We Can’t Forget That Trend Matters

I often write about mean-reversion and look for different charts that show where the proverbial rubber-band appears to be overextended and ripe for a correction back to the mean. These types of setups have shown themselves in several markets and lead to shifts in short and intermediate trends.

However, we can’t forget that the trend is still important. The overarching direction of a market matters and is not something I ignore when reviewing a chart. That’s why the trend of the S&P ($SPY) is always the first chart I show in my Weekly Technical Market Outlook. It’s rarely changes and I often just attach a sentence or two to it. But before we can dig into the internals of an asset class or look at other interesting charts I believe it’s critical to acknowledge the prevailing trend. Those higher highs and higher lows matter!

Today we are seeing new intraday highs in the S&P and the Nasdaq 100 ($QQQ). The trend in the ‘big 3′ indices is firmly positive. While part of my analysis includes looking for turning points, we must still respect the trend itself and is something that can be extremely difficult to do at certain points.

Will the current up trend end? Of course it will! Will we be able to foretell its demise? Studies have shown that it’s unlikely. Will we continue to watch the internals of a market by charting things like breadth and momentum to understand its ‘health’? Absolutely. But we must allow the current up trend to be innocent until proven guilty and at this point the judge has yet to slam his hammer down convicting this bull market to death.

SPY QQQ DIA

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.

Compilation of New Yahoo! Finance Contributors

Phil Pearlman, who has helped take Yahoo! Finance to the next level during his time at Yahoo! has compiled a group of financial writers as Yahoo! Finance Contributors.

The bloggers will be producing content on their respective Tumblr pages which will filter over to Yahoo! Finance. I’m honored to be included on this list among these great traders and writers as well as the opportunity to have my musings shared on one of the largest and most trafficked sites in the world.

I look forward to reading what each of these contributors share. Here’s the list:

A Wealth of Common Sense (Ben Carlson)
Jon Markman
What Works on Wall Street (Jim O’Shaughnessy)
Kimble Charting (Chris Kimble)
Charlie Bilello
Ryan Detrick
Carl Icahn
Ralph Acampora
Greg Harmon
Linda Descano
Gregor Macdonald
James Altucher
Jeffrey Kleintop
Vitaliy Katsenelson
The Kindergarten (Josh Brown)
Najarian Brothers (Jon & Pete)
Ivaylo Ivanov
JC Parets
Andrew Thrasher
Erik Swarts
Almanac Trader (Jeff Hirsch)
Dan Nathan
The Irrelevant Investor (Michael Batnick)
Blue Phoenix (John Licata)
Patrick O’Shaughnessy
Blaine Rollins
Jamie Lissette
Joe Mansueto
Andrew Nyquist
Estimize
Scott Krisiloff
Jeremy Hill
Dana Lyons
Market Anthropology (Eric Swarts)
The Whipping Post (Justin Frankel)
Phil Pearlman
Barry Ritholtz
Chris Ciovacco

Make sure you bookmark these links as each will undoubtedly bring must read commentary. As far as my YF Tumblr page goes, I will be sharing the same content there as I do on the blog.

More: Dr. Pearlman’s Opus (The Reformed Broker)


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 7/21/2014

Once again the bulls were able to ride on Friday aboard the Buy the Dip Express to close out the week up 0.54% on the S&P 500 ($SPX) although the Small Caps didn’t fare as well, down 0.76%. On Thursday we saw a bit of panic selling with down volume outpacing up volume on the NYSE nearly 6-to-1. Buyers came back in force on Friday with advancing volume accounting for 82% of trading volume on the NYSE and advancing issues made up 79%.

I mentioned on Twitter (here and here) last week that an intermediate-term cycle would be peaking on Wednesday. Typically we see larger shifts in trend after this cycle rolls over, so while Thursday’s selling wasn’t a huge surprise I would be slightly surprised if that was the extent of it. But of course we follow price not force it, so respect must be shown.

Trend

Last week’s small drop in the S&P 500 ($SPX) saw our short-term trend line get tested and held. This keeps the overall trend intact with the bulls in control.

Trend

Breadth

Like the chart above, we saw the short-term trend line for the Advance-Decline Line get tested as well. As the S&P has consolidated between 1990 and 1950 the A-D Line has weakened. The trend is still positive for this measure of breadth, but it appears a few more holes were poked in it compared to the price movement of the equity market.

breadth

Yield Curve

One of the important charts that hasn’t been getting much attention lately is the drop in the Yield Curve. The movement in the Yield Curve can have a large impact on the health of the Financial sector ($XLF). When yields begin to drop like they have been in 2014, it makes it much harder for the Financials to perform well. Last week the Yield Curve hit a new 2014 low while the relative performance of $XLF against $SPY held above its May low.

If the Yield Curve continues to weaken I’ll be watching to see if Financials continue their under-performance of the overall market and decline past that May low.

xlf vs spy

Treasury Bonds

While on the topic of Yield, I wanted to show the chart of the 10-year Treasury Yield ($TNX). Three weeks ago I showed this chart and the importance of the resistance level in the Relative Strength Index (RSI). Since then we saw yields rise and the RSI indicator hit resistance, sending bond prices higher and yield lower. The 10-year Yield is now back down to prior support, just under 2.5%. As I’ve been saying for almost the whole year…. bond yields are in their own little bear market and while nearly every major bank’s economist is calling for yields to rise, price continues to disagree.

TNX

Momentum

Last week we saw a nice bounce in the Relative Strength Index (RSI) on the 50 level as price rose on Friday. Momentum continues to sit firmly in the bulls favor as each dip keeps getting bought and selling pressure in the momentum indicators remains muted. However, we did not see a rise in the MACD, which in my opinion is less important than the bounce in the RSI.

Momentum

High Yield vs. Corporate Bonds

While I wrote above how the 10-year Treasury Yield was testing support and how momentum was favoring the bond bulls. We could be about to see some mean-reversion in the ratio between the iShares High Yield ETF ($HYG) and the iShares Investment Grade Bonds ETF ($LQD). The selling that took place on Thursday sent the RSI indicator under 30, which has previously preceded a short-term shift that favors $LQD over $HYG.

I’ve put dotted blue lines on the chart below to show past instances of momentum being oversold for this pair going back to late-2010. Some of the bounces have been minimal like in early 2011 and earlier this year while others have shown to mark the start to a new trend in relative strength between these two debt ETFs like in late-2010 and 2012.

High YieldRelative Sector Rotation

Recently StockCharts.com added the Relative Rotation Graphs to their arsenal of data. These types of charts are really interesting and I’ll be showing them on the blog every couple of weeks.

On the Y-axis (vertical) we have momentum and on the X-axis (horizontal) we have relative strength. Based on the research by Julius de Kempenaer, assets move from a Leading stance where both momentum and relative strength are strong to Weakening, where momentum has weakened by relative strength is still strong, followed by Lagging, when momentum and relative strength are both weak, followed by Improving, when momentum is strong and relative strength is weak. So we typically see assets move in a clockwise circle.

First I want to look at the major sectors. The Energy Sector ($XLE) has spent the last 8 weeks (the time period of the ‘tail’) going from the top of Leading towards the bottom as its momentum has begun to weaken. We’ve seen a large shift in Utilities ($XLU) as it has fallen hard into the Weakening portion. Some sectors to keep an eye on are Health Care ($XLV), Technology ($XLK), and Consumer Discretionary ($XLY) which has been trying to dig itself out of a deep hole but has been making some nice ground into the Improving camp.

Sector RRG

Relative Country Rotation

This next chart is the same as the above except we are now looking at Country-specific ETFs. Canada ($EWC), Mexico ($EWW), and Hong Kong ($EWH) all are currently in the Leading category. While Japan ($EWJ) has made a great improvement over the last eight weeks. Italy ($EWI) has seen its momentum and relative performance weaken significantly, going from Leading to Lagging over the last two months.

Country RRG

Last Week’s Sector Performance

While I think the Relative Rotation Graphs are a great tool, I still think it’s important to know how the sectors are performing. Technology ($XLK) was the star last week followed surprisingly by Financials ($XLF). Even though Volatility spiked over 30% on Thursday, the three defensive sectors were our weakest sectors for the week, with Health Care ($XLV) being the biggest under-performer.

Week sector

Year-to-Date Sector Performance

With the recent weakness in Energy over the last two weeks, Utilities have regained the top spot for 2014. Consumer Discretionary still remains the worst performing sector YTD. Although, as the RRG shows above, it has been improving and may be a sector to keep a watch out for if price can keep strengthening.

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.