About Andrew Thrasher, CMT

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

Individual S&P 500 Stocks Are Not Rising With the Index

When I discuss the market’s breadth one of my go-to measures is the Advance-Decline Line. This tool simply looks at the number of stocks that are rising and falling and ideally we have more stocks that are going up than going down. So far, the A-D Line has continued to confirm the rise in stocks. Simple as that. But there is another tool that I like to watch and that breaks down the 500 stocks that make up the S&P 500 and examines where they are relative to their individual 52-week highs and lows. I looked at this indicator back in October of last in a post titled, We Haven’t Seen A Market Top Yet. And based on it’s current level while the S&P 500 is at (near) a new high, I began to dive deeper into the data.

We do not only want more stocks going up than going down when the U.S. market itself is rising but we want broad participation at new highs. Barry Ritholtz once shared some of the key signs Lowery’s Research looks for in a market top (note: I’m not calling for a market top in this post) in an article for Bloomberg. One of which is the number of stocks that are 20% or more below their 52-week high. Quoting Paul Desmond, chief strategist of Lowry’s:

When a major index such as the S&P 500 is making new highs but the number of SPX stocks making 52-week peaks begins declining, that divergence is a significant warning sign. Desmond notes that this can warn of an eventual top as much as a year ahead of time.

This point is what I’d like to take a look at today. One of the charts I review daily is below and shows the S&P 500 ($SPX) and an indicator that measures the average position of the individual S&P 500 stocks in relation to their own 52-week high and low on a scale of 100-0 with 100 being all of the stocks are at their 52-week high and 0 if all the stocks were at a 52-week low As of May 26th, we are at 63, meaning we are closer to stocks being at their mid-point (a reading of 50) between their high and low than they to mirroring the index and being near at fresh all-time high. So what’s this mean? Next I’ll review past examples of this taking place.

S&P components relativeBelow is the S&P 500 (blue line) with red vertical lines marking past instances since 2002 when the S&P 500 was at a new 52-week high but the above mentioned indicator was at 70 or less. Since the start of the current bull market we have only seen this occur once, and that was in February of 2012. Before that we had quite a few days meet this criteria in 04-06. And yes, it also marked the market peak in 2007, but stay with me and don’t just assume we are seeing an end to the bull market. So let’s zoom in a bit on this next chart….

breadth relative 52wk high low 02 to 15With this next chart we can get a better idea of the resulting price action after the above mentioned criteria has been met, as shown by the red lines during 2002-2007. Typically we have seen price decline but the majority of the examples have turned into what many would call “buyable dips.” You’ll notice that not every time did the market decline, nothing is perfect in measuring the ‘health’ of an up trend – October 2006 is a great example of where we saw very low relative readings while the market was at a fresh high but the S&P 500 continued even higher.

breadth relative 52wk high low 02 to 07So what does this mean for stocks today? Here are my two takeaways from this data….

1. At the most recent closing high in the S&P 500 this indicator was at a 67. At the peak in ’07 it was at a 63 and has only been that low at a 52-week high in the S&P one prior time, November ’05 (a date that did not coincide with a turning point in stocks, even on a short-term basis). So while we are still seeing a relatively low level of S&P 500 stocks participating right now, things were even weaker in 2007.

2. The up trend in the average position of the S&P 500 components has not broken. If you look back at the first chart you’ll see we’ve been able to hold above 60 so far this year. What would cause me to get concerned is if we saw more stocks shift to lower, away from their prior 52-week high’s, while the S&P 500 itself headed higher. This would widen the divergence and decrease the level of participation in the up trend of the U.S. market. What would actually be bullish, is if we saw the market decline, reset, and begin seeing a stronger level of participation in the trend as stocks head higher.

This is just one set of data and there are many others that can also provide insight into the ‘health’ of the bull market. In the end, it’s confirmation that I’ll look for, and that only comes in the form of pure price movement. In this case it would be the S&P 500 declining. Until that happens I continue to give credence to the current up trend. It’s shown more resiliency than many would have expected. However, it’s tough to not be concerned by this low level of participation in the bull market, this seems like an awfully low average leverage for stocks to be trading at in their respective ranges while the index itself is so high. We’ll see what happens.

 

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.

Why REITs Looks Interesting To Me

One setup that stood out to me recently was the weekly chart of the Vanguard REIT ETF ($VNQ).  While U.S. equities hit a fresh high last week, REITs are basically flat for 2015. With the recent rise in U.S. interest rates, REITs have seen some rough patches over the last several weeks as REITS have a low correlation to bond yields. In fact, the 60-week correlation between $VNQ and the 10-year Treasury yield is -0.94. I’d call that pretty negatively correlated! However, REITs have still outpaced long-term bonds with the ratio between $VNQ and $TLT sitting near its high from the last two years.

Below is a weekly chart of VNQ going back to mid-2012. It’s had a nice up trend and is currently a little less than 10% off its high that was set in 2014. While it began to show signs of a down trend, setting a lower high and then a lower low, price has bounced back and recovered the low from March. This bounce has occurred right at the 50-week Moving Average, which has helped ‘define’ the up trend over the last several years.

We are also seeing the previous low in the Relative Strength Index (RSI) also holding as support. This is a good sign that momentum may remain in a bullish range and price is in fact not about to start a new down trend. Another momentum tool that I don’t show very often on the blog but I’ve included on this chart is the Williams %R. This indicator is essentially the inverse of the Stochastic Oscillator. It essentially looks at price over a set period of time (16 weeks in this chart) and it’s position relative to the highest high over that same period. I find it interesting when the %R breaks below -80 on a weekly chart as it often has been associated with prior lows in price. We saw an example of this most recently last September and before that, December 2013.

VNQIf bond yields continue to come off their recent run then we could see the negative correlation to REITs work in their favor as $VNQ recovers and holds above its 50-week Moving Average. But if this slight drop in yield is just a pause and rates keep rising then we may see REITs break this Moving Average support and it’s prior 2015 low.

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.

 

Does Trading Volume Support the Trend in Stocks?

The last post I wrote took a long-term look at the S&P 500 from a monthly viewpoint. Today I want to look at the S&P 500 SPDR ETF ($SPY) on a daily chart but focus on volume and what it has to say about the current trend.

I’m using the S&P ETF rather than the index itself to get a ‘truer’ view of volume flow. There are two indicators I want to look at when analyzing volume: On Balance Volume (OBV) and Accumulation/Distribution. Both of these tools take into account the raw amount of shares traded but the way it’s used is different for each tool.

Let’s first look at On Balance Volume. This indicator simply adds the number of shares traded when $SPY is positive for the day and subtracts the number of shares traded when the ETF has negative performance for a day. This helps us see if there is more volume being traded on up or down days. When $SPY is being bid higher we’d prefer to see more activity and on down days see fewer shares traded. Now of course this doesn’t necessarily mean there are more or less traders involved on each days, as one person can buy 100,000 shares and it would have the same impact to volume as 100 investors trading a 1,000 shares. But it’s accessing the amount of activity that volume can help us see.

Currently, for 2015, we are seeing a larger number of shares exchanging hands on down days than up days as On Balance Volume has been declining since its late-December peak. This is creating a negative divergence with price as $SPY has been advancing (albeit at a choppy pace) for the bulk of the last four months.

SPY volumeNext we have the Accumulation/Distribution indicator. Like OBV, the Accum/Dist tool uses volume in its measurement. However the difference is it doesn’t simply add and subtract volume based on if price finishes higher or lower on the day. Instead, this volume indicator looks at the range in which price traded that day and whether it closed in the higher or lower end of that range. At the start of this year we had a series of decent amount of volume being traded with the close on $SPY being in the top of the daily range. This pushed the Accumulation/Distribution indicator higher through January and February. However, since March it’s leveled out – similar to what’s taken place in price.

So what does all have to say about volume and whether it supports the current price action in the equity market? I think we currently have a mixed bag. On the surface we have less trading activity on up days for the S&P 500 ($SPY) than on down days shown by the OBV indicator, but at the same time price has been able to stabilize itself intraday and close near the higher end of its range as shown in the Accum/Dist data. At a quick glance, 2011 appears to have displayed a similar type of movement. With more shares traded on down days going into the intra-year peak in May. We’ll see if the bearish action in price that took place in ’11 repeats itself during this year. Just because volume diverged in 2011 doesn’t mean we see a near-bear market in 2015. I”ll be watching price more closely for signs of distress.

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.