earlier this week I mentioned the extreme in sentiment from Ned Davis Research’s report. We have the building blocks for a correction, it’s just a matter of when the players deem them important. If anything has been apparent in 2013 it’s been that being a equity bear has not been fashionable. I have not put on my bear hat just yet but it may be time to dig it out of the closet.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

2013 Hasn’t Been A Good Year for South Africa

Posted on May 22, 2013 by Andrew Thrasher — 1 Comment ↓

While most equity markets have been enjoying a good year so far, South Africa ($EZA) has unfortunately not participated. Down nearly 12% YTD, the iShares South Africa ETF ($EZA) has not been able to catch its stride in 2013.

Looking at the below chart, it’s almost as if someone flipped a switch when the ball dropped on New Year’s for South Africa. A large share of the equity and bonds traded in South Africa are owned by foreign investors. With the country’s currency (the rand) quickly devaluing many are pulling their money out of the economically weak country. South Africa will be holding elections next year and there seems to be many questions regarding policy changes as a result of the election. This could help explain why the South African ETF has diverged from other foreign equity markets.

With the multi-month drop in $EZA, we can see the Relative Strength Index has created a level of resistance near 55, a sign of bearish momentum. In the bottom panel of the chart we can see the massive outflows based on the On Balance Volume indicator. In late April the ETF saw a quick pop but there doesn’t appear to have been any kind of substantial buying pressure that went into $EZA, indicating that the short-lived rally wouldn’t hold.

Prior support appears to be at the $59-$60 level. However, as long as we see the bearish momentum in the RSI indicator and selling pressure matching the drop in price, it’s going to be difficult for bulls to hold their ground if/when we get to $59.

Sentiment Has Hit An Extreme Reading According to Ned Davis

Posted on May 20, 2013 by Andrew Thrasher — 3 Comments ↓

Ned Davis does excellent work when it comes to sentiment research and technical analysis. Most recently, their proprietary sentiment indicator has broken above 70%, indicating extreme optimism in the equity market. Brad Lamensdorf over at Forbes highlights the sentiment data and provided the following chart. As you can see, the market has not fared very well when sentiment has gotten to this extreme of a level.

From Forbes:

The latest Crowd Sentiment Poll compiled by Ned Davis Research has now broken through 70 to a reading of 70.9. This level rivals the most extreme readings of this contrarian indicator over the last 10 years. The measure is a proprietary compilation of sentiment measures, and NDR has published the Sentiment Poll long enough for it to have a track record. Right now, the record says, “Watch out.”

According to Ned Davis, the S&P 500 has returned nearly -17% since 1995 when their sentiment indicator breaks above 70. We have seen frothy sentiment data spike up a couple of times this year. However, this isn’t the first above 70 reading the proprietary indicator has recorded this year, we’ll see if this extreme reading is able to slow the bulls advance or if we continue to trek higher.

Source: Sentiment Blow Out (Forbes)