Technical Market Outlook 3/30/2015

It’s been a few weeks since I’ve done a Technical Market Outlook, so let’s get into it…

Trend
While the equity market goes back and forward from being positive and negative in performance for 2015, the up trend appears to still be intact. We have continued to see a series of higher lows in the S&P 500 ($SPX) and price has found support at the 100-day Moving Average on nearly every dip over the last several months.

trend

Breadth
As the S&P made a run back to its 2015 high earlier this month many traders had their fingers crossed that the Advance-Decline Line would also set a new high. Unfortunately while breadth was able to reach its prior peak, price was not as lucky. We still have the A-D Line making higher lows and reflecting the long-term bullish trend in the equity market.

The Percentage of Stocks Above Their 200-day Moving Average also has been putting in a series of higher lows but still remains in a down trend as it’s unable to make any higher highs. However, it is nice to see some improvement being made in this breadth measure, one that’s been struggling for over a year.

breadth

Options Activity
With much discussion over the historically high valuations of the U.S. equity market it seems traders are getting a little trigger happy within the options market. Below is a chart of the S&P 500 in the top panel along with three measures of Put/Call Ratios: Index Put/Call, Equity Put/Call, and All Put/Call. I’ve put horizontal lines on each measurement to show levels that have previous been high points for each Put/Call ratio. When the market declines we often see these indicators begin to spike but it’s not often we see them all spike at the same time. For example, in June 2013 we saw Equity and All Put/Call spike near the short-term low in price but the Index indicator did not.

What’s interesting is that for the last three months we’ve been getting spikes in all three Put/Call Ratios with the S&P 500 dipping just a couple of percentage points at a time. Looking at the last couple of years these option measurements stay fairly ‘calm’ even when the market turns lower. This is likely due to traders believe that they are just short-term drops that can probably be bought, leaving little reason to buy protection or make directional bets on things heading even lower. But this year that seems to have changed. It hasn’t taken much to get option traders to push their bets towards Puts, sending the ratios to abnormally high levels. Could this be due to the changes that many are expecting the Fed to take this year, causing traders to get nervous with each tick higher in volatility? I don’t know but it does seem like the environment has changed.

Put Call

Momentum
The daily chart of the S&P 500 and three momentum indicators has seen a period of consolidation. The Relative Strength Index (RSI) has been unable to break above 65 this year but it’s also staying above its bullish range support, as bearish traders have not been able to push this indicator into ‘oversold’ territory. The MACD indicator on the other handed has continued to diverge, making lower highs since last November.

On March 12th I wrote a post called The U.S. Equity Chart I’m Watching. In it I wrote about the weekly S&P chart and the levels of support I was watching in price as well as momentum. The bearish divergences that are taking place on the weekly chart are still present but support continues to hold. While breadth (as discussed earlier) has remained in a bullish up trend, reflecting the positive moves in price, momentum has continued to weaken. That chart I wrote about on March 12th continues to be one I keep a close eye on each week, and is a chart I think will provide key insight when/if things turn bearish for equities.

momentum

Stock-Bond Ratio
I often show the Relative Strength Index (RSI) for varies asset classes and securities and how it can be used to find interesting setups on charts, but it can also be used to show potential turning points for other markets. Below is a chart of the S&P 500 (black line) and the ratio between the S&P 500 and 30-year Treasury bonds (light blue line) and the RSI line for the S&P and 30-year. I’ve put blue circles on the S&P 500 when the momentum indicator has gotten below 30, signaling a possible trend change in relative performance from bonds to stocks.

While this hasn’t marked every low point in stocks, it has done a fairly good job at finding places where the S&P soon turns higher. And we are seeing one of those moments now, with the RSI currently at 27.95 for the ratio b/w the S&P and 30-year Treasury’s. From a momentum perspective, it seems we may see a bounce in stocks soon if traders begin shifting their focus from bonds back to equities.

stock bond ratio

Relative Rotation Graph
Below is a Relative Rotation Graph for the nine S&P sectors. This graph shows the relationship between relative performance of the sectors to the major index and the momentum of that trend in relative performance. Over time the nine sectors have historically gone in a circle as they lose/gain momentum of relative performance as well as lose/gain in the trend of that relative performance.

Currently, the Energy sector ($XLE) has been making strong improvements, as has Materials ($XLB). Meanwhile, Utilities ($XLU) has weakened substantially over the last eight weeks in momentum of the trend in relative performance. Consumer Discretionary ($XLY) and Technology ($XLK) are the only sectors that remain in the ‘leading’ quadrant.
RRG sector

Year-to-Date Sector Performance
As we get close to finishing out the first quarter of 2015, Health Care ($XLV) and Consumer Discretionary are the leading sectors YTD. Utilities, Financials ($XLF), Energy, and Industrials ($XLI) all are in the red for the first three months, with Utilities being the worst performing sector of ’15.

sector performance

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.

The Levels to Be Watching In Silver

While many point to the Federal Reserve as the tide that raises all ships, the boats carrying commodities have all but sank over the last couple of years. Silver ($SLV) has fallen nearly 30% since it’s 2014 high alone and made a series of lower highs and lower lows. It’s hard to argue against the notion that the Silver is in a bear market as each rally gets faded. We can also see signs of this bear market in momentum, with each march higher hitting a brick wall at the upper end of a bearish range.

Below is a weekly chart of the iShares Silver Trust ETF ($SLV) going back to late 2012. After a large drop in 2012 and 2013 silver began to consolidate at created support near $18. However, each rally was unable to get back above the 50-week Moving Average and momentum began defining the range for which it would eventually remain for the coming year. After multiple tests of the support at $18, price eventually broke through and tagged $15 for this ETF. As with many levels of support, once it breaks it often becomes resistance. Which is what we can see took place at the start of this year when Silver bulls tried to gain the majority. But they were unable to get the popular opinion and price failed at $18 and again was unable to break the 50-week MA.

Now with price re-testing $15 for $SLV we have a bullish divergence in the Relative Strength Index (RSI). We saw a similar divergence in June of last year before small rallies took place but ultimately failed. With the RSI making a higher low as price tests a prior low, this a potentially positive sign that price may begin to rally. What’s important to understand with this chart is the defined level of resistance in momentum. The bearish range that the RSI is in has put a quick end to any attempt to see price appreciate and we’ve yet to see the indicator break above this level yet.

Going forward I’ll be watching if the RSI can get materially above 50 and if price can once again break above $18 as well as its 50-week MA. This will likely not be an easy feat for Silver bulls to take on, but it’s important to know where ‘price memory’ is and the levels to keep an eye on.

SilverA second chart of Silver I want to take look at involves Sentiment. The chart below comes from SentimenTrader.com and is a proprietary mix of varies sets of sentiment-related data. As Silver consolidates near $15 I find it interesting to see sentiment begin to put in a series of higher lows from what is deemed an “excessive pessimism” level. Each test of this level in price has been accompanied by, what appears to be, less and less bearish sentiment. This may help give some self-esteem to the bulls as their camp begins to grow in attendance.

Prior rallies from $15 in $SLV have seen sentiment stop out around 60, if we do see price rally I’ll be watching to see if sentiment can break above these two prior highs as a possible sign that a shift in taking place in the Silver market.

Silver Sentiment

 

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.

It’s Now Cheaper to Buy Oil Than Lemonade

It’s hard to ignore the massive decline in the price of a barrel of oil. The last few weeks have seen crude prices tumble back to their January lows of $44. The faint idea of black gold returning to a bull market after the 20% rally has turned from a dream into just a fantasy.

As the snow melts across the Midwest and East Coast and schools closed for Spring Break, the warm weather of summer seems to be quickly approaching. A popular summer pastime for kids is setting up a lemonade stand and hawking  their homemade beverages to passersby. At this rate it may be more profitable for kids to trade in their lemons for oil.

An 82.5 ounce container of Country Time Lemonade can make (according to the label) 34 quarters of lemonade, which is 136 cups. Doing a quick search at Walmart.com shows that this container costs $9.44, making each cup cost about $0.07, not including the cost of water and the cup itself. When selling cups full of the cold drink for $0.50 or even a $1.00 each, the margins likely appear to be pretty attractive for those future CEOs.

But if kids begin to look at other commodities to pitch to their customers, oil may be an attractive option. According to businessdictionary.com, there are 42 gallons of oil per barrel, which comes to 672 cups of oil. With oil trading at $44 per barrel, that comes to $0.06 a cup. Now of course there are other costs associated with procuring an actual barrel of oil. For the purposes of this article, we’ll stick to just the raw materials.

But looking at the simple math, the profit margin for a budding entrepreneur to sell cups of oil rather than lemonade this summer beats out the powder juice substitute by about 17%!

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.