Equities Just Taking A Breath or a Market Top?

Andrew Thrasher — Thu, 23 May 2013 13:09:43 +0000

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.

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2013 Hasn’t Been A Good Year for South Africa

Andrew Thrasher — Wed, 22 May 2013 13:53:10 +0000

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.

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Sentiment Has Hit An Extreme Reading According to Ned Davis

Andrew Thrasher — Mon, 20 May 2013 19:57:40 +0000

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)

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The Bears Have A Tight Grip on Platinum

Andrew Thrasher — Fri, 17 May 2013 13:26:15 +0000

Both precious and industrial metals have taken quite a beating this year. Most of the focus has been on gold and silver, which are down 17% and 25% YTD, respectively. The platinum market ($PL_F), while not down to the same degree as the shiny commodities, has also been unable to catch very many bids in 2013.

In February we saw platinum make a double top at $1725 while momentum (RSI indicator) created a slight negative divergence. Price then began to take the elevator down which put the Relative Strength Index into a bear market range. We can see that RSI has been unable to break above 50 as momentum stays depressed.

Next up lets look at the price action of platinum ($PL_F), a short-term symmetrical triangle has formed over the last two weeks. Typically we see this type of pattern occur after a well-defined trend, which isn’t the case for platinum. This is a continuation pattern as price coils between the two trend lines. Based on this mornings price action, it appears we will be having a downward break as $PL_F weakens. We also have the 61.8% Fibonacci retracement level acting as resistance at $1525, which also acted as support in December ’12. The price action coupled with bearish momentum appears to indicate more downside risk for the metal. I’ll be keeping a close watch to see if bulls are able to overtake the Fibonacci resistance and the bearish momentum, if a test is unsuccessful then lower prices could be in order.

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Where Could High Yield Be Heading?

Andrew Thrasher — Wed, 15 May 2013 13:09:38 +0000

Investors have been turning over every rock they can find in the search for yield. Causing the high yield space to be booming as of late. 2012 saw a record amount of high yield debt issued, beating out the previous record set just a few years prior in 2010. With Bernanke doing nearly all he can to suppress rates, fixed income investors are forced to continue walking further out on the risk curve.

The iShares High Yield Corp. Bond ETF ($HYG) is a popular method to play the high yield game. Going back to 2011 we can see that $HYG has been in a fairly large triangle pattern. Typically the closer we get to an apex in this type of pattern the less ‘explosive’ the breakout is, but that doesn’t mean a large move in either direction is out of the question. Momentum (RSI indicator) has been bullish during 2013, finding support at 55 and has been testing this level over the past couple of days. We can also see that bullish volume has been keeping the On Balance Volume (OBV) indicator rising – a sign that buyers continue to step in to move prices higher. Combining the support in RSI, the trend line on OBV and the support line of the triangle on price action we can get a clearer picture if we see a breakdown in the coming days/weeks if $HYG begins to lose its luster.

To continue the theme of a frothy high yield market, Bespoke put out an interesting piece comparing high yield to Treasury debt:

The chart below is from last week’s Bespoke Report newsletter, and it shows the average yield to maturity on the Merrill Lynch High Yield (Junk) Master Index. At a current level of 5.24%, investors have never been paid less to own high yield debt. Yields are so low, in fact, that five years ago the yield on the 10-Year US Treasury was higher than the current yield on junk bonds. In the chart below, the red dots on the blue line represent periods going back to 2000 where the yield on the 10-year US Treasury was higher than the current yield on the High Yield Master Index. With yields this low, high yield bonds are anything but high yielding.

Source: High Yield Yields Less Than Treasuries Five Years Ago (Bespoke)

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Analyzing the Drop in the Australian Dollar

Andrew Thrasher — Mon, 13 May 2013 15:12:13 +0000

The Aussie Dollar ($FXA) has been experiencing some weakness with momentum turning bearish. However there are a few bright spots for the currency down under. In March I wrote about the bullish COT data for the Canadian dollar, British Pound, and the Australian Dollar. All three put in gains in the following weeks. $FXA is now seeing similar action it the latest COT data while still experiencing headwinds from the increase in selling.

Here’s a piece:

Over the last month the Aussie dollar ($FXA) has been experiencing some weakness, dropping 5% in April. Let’s take a look at some of the earning warning signs that lead to the drop as well where the Aussie dollar could be heading.

While the drop has been quick, there are some signs we can look at that foreshadowed the move and help us examine future charts of not only the Aussie but other securities as well. In early April the Currency Shares Australian Dollar ETF ($FXA) attempted to break above resistance set over the previous twelve months at $105.

Source: Analyzing the Drop in the Australian Dollar (TraderPlanet)

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Checking Back in With Crude Oil

Andrew Thrasher — Fri, 10 May 2013 13:02:12 +0000

Crude oil ($CL_F) has been rising over the last few weeks and I thought it’s time to check back in with the black gold commodity. In April I wrote about how light crude oil was testing Fibonacci support at $86 while sentiment data calling for potential continued weakness. It seems the bulls were able to hold support and crude has rallied 12% back above $96/barrel.

The energy commodity now sits just under the falling trend line that’s batted down previous rally attempts going back to 2012. This trend line as well as the previous closing high at $99 are where buyers are likely to set their scopes. As often said, the more times a level of resistance (or support) is tested the more likely it is to break. We can’t know how many times it must be tested, but we if crude can catch a few more bids we might get our third chance at higher oil prices. I’m not writing to be bullish or bearish on oil, but I will be watching these two levels of resistance and see how price reacts. As always, let price action dictate our bias.

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The Bull-Bear Case For Equities

Andrew Thrasher — Wed, 08 May 2013 13:18:43 +0000

Whenever I look at the market I try to view it from both sets of eyes – those of the bulls and the bears. For the better part of 2013 we’ve seen momentum and breadth drop, raising a yellow flag for the equity market. With the break above 1600 on the S&P 500 ($SPX) breadth has come back and started rising again along with some of the ‘risk on’ metrics. The cyclical sectors have picked up their performance as noted by J .C. over at All Star Charts,with defensive sectors like healthcare and staples giving up some of their relative gains. The bulls had their fair share of battles to fight to get the intermarket view of stocks to improve, and it appears they have done their job. Below is a chart showing the breakout in three breadth indicators: advancing minus declining issues, the Summation index, and the percentage of stocks above their 50-day moving average.

Turning to the bear side, we are extended to the upside. Yesterday’s price action took us completely outside the upper Keltner Band. The Keltner Bands overlay is similar to Bollinger Bands, except it uses volatility (Average True Range) to determine the distance between the bands. The S&P 500 ($SPX) has broken above the upper band three previous times so far this year, the first time was ignored, and the second caused equities to momentary dip before continued to advance. A rise above the upper band just lets us know that the market is due for a breather or some type of consolidation, it doesn’t mean we are about to enter a bear market. In my piece for TraderPlanet I noticed the level of resistance created by Andrews’ Pitchfork, which we last came in contact with in April. While yesterday’s close took us above the Keltner Band, it also knocked us into the Andrews’ Pitchfork resistance (not shown).

When weighing the above views of the market, I have a feeling the breadth is more important for the longer-term trend of the market, while the bearish case is more concerning for short-term trading. I’ll be watching to see if we have some type of consolidation while the buyers reload and keep breadth advancing and price moving higher.

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Can Buyers Keep The Stock Party Going?

Andrew Thrasher — Mon, 06 May 2013 17:31:13 +0000

I hope you all had a good weekend. I had my first professional BBQ competition of the year, and while it rained most of the time we had a good time and were pleased with the results.

The equity market has not been laying off the gas pedal lately and we find ourselves back at a level of possible resistance. On April 12th I tweeted about this level of resistance, which held up for a quick 55+ point drop in the S&P 500 ($SPX) before the up trend continued. This is the topic of my TraderPlanet piece for this week.

Here’s a blurb:

The S&P 500 has been enjoying a nice uptrend for the last six months, with small healthy pullbacks.

There are various ways for us to monitor trend, I recently wrote on my blog about simple trend lines and support levels – discussing that technical analysis doesn’t have to be difficult.

A great tool for monitoring support and resistance in a trending market is Andrews’ Pitchfork. This tool looks at the channel of a trend, built around three price points that create the ‘pitchfork.’

Now go read the rest.

Source: Can Buyers Keep The Stock Party Going? (TraderPlanet)

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Stocks and Bonds Appear to Be Best Friends

Andrew Thrasher — Thu, 02 May 2013 13:23:26 +0000

It’s interesting the way different markets relate to one another. Typically Treasury bonds aren’t the best friends of stocks, moving in opposite directions most of the time. There have of course been periods of time where the two have worked out their differences and advanced or declined with one another. When this happens we begin to notice a divergence that takes place between yield and equities. Since mid-March yields have been falling while stocks continue to head higher. Bonds are often considered the ‘smarter asset’ compared to stocks and when yield isn’t mirroring the move in risky asset classes it typically raises a red flag for stocks. However, this hasn’t been the case so far this year.

Even though stocks have been hitting new highs, it has been bond prices that have been the outperformer over the last couple of months. One note regarding this couple is the momentum between the relationship of the S&P 500 ($SPX) and 30-Year Treasury Bonds seems to be waning. The RSI indicator is just about down right depressing as it makes lower highs. This type of momentum divergence has been present during just about every intermediate equity top. But none of this matters until price confirms. While it’s concerning to see the S&P overshadowed by bonds during this rally, it only becomes important when the Mr. Market says so.

Yields continue to fall and the correlation between bonds and stocks continue to rise. Over the last 10 years the 60-day correlation between the S&P 500 ($SPX) and 30-year bonds has only been this high nine previous times. So what does this all mean? It means investors have not been shifting out of bonds and the ‘Great Rotation’ is not necessary underway. Whether you chose to blame Bernanke, Japan, or your Uncle Bubba – stocks and bonds are now best friends. It’s unlikely this courtship will last forever, normally it’s the bond boys that win out, we’ll see if this time is any different.

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