About Andrew Thrasher

Andrew Thrasher, CMT is an Investment Analyst for an asset management firm in Central Indiana. He specializes and writes about technical analysis as well as macro economic developments.

We Haven’t Seen A Market Top Yet

While I color myself concerned about the selling taking place in stocks, I do not think we have seen the top, not yet at least.

It never ceases to amaze me how fast the sentiment changes in the market. We go from cheering on new highs to people already looking for an 1987-type crash. Don’t get me wrong, it makes my uneasy when I read an article in GQ where the author, while writing about stripes, throws in lines like: “Button up one of the bolder striped shirts out there and you’ll be ready to do more than push stocks” or “built for mergers, acquisitions.” You rarely want to see references to Wall St in non-financial publications and while this one was subtle it still stood out. There are many pieces of data that show retail investors have come back stocks and even men’s magazines are taking their cue.

There’s been a lot of discussion about whether we have seen the peak in the stock market and if we are about to see a repeat of 2007. Business Insider has been running stories about the anonymous twitter user who may have called the top even though we are down just 7%, which is less than the corrections we saw in 2010, 2011, and 2012.

While I can understand the similarities between the prior peak and the current price action, I do not think we’ve seen enough deterioration in breadth and momentum in order to be confident that the S&P 500 ($SPX) will not make a new high in the coming weeks.

In late-September I showed the divergences that were taking place in the Advance-Decline Line (breadth) and the Relative Strength Index (momentum) and how they were acting as negative symptoms that could send prices lower. While they were in fact diverging, they had not separated from the equity market to the same degree as prior market tops.

A different example is the following chart showing the S&P 500 components relative to their respective 52-week high and low. The more stocks that are closer to their own 52-week low, the farther down the line falls. You can see that at the 2007 high, the divergence was much more pronounced than the small separation we have today. Before the small decline in July and August of ’07 we saw this indicator diverge just like it’s during right now. I’ll show why this may be important later on.

S&P relative

How about momentum? We do have a bearish divergence that developed at the most recent high but again, it was not at the same degree as we saw in 2007. Momentum (like breadth) was much weaker going into the market top than it is today. Like the chart above, a smaller divergence was created that led to the July/August drop prior to the ’07 peak.

RSI

If we must (do we have to?) compare this market environment to something then it seems more like July/August of 2007 than October 2007. The drop that lead to the market top in ’07 lasted roughly 9% and set up both breadth and momentum to create much larger divergences as fewer stocks participating in the advance. The July high as I showed in the two charts above had bearish divergences present, but they were less severe, like they are now, than what eventually was created into the actual peak.

So while the sectors that have been leading this year (Utilities, Consumer Staples, and Health Care), the breakdown in High Yield bonds, and the start of breadth and momentum weakening are very reminiscent of the prior market high, I don’t believe we are there quite yet. It sure seems like there are a lot of traders preparing for a market crash and we rarely see the market give the people what they want. Another advance to a new high before stocks sell-off again may just be what catches the most traders off guard.

This isn’t the market environment that makes me put on my bull hat but at the same time I think patience is key and we need to see how price action shapes out over the next two weeks. There are plenty of signs that stocks may have over-extended to the downside, it’s just a matter of if Mr. Market decides to care. I could be wrong and if that’s the case then I’ll happily switch my bias to reflect the latest price action. As always, I continue to respect what price is telling us, but if history is our guide then we likely have not seen the market peak just yet.

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.

Weekly Technical Market Outlook 10/13/2014

Well it seems the warning flags that the market internals (momentum and breadth) had been showing us were correct. Back on September 22nd I wrote “I think right now the U.S. equity market is showing some negative symptoms. This doesn’t mean we need to call the morgue but there seems to be something happening based on the internals and the information price action is providing us.” Since then we’ve seen price fall 5%. Now, based on your personal investment time frame that 5% could be irrelevant or the volatility you needed to add some alpha.

Trend

For quite a while the trend portion of my Weekly Technical Market Outlook had been pretty self-explanatory. With this recent period of volatility some major levels of support have been broken. The 100-day Moving Average and rising trend line that had keeping investors bullish have now been put in price’s rear view mirror.

The S&P 500 ($SPX) now sits just a few hairs above its August low as well as the 200-day Moving Average (not shown). A meaningful drop here would create a lower low and potentially signal the end to the current up trend. I say meaningful because I’ll be looking for price to get lower than just 1897, but closer to 1880 to gain confidence that the bears are truly in control and the trend has changed, but that’s just me.

trendTreasury Bonds

As traders have left the warm familiarity of stocks and shifted to bonds, the varies portions of the Treasury yield curve has rising steadily. The more-often discussed Treasury 20+ Year ETF ($TLT) has already exceeded its prior high but today to focus on the shorter-term Treasury 3-7 Year ETF ($IEI). This Treasury ETF held sold support in the Relative Strength Index (RSI) just a few points under 50 while it pushed against its rising trend to make a run for its 2013 high. Price now sits right at that early ’13 peak along with its momentum indicator ready to break its own level of resistance.

IEIBreadth

The following chart was one of the signs we had that trouble may have been brewing for stocks. The Advance-Decline Line failed to make a new high along with price, creating a bearish divergence. While the S&P 500 sits right at its prior low, this measure of breadth has broken its own August low and now finds itself back at a level not since seen April of this year.

Meanwhile, the Percentage of Stocks Above Their 200-day Moving Average has dropped down to its December 2011 level with fewer and fewer stocks able to keep their heads above their proverbial trend water line.

breadthCotton

Back in August I wrote a piece for See It Market looking at the potentially bullish setup in price, sentiment, and COT data for Cotton ($BAL). Since then we have not seen cotton prices move very much, as they began to rise only to weaken once again and put in a slightly lower low. However with this recent low we now have a bullish divergence in the Relative Strength Index (RSI) on the weekly chart as it did not confirm the move lower. Looking at price, it appears we may have a false breakdown under the 2012 low, I’ll be watching to see if $BAL can stay above this level going forward. When checking back in with the COT data since August, Commercial Traders have continued to add to their net-long position. They are now holding their largest net-long position in at least 4 years!

While cotton prices haven’t shot higher since my last writing on the commodity, the bullish case for higher prices in cotton continues to hold true in my opinion.

CottonMomentum

Like the Advance-Decline Line for breadth, the RSI and MACD momentum indicators were flashing warning signs back in September as they were unable to confirm the new high. We now have the RSI sitting right at its support level. Will we get a bounce or will momentum move to an ‘oversold’ level before the bulls get any reprieve.

momentumS&P 500 Bollinger Bands

As anyone who has been around the markets for any extended period of time can attest to, oversold markets can always become MORE oversold. And this is also true when it comes to the use of Bollinger Bands, and is something I want to point out before diving into this next chart.

Below is the S&P 500 along with a set of Bollinger Bands. Typically these bands use a 20-period Moving Average with the outside bands set at 2 standard deviations. But one set of Bands that I watch uses the 65-day MA and a 2.5 standard deviation. I’ve noticed that we see prices put in a low when they reach this lower Bollinger Band. In the bottom panel of the chart is the %B indicator, which simply shows where price is in relation to the Bands. As you can see, when price has previously reached its lower Band, a low is often put in or not too far away. The obvious exception from the last six years was the 2008 bear market.

The drops that we’ve seen in the S&P 500 each year (excluding 2013 since we didn’t see any material decline) seems to have come to an end at the lower band of this set of Bollinger Bands, will this decline be different?

spx bb

Emerging Markets

Martin Pring, who wrote Introduction to Technical Analysis and developed many different indicators created a Diffusion Indicator to be used with different markets. Pring’s Diffusion Indicator looks at the number of stocks within a given market and how many are above their 40-day Moving Average. Pring then takes a 10-day Moving Average, which is what’s plotted below for the Emerging Market Index.

As the chart shows, when this indicator has gotten down to -12 over the last several years it’s signaled a bottom for the iShares Emerging Market ETF ($EEM). This is a helpful tool I use to help find potential short-term turning points within certain markets. I’ll be watching to see if this low in the Pring Diffusion Indicator helps put in a low for $EEM.

EEMLast Week’s Sector Performance

With little surprise the strongest sectors last week were the three defensive portions of the market, Utilities ($XLU), Consumer Staples ($XLP), and Health Care ($XLV). While stocks bled for most of the week, Utilities and Staples actually closed out on Friday in the green. Energy ($XLE), Industrials ($XLI) and Materials ($XLB) took the brunt of the damage.

last week sector

Year-to-Date Sector Performance

With Utilities recent strength it has moved back to the top spot for 2014. Close behind is the Health Care sector, followed by Consumer Staples and Technology ($XLK). The Energy sector remains the worst performing part of the market YTD followed by Consumer Discretionary ($XLY).

Based on the Sector Rotation Model at stockcharts.com, it’s a bit concerning to see Utilities, Health Care, Staples, and to a lesser degree Financials, leading the way so far this year, as those four sectors sit at the top of the economic cycle. Much more digging would need to go into this type of analysis but I believe it’s an important note to make.

ytd sector

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.

Will This Historically Bullish Setup Send Stocks Higher?

While stocks finished trading on Wednesday higher by 1.75%, we still saw an increase in the number of stocks making new 52-week lows on the NYSE. At first glance I thought this was another sign of deteriorating breadth, with fewer stocks participating in the advance. Not to say this is not true or to take away from the notion that breadth has been weakening over the last several weeks, but historically this setup has been short-term bullish for equities.

To look at things further I put the data in excel and ran the numbers. Below is a chart that shows past instances of the number of new 52-week lows on the NYSE rising, the S&P 500 ($SPX) closing with a gain of at least 0.80%, and the percentage of NYSE issues making a new 52-week low being greater than 7% going back to 1990. It’s rather common for the number of new 52-week lows to increase while stocks rise, but it’s rather rare to see this occur with a large percentage of stocks.

As you can see, when these three criteria are met, we have historically had a short-term bottom in stocks. The last example of this happening was in 2011 and before that was at the 2009 low. When looking at the data it’s hard to ignore the instances where these measures lined up before the 2000 and 2007 highs. So it is not to say that we won’t have lower prices, as there are many pieces of data right now that could help make that argument. However, we may be seeing some exhaustive selling that could allow equity bulls some reprieve.

If we were to tighten up the criteria to the S&P 500 having a gain of greater than 1.75%, like we saw on Wednesday then the number of previous occurrences gets cut from 24 down to 7, with the last four occasions being March 3, 2009, September 2008, and October 1999.

Indicator

Data courtesy of stockcharts.com

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.